<p>The government’s proposal to replace the Income Tax Act of 1961 with a new Act in 2011 is not just another piece of new legislation. The draft direct tax code which will become the IT Act, placed before the nation by Finance Minister Pranab Mukherjee for discussion, is a path breaking move. When implemented, the new tax code is likely to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand and improve tax base and compliance and also lower tax litigations. The concessions proposed in the form of lower income tax to individuals, for example, will come with the removal of all types of exemptions that a taxpayer currently enjoys. The message is clear: tax rates will be lower if all incomes are disclosed and accounted for. Similarly, to make sure that all income gets taxed at least once, money saved to get tax exemptions will be taxed when withdrawals take place.<br /><br />The proposed tax code also makes major changes in wealth tax calculations and rates. It raises the threshold limit to Rs 50 crore from the present Rs 30 lakh and offers reduction in tax rate from one per cent to 0.25 per cent. But, in a smart move, to expand the scope of taxation, the tax code includes financial assets like shares, corporate bonds, fixed deposits, etc in wealth tax. In case of capital gain tax too, it does away with the present system of short-term and long-term tax with a uniform one and the gains will be taxed at marginal tax rate as applicable to the tax payer. This implies that bigger investors will be taxed at higher rates than the smaller ones. Similarly for the corporates, the tax code has reduced the basic rate but has plugged many loopholes used to evade tax.<br /><br />But make no mistake, if the tax code is generous in giving relief to tax payers, it will be tough on those who evade tax through fraudulent means. The code prescribes stiff penalties and prosecution for non-compliance and every tax offence under the code will be punishable with imprisonment and fine. It also proposes to punish tax consultants who help in tax evasion, while giving sweeping powers and blanket protection to Income Tax officials for initiating court proceedings on matters relating to tax offences.</p>
<p>The government’s proposal to replace the Income Tax Act of 1961 with a new Act in 2011 is not just another piece of new legislation. The draft direct tax code which will become the IT Act, placed before the nation by Finance Minister Pranab Mukherjee for discussion, is a path breaking move. When implemented, the new tax code is likely to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand and improve tax base and compliance and also lower tax litigations. The concessions proposed in the form of lower income tax to individuals, for example, will come with the removal of all types of exemptions that a taxpayer currently enjoys. The message is clear: tax rates will be lower if all incomes are disclosed and accounted for. Similarly, to make sure that all income gets taxed at least once, money saved to get tax exemptions will be taxed when withdrawals take place.<br /><br />The proposed tax code also makes major changes in wealth tax calculations and rates. It raises the threshold limit to Rs 50 crore from the present Rs 30 lakh and offers reduction in tax rate from one per cent to 0.25 per cent. But, in a smart move, to expand the scope of taxation, the tax code includes financial assets like shares, corporate bonds, fixed deposits, etc in wealth tax. In case of capital gain tax too, it does away with the present system of short-term and long-term tax with a uniform one and the gains will be taxed at marginal tax rate as applicable to the tax payer. This implies that bigger investors will be taxed at higher rates than the smaller ones. Similarly for the corporates, the tax code has reduced the basic rate but has plugged many loopholes used to evade tax.<br /><br />But make no mistake, if the tax code is generous in giving relief to tax payers, it will be tough on those who evade tax through fraudulent means. The code prescribes stiff penalties and prosecution for non-compliance and every tax offence under the code will be punishable with imprisonment and fine. It also proposes to punish tax consultants who help in tax evasion, while giving sweeping powers and blanket protection to Income Tax officials for initiating court proceedings on matters relating to tax offences.</p>
