DTC's wider tax slabs to benefit all

In what could be a big relief to individual taxpayers, the government has proposed a widening of the three-tier slab structure, with the lowest rate of 10% for Rs 2-5 lakh taxable income, 20% for Rs 5-10 lakh and 30% for higher income.

The current slabs are Rs 1.6-5 lakh, Rs 5-8 lakh and above Rs 8 lakh respectively. Tax experts said this would bring significant benefits to taxpayers across the slabs.

The Direct Taxes Code (DTC) Bill cleared by Cabinet on Thursday also proposed a 30% corporate tax rate (for domestic companies) sans surcharge or cess. Though this falls short of the proposal in the DTC draft released earlier to bring down the rate to 25%, there would still be nearly a 4 percentage point difference from the current rate which is inclusive of surcharge and cess.

The DTC Bill will now be introduced in Parliament.

The effective tax rate (ETR) for most companies is in the range of 18-20% at present, thanks to depreciation and other forms of expenses allowed. According to Ajit Krishnan, partner, Ernst & Young, in the DTC regime, the ETR would not change substantially for most companies in the manufacturing industry, while some infrastructure companies could see their tax liability going up a bit on account of the removal of exemptions. But oil and gas companies have little to worry about as the government has committed to retain the capital subsidy scheme for them.

The DTC regime would, however, bring IT companies on par with other firms as the tax holiday for export income could go.

Current corporate tax rate is also 30%, but inclusive of a 10% surcharge and a 3% education cess, the tax rate works out to be 33.99%.

After the Cabinet meeting, finance minister Pranab Mukherjee said: "The whole objective (of DTC) is that a plethora of exemptions will be removed. (Income) tax slabs will be three. Rate of taxes will be taken in the schedule (of the bill) so that they need not be changed every year."

In June this year, the government brought out a revised discussion paper on DTC in which it addressed a lot of concerns raised by the original draft released last year.

For companies, the biggest relief was withdrawal of minimum alternate tax (MAT) based on gross assets and restoration of MAT regime linked to book profit. It was also clarified that savings in Public Provident Fund (PPF), other employee provident funds, New Pension Scheme and pure life insurance products and annuity schemes will not be subjected to tax at any stage.

The much-sought incentive for SEZ units was, however, not granted. Only limited relief was given in terms of grandfathering of profit-linked incentive for existing SEZ units which will be operational at the time of implementation of the code.