Direct Tax Code 2011 India | Direct Tax Code Highlights Corporate Individual

Direct Tax Code 2011 India | Direct Tax Code Highlights Corporate Individual

Personal Income Tax Rates

The New Direct Tax Code talks of substantial increase in the tax slabs for an individual tax assessee. A part of this may be implemented in forthcoming budget. The Tax Code Bill 2009 talks of increasing the 10% slab to Rs 10 lakhs, 20% slab between Rs 10 lakhs and Rs 25 lakhs and 30% above Rs 25 lakhs.
New Direct Tax Code 2011: Major relief for salaried class

The new provisions under the Direct Tax Code are as follows:
• Tax for income between Rs. 2 lakh – Rs. 5 lakh: 10%
• Tax for income between Rs. 5 lakh – Rs. 10 lakh: 20%
• Tax for income over Rs. 10 lakh: 30%
Corporate tax has been kept at 30%.
The limit for exemptions for salaried people is Rs. 2 lakh, while that for senior citizens is Rs. 2.5 lakh.

The new Direct Tax Code comes into effect from April, 2011.
The Tax Code also raised income tax slabs significantly, lowering the tax burden on individuals. The draft proposed exempting the general tax payer from paying tax for income up to Rs 1.60 lakh a year.

According to the proposal, a tax payer will pay at the rate of 10 per cent for income above Rs 1.60 lakh and up to Rs 10 lakh, at 20 per cent on income between Rs 10 lakh and Rs 25 lakh and at 30 per cent for income beyond Rs 25 lakh.

At present, while the basic exemption limit remains at Rs 1.60 lakh a year, the limit for tax slabs are much lower — one pays 10 per cent tax on income ranging between Rs 1.60 lakh and Rs 3 lakh, 20 per cent between Rs 3 lakh and Rs 5 lakh and 30 per cent beyond Rs 5 lakh.

Thus, for an individual with taxable income of Rs 10 lakh a year tax payment will drop from Rs 1.68 lakh to Rs 51,000, a net annual saving of Rs 1.17 lakh. The exemption limit for women and senior citizens will continue to be Rs 1.90 lakh and Rs 2.40 lakh, respectively.

Similarly, the tax treatment for post-retirement benefits may prove to be a major dampener. Money saved in specified instruments like PPF and PF for getting tax exemption will become taxable when they are withdrawn later.

These investments, when accrued, were earlier exempted from tax. The Tax Code says that under the Exempt Exempt Tax (EET) system all withdrawals will attract tax because the amount withdrawn will be treated as part of the income for that year.

But in the Tax Code it is unclear if the employee’s contribution to PF and PPF will be taxed at the time of withdrawal. KPMG’s Vasal says that this is an anomaly that needs to be corrected. He believes that only the employer’s contribution and interest accrued to the account will be taxed.

Though taxing financial gains available after retirement will pinch the retired people, Vasal is of the view that the proposal is equitable as income is liable to be taxed at least once.

However, as a relief to senior citizens, tax exemption limits for them should be raised to Rs 5 lakh per annum instead of Rs 2.40 lakh at present. The Tax Code, however, specified that the tax exempt status currently available to withdrawals would continue to apply to amounts accumulated in post-retirement savings schemes like PPF, EPF, etc, up to March 31, 2011. Money that accrues from April 1, 2011 will be taxed on withdrawal.

For the corporate world, the proposed reduction in the tax rate to 25 per cent from the existing 30 per cent is certainly good news and will help lowering the tax burden of India Inc in a big way. But at the same time the Tax Code proposes to do away with many exemptions that help lowering the tax. In a significant policy change, the Tax Code plans to discontinue all profit linked incentives for area-based investments like setting up plants in a backward area or in the north-east with investment-linked incentives in specific sectors like infrastructure, power, exploration and oil production etc.

Moreover, under the new proposal, tax holiday will not be for a specific period, as is the case now, but will be equal to all capital and revenue expenditure barring land, goodwill and debts.

Once a firm recovers the permitted investments and profits will be taxed. This change is aimed at incentivising capital formation in critical areas and remove incentives to shift profits from the taxable unit to the exempted unit.
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