The Cabinet has cleared the Direct tax code and will be introduced in Rajya Sabha, and referred it to a select committee, during the monsoon session.
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 new Code comes into effect from April, 2011.
After the approval of the Cabinet, the decks are cleared for tabling the legislation in the Monsoon Session of Parliament so that the new Act ushering in reduced tax rates and exemptions may come into effect from next fiscal.
When enacted, the Code will replace the archaic Income Tax Act and simplify the whole direct tax regime in the country.
The Code aims at reducing tax rates, but expanding the tax base by minimising exemptions.
The Finance Ministry had earlier come out with a draft on the (Direct Tax Code) DTC bill, some of whose provisions drew strong criticism from industry as well as the public.
To address those issues, the ministry brought out the revised draft, dropping earlier proposals of taxing provident funds on withdrawal and levying Minimum Alternate Tax on corporates based on their assets.
"As of now, it is proposed to provide the EEE (Exempt-Exempt-Exempt) method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPF) ...", the revised DTC released by the Finance Ministry said.
The revised draft also puts pensions administered by the interim regulator PFRDA, including pension of government employees who were recruited since January 2004, under EEE treatment.
The first DTC draft had proposed to tax all savings schemes including provident funds at the time of withdrawal bringing them under the EET (Exempt-Exempt-Tax) mode.
Under the EEE mode, the tax exemption is enjoyed at all the three stages - investment, accumulation and withdrawal.
The earlier DTC draft had proposed to reduce the corporate tax to 25 per cent from the present 30 per cent. The revised proposal has also made it clear that tax incentives on housing loans will continue. Payment on interest on housing loans up to Rs. 1.5 lakh will continue. The earlier draft was silent on housing loans.