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India To Simplify Tax Code

by Lorys Charalambous,, Cyprus

10 August 2007

A new income tax code is due to be introduced into parliament in December 2007, although this is unlikely to lead to a radical overhaul of India's taxation system, according to Finance Minister Palaniappan Chidambaram.

The new code will represent a simplified version of the current Income Tax Act, which has been in force since 1961. However, Chidambaram has sought to dampen speculation that the changes will lead to lower rates or drastic reform, revealing that the amendments will "finetune" the current system and widen the tax base.

When asked by reporters whether he thought there was room for cuts in income tax, Chidambaram replied that he thought current income tax rates were about right, and that his focus was on widening the tax base and improving rates of compliance. He added, however, that future tax rates will "depend on what we find is the revenue picture in the first week of February".

In India, individual income tax is charged at progressive rates to 30%, and a 10% surcharge applies on tax payable by individuals whose income is above R1 million (US$24,750). A 2% educational excess also applies. The effective top rate of tax is 33.66%.

On the subject of indirect taxation, the Minster explained that there would be little additional change in the foreseeable future.

Consumption taxes in India have been undergoing a major overhaul. A value-added tax system replaced service taxes in most states in April 2005, while Chidambaram has called for the country's central value-added tax (CENVAT) and service tax to be harmonised.

Chidambaram was criticised by the investment industry after his 2007 budget, announced last February, increased dividend distribution tax from 12.5% to 15%, and placed a a 25% dividend distribution tax on money market mutual funds. Meanwhile, the scope of the unpopular Fringe Benefit Tax was expanded to include employee stock option plans.

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