In a move that could leave more money in the hands of people, the Government proposed to raise exemption limit on income tax from the present Rs 1.6 lakh to Rs 2 lakh, the bill also seeks to remove surcharge and cesses on corporate tax, which could provide relief to business houses.
The Cabinet approved the much-awaited Direct Taxes Code (DTC) Bill on Thursday, which is likely to be tabled in Parliament during the ongoing Monsoon session and thereafter it may be referred to standing committee.
When asked what will be the limit of exemptions for income tax, Finance Minister Pranab Mukherjee told reporters after the Cabinet meeting that it is proposed to be raised to Rs 2 lakh from the current Rs 1.6 lakh.
"The whole objective is that a plethora of exemptions will be limited. (Income) tax slabs will be three. Rate of taxes will be taken in the schedule so that they need not be changed every year," he said.
On the corporate tax, he said it is sought to be retained at the present level of 30 percent, but there will not be any surcharge or cesses on it.
According to sources, the DTC bill is likely to be tabled in Parliament on Monday. Thereafter, it will be referred to Parliamentary standing committee, they added.
When asked what the new income tax slabs would be, Mukherjee said, "That will be discussed in Parliament."
For senior citizens and females, the tax slabs are likely to be relaxed further, they added
When contacted, senior officials in the Finance Ministry declined to comment on the slabs.
At present, income between Rs 1.65 lakh and Rs 5 lakh attracts 10 percent tax, while the rate is 20 percent for the Rs 5-8 lakh bracket and 30 percent for income above Rs 8 lakh.
The first draft of the bill had suggested 10 percent tax on income between Rs 1.60 lakh and Rs 10 lakh, 20 percent on income between Rs 10 and Rs 25 lakh and 30 percent beyond that.
However, finance ministry officials had later said those slabs were just illustrative.
The Bill, approved by Cabinet on Thursday also seeks to impose minimum alternate tax (MAT) at 20 percent of the book profit, compared to 18 percent at present.
The first draft had proposed to impose MAT on assets, which drew strong criticism from the industry. The MAT on book profit has been maintained in the revised draft as well.
The first draft had also proposed to tax long-term savings like provident funds at the time of withdrawal. However, the revised draft exempted them, after the first draft drew flak.
"Concerns were expressed for shifting from EEE (exempt, exempt, exempt) to EET (exempt, exempt, tax)," the Finance Minister said.
This would also address the issue of taxing surplus funds of charitable institutions, he added.
When enacted, the DTC will replace the archaic Income Tax Act and simplify the direct tax regime in the country.
Finance Ministry officials exuded confidence that the Bill will come into force by the deadline of 1st April 2011.
The code aims at reducing tax rates, but expanding the tax base by minimising exemptions.
"DTC will help in streamlining various tax exemptions, deductions and thereby bring in moderate tax rates. DTC would address most of the issues raised by corporate India, like, not imposing tax on gross assets, clarifying EEE, introducing graded deduction for capital gains among others," Ernst & Young Tax Market Leader Sudhir Kapadia said.