New Tax Code 2009 : Rewiring the Taxman

New Code aims to make tax laws and rates, Tax payer Friendly

I was recently discussing with a group of friends that the Indian tax rates structure needs a definite shift if the government wants voluntary compliance of tax laws and wants to increase the number of tax payers in the country. One of the discussion points was that government should introduce single tax rate of say 10% on the taxable income for individual tax payers and should do away with so many slabs and deductions. One suggestion was that income beyond 5 Lac should be taxed at 10% with no rebates or deductions whatsoever.

And here comes the New Direct Tax Code Bill, 2009  which attempts to simplify the lives of the tax payers.  Though the bill does not fulfill the wish-list of our discussion, it is surely a step towards providing a more tax-payer  friendly and simplified tax structure.

Following are the brief highlights of the New Direct tax code Bill,2009

• The objective of the new tax code is to establish an efficient , effective and equitable direct tax structure in the country.
• All direct taxes like Income Tax, Dividend distribution tax (DDT), Fringe benefit tax (FBT) and Wealth tax will be covered under this single tax code.
• New Tax Rates will be applicable w.e.f. Financial year 2011 as under

• Savings will now be taxed on EET basis. This means that Savings when done under designated schemes would be exempt from tax in the year the saving is done (First ‘E”). It will continue to be exempted together with the accumulations/accretions till the time they remain invested (that means till they are not withdrawn, this is Second ‘E’). The savings will be taxable at normal tax rates in the year in which withdrawal is made (this is ‘T’).
• However, accumulated balances as on 31st March,2011 in the Provident Fund will not be taxed.
• Deduction on account of savings has been increased from current 1 Lac to 3 Lac. However, since the new code doesn’t mention deduction in respect of Housing loan, the same may go.
• Dividends will continue to remain tax free in the hands of Investors.
• Capital Gains would now be taxed as income. The concept of short term and long term capital gains has been removed from tax perspective. Indexation benefit would be available on asset held for more than one year.
• The indexation base has been changed from 1981 to 2000.
• Since all capital gains are now taxed, Securities Transaction Tax (STT) has been abolished under the new tax code.
• Salary received in form of perks, perquisite, LTA, Rent free accommodation, Medical reimbursement will now form part of Income and will be taxable.
• Wealth Tax has been Re-introduced. Net Wealth in excess of Rs. 50 Crore  will be taxed @0.25%
• In addition to deduction of Rs 3 Lac for notified savings schemes, Rs 15,000 deduction will be available for Medical Insurance Premium for self and family , and another Rs 15000 for parents. Up to Rs 50,000 can be claimed as deduction for treatment of disabled dependant , Rs 40,000 for prescribed diseases. Rs. 50,000 deduction would be available to handicapped and Rs 75000 for person with severe disability.

The New tax code is in discussion stage. You can give your comments and suggestions on the same by writing an email to directtaxescode-rev@nic.in

Keep a watch on this blog for posts related to implications of new tax code.

Download Discussion Paper

Download Direct Taxes Code Bill, 2009