The government today initiated radical tax reforms through a draft code that aims at moderating income tax rates, abolishing Securities Transaction Tax and increasing deduction for savings up to Rs 3 lakh.
Releasing the Direct Taxes Code that will ultimately replace the over four-decades old Income Tax Act and bring all other direct taxes like wealth tax under its purview, Finance Minister Pranab Mukherjee today said if reasonable level of discussion happens on the code, a Bill could be placed in the winter session of Parliament.
The code proposes to exempt the general tax payer from paying income tax if his income is Rs 1,60,000 in a year. He would pay just 10 per cent up to Rs 10 lakh, 20 per cent beyond that and Rs 25 lakh and 30 per cent beyond Rs 25 lakh.
Currently, the general income tax payer does not pay tax till Rs 1,60,000 of income in a year. However, he pays 10 per cent tax on income between Rs 1,60,000 and Rs 3 lakh, 20 per cent between Rs 3 lakh and Rs 5 lakh and 30 per cent beyond Rs 5 lakh.
"We expect to have better compliance and better collection of taxes," Mukherjee said.
While the code proposes abolition of the controversial STT, it also suggests reintroduction of tax on long term capital gains on securities trading.
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Home Minister P Chidambaram, who during his tenure in the Finance Ministry had initiated work on the code, said that this was a brand new code written from scratch.
"There is no point looking at this with reference to the 1961 (IT) Act. Hours of work have gone into it preparing it... You will be doing a dis-service if you look at it from the present Income Tax law," he said.
The present tax laws were only a feast to lawyers and the best way to read the provisions of the code would be to study the relevant chapter before going into the provisions, Chidambaram said.
The attempt, Mukherjee said, "is to simplify the language to enable better comprehension and remove ambiguity to foster voluntary compliance".
The thrust of the code, would be to "improve efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base", he said.
The new code is based on well accepted principles of taxation and best international practices, the Finance Minister said, adding, "it will eventually pave the way for a single unified tax reporting system".
It would also meet the aspirations of "our young and professionally mobile population", he added.
Pointing out that the Direct Taxes Code will replace the Income Tax Act, which was enacted in 1961, Mukherjee said the government would come out with a draft bill on the new code during the Winter Session of Parliament.
The process to frame the new code began with Mukherjee's predecessor P Chidambaram announcing the intention to come out with a new law in the 2005-06 Budget speech.
Chidambaram said, "By the time the code becomes law, it may be 2011 -- the golden jubilee of the old law."