Monday, November 29, 1999

Revised DTC likely to raise taxation rates

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The revised draft Direct Tax Code has brought cheers to the taxpayers by rolling back the proposal to tax long-term savings such as provident fund and the PPF at the time of withdrawal, but taxpayers should gear up to fork out more in the form of taxes as the rates illustrated in the first draft DTC are unlikely to be as generous in the final DTC.According to the revised DTC draft released yesterday, the tax rates would be calibrated. This may translate into higher tax rates compared to what was proposed in the first draft DTC because the roll back of exempt-exempt-tax scheme and computation of minimum alternative tax (MAT) on gross value of assets, would reduce the tax base substantially. Thus, there are strong chances that the tax rates may go up if compared to the first DTC.According to sources in the finance ministry, corporate tax rate could be more than 25 per cent but would be less than 30 per cent as against the 33 per cent effective rate paid by corporates currently. In the first draft discussion paper, the DTC had proposed that the tax rate for corporates would be substantially reduced to "a uniform rate of 25 per cent".Since with the proposal to levy MAT on book profit, as is the current practice, and not on the value of gross assets, the base would be diluted hugely so, the sources said, rate on MAT may also be increased. At present, the MAT is levied on book profit at 18 per cent plus surcharge and cess.However, the decision on Securities Transaction Tax (STT), levied on all transactions in the stock exchanges, would be "calibrated based on the revised taxation regime for capital gains and fund of flow to the capital market", the sources added.As regard the personal income tax, with the exemptions on savings and home loans being retained, the slabs and rates are likely to tinkered with.As regard the revenue forgone compared to the first draft DTC, the sources added that there would not be any loss on account of the revised DTC if compared to the current tax regime. However, compared to the first draft, there would be a "notional" loss because of the shift from asset-based MAT calculation to profit-based computation of MAT.The revised draft though provides more clarity on capital gains on long term assets. It proposes to change the base date for determining the cost of acquisition so that all unrealised capital gains on such assets (between 1.4.1981 to 31.3.2000) would not be taxed. And also, capital gains would be taxed after allowing indexation on this raised base.

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