In a set of recommendations that should warm the cockles of the ‘aam aadmi's' heart and that of all taxpayers at large, as also enthuse the stock markets, the Parliamentary Standing Committee on Finance has pitched for relief far higher than what was proposed by the government in the Direct Taxes Code (DTC) Bill, aimed at ushering in a new direct taxation regime.
As a measure for neutralising the impact of high inflation, the standing panel headed by the former Finance Minister and senior BJP leader, Yashwant Sinha, has suggested that the annual income tax exemption limit be raised to Rs. 3 lakh from the current level of Rs.1.8 lakh and recommended marked changes in tax slabs to leave more money in the hands of taxpayers. Alongside, it has proposed a higher investment limit for tax savings schemes at Rs. 3.20 lakh to induce savings, while recommending abolition of the Securities Transaction Tax (STT) to perk up trading on the bourses.
In its report, after scrutinising the DTC Bill, which was submitted to Lok Sabha Speaker Meira Kumar on Friday, the committee also suggested that while the rate of corporate taxation be retained at 30 per cent, the limit for wealth tax be pegged at Rs. 5 crore.
Even as tabling of the committee's report in the Lok Sabha during the budget session will finally pave the way for debate and approval of the DTC Bill and thereby replace the archaic Income-Tax Act 1961, it has come a wee bit too late for implementation during the new fiscal year starting April 1, although it was meant to be so.
However, in view of the delay, Finance Minister Pranab Mukherjee may choose to incorporate certain tax provisions of the DTC Bill in the budget for 2012-13, to be presented in the Lok Sabha on March 16, so as to give a fillip to both spending and savings and thereby stimulate growth.
The standing panel has suggested that personal income of over Rs. 3 lakh up to Rs. 10 be taxed at 10 per cent, over Rs. 10 lakh up to Rs. 20 lakh at 20 per cent and over Rs. 20 lakh at 30 per cent.
If accepted, the modifications would be a bonanza of sorts for taxpayers as the current taxation rates are 10 per cent on income over Rs. 1.8 lakh to Rs. 5 lakh, 20 per cent on income over Rs. 5 lakh to Rs. 8 lakh and 30 per cent on income above Rs. 8 lakh.
In its place, as per the DTC proposal, the government had opted for an income tax exemption limit of Rs. 2 lakh, followed by a 10 per cent tax on income above Rs. 2 lakh up to Rs. 5 lakh, 20 per cent on income above Rs. 5 lakh up to Rs. 10 lakh, and 30 per cent on income above Rs. 10 lakh.
Likewise, as against the current tax exemption through savings instrument at Rs. 1.2 lakh and the DTC proposal of Rs. 2 lakh, the parliamentary panel has suggested extending the limit to Rs. 3.2 lakh. As for wealth tax, the committee has suggested that the impost should be levied only if the value of the specified asset exceeds Rs. 5 crore. This is way above the current limit of Rs. 30 lakh, and Rs. 1 crore proposed in the DTC Bill.
Also, it has said wealth tax should be levied at 0.5 per cent on assets valued above Rs. 5 crore and up to Rs. 20 crore, 0.7 per cent on assets above Rs. 20 crore and up to Rs. 50 crore and 1 per cent on assets above Rs. 50 crore. The current wealth tax rate is pegged at one per cent.
From the stock market perspective, nothing could be more cheering than abolition of the Securities Transaction Tax (STT), a step that investors have been clamouring for quite some time. While recommending its abolition, a step that is expected to lead to higher trading volumes on the bourses, the standing committee has also suggested calibration of both short and long term capital gains tax.
“The Committee would recommend that the Ministry may explore the possibility of abolishing the STT ... The distinction between listed and unlisted securities should be removed,” the report said.
Aimed at incentivising long-term savings and social security, the committee has also suggested an increase in tax exemption “... with regard to allowable deductions for expenditure incurred on life insurance, health insurance and fees paid for education of children, all of which together have been subject to a combined limit of Rs. 50,000 per annum, the committee would recommend that this limit may be increased to Rs. 1 lakh so that all the above expenses are covered in a reasonable manner.” However, this, it suggested, would be apart from the additional deduction of Rs. 20,000 on account of health insurance premium paid for dependent parents, which should be separately allowed with a view to promoting social security for senior citizens. “The committee further believe that since higher education, particularly professional education has become extraordinarily expensive for ordinary citizens of the country, similar additional deduction to the tune of Rs. 50,000 may be permitted specially for this purpose over and above the deductions suggested above,” the committee said in its report.
Giving the rationale for suggesting markedly higher relief than what was proposed in the DTC Bill, the committee said: “Such focused deductions on personal incomes would help provide requisite relief to the middle-classes, while encouraging long term household savings for the benefit of the economy at large.”
On the issue of the General Anti-Avoidance Rules (GAAR), a provision aimed at curbing tax evasion through cross-border transaction, the panel said that the Finance Ministry and the Central Board of Direct Taxes (CBDT) should seek to bring greater clarity and preciseness to the scope of the provisions. “There should be certainty on these provisions so that foreign investors do not become wary of investing in the country ... The provisions to deter tax avoidance should not end up penalising taxpayers who have genuine reasons for entering into a bonafide transaction.”
Urging the government to remove uncertainties with regard to applicability of the double tax avoidance agreement (DTAA) treaties, the panel said: “Uncertainties with regard to applicability of tax treaty provisions should be removed so that India's credibility as a reliable treaty partner is not affected.”
