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India Nears New Tax Code

by Mary Swire,, Hong Kong

21 May 2010

Indian finance minister Pranab Mukherjee has mentioned nine core areas of concern, which will be taken into account in a new draft Direct Taxes Code (DTC), which reportedly may be published by mid-June 2010. However what these areas were has been left to speculation.

The revised draft DTC will be the subject of a public consultation, after which the DTC bill will be tabled in Parliament during the monsoon session, Mukherjee said in an address to the Central Direct Tax Advisory Committee, according to an official release. The DTC is a long awaited replacement to the Income Tax Act, 1961.

There is speculation that the redraft will include a reduction in the proposed tax relief for the moderately wealthy. In the first discussion paper on the DTC last year, tax bands were to be widened sharply; the highest band with a tax liability of 30% was to fall on annual incomes above INR2.5m (USD55,000), against the current level of over INR800,000. Now it is widely expected that the 30% tax threshold will start at incomes above INR1m.

The 20% income tax would now apply to the INR0.5m-1m band, but, as a concession, the untaxed threshold would rise from INR160,000 to INR200,000.

The draft also proposed that long-term savings be taxed at the time of withdrawal, and the minimum alternate tax (MAT) be calculated against the gross assets of the companies concerned. These unpopular proposals may be scrapped, thus necessitating the revised bands of income tax. The rationale behind the MAT amendment was that gross assets also included the external debt of the taxpayer and taxing debt was not reasonable.

Tax exemptions on home loans, which were not included in the first draft, might not appear in the second draft either, despite this being commented on; instead the individual tax exemption limit on savings like insurance may be raised to INR300,000 from the current INR100,000.

Among other matters, the finance minister said that two more Centralized Processing Centers (CPC) would be set up this year. "The first one at Bengaluru has enabled faster processing of tax returns and better records management," he said.

Mukherjee further stated that the Refund Banker Scheme would be extended to nine more cities this year, thus enabling speedier refunds to the bank accounts of taxpayers in 15 cities.

TAGS: tax | India | tax rates | tax reform | individual income tax

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