In the run-up to Budget 2010-11, the Finance Ministry is mulling a reduction in the number of personal incometax rates from the current three to two.
At present, there are three rates - 10, 20 and 30 per cent - and these are applied on slabs that are specified from year to year as part of the Budget.
The Finance Ministry is looking to simplify the number of rates without sacrificing revenues. The proposed Direct Taxes Code, however, suggests three rates - 10, 20 and 30 per cent - that could be applied on seemingly generous income slabs. Even as a section of Finance Ministry favours the and fewer rates.
The strong economic growth between 2004 and 2007 also helped boost direct tax collections, which now exceeds the indirect tax collections and also accounts for over 50 per cent of the Centre's total tax kitty. In the past, even a single rate for personal I-T was considered, but later given up for equity reasons.
Even for the current fiscal, the Centre is betting on higher direct taxes to make good the shortfall in indirect tax collections. Although the proposed Direct Taxes Code seeks to substantially relax the slabs for individual taxpayers, the relief will be neutralised to some extent through changes in the method of taxation of savings from the current Exempt-Exempt- Exempt (EEE) method to the proposed Exempt-Exempt- Tax (EET) method.
Tax experts think that the proposed Code does not really give a new deal to the personal income taxpayers falling under the aam-admi category although there have been promises that the existing savings will not be brought under the new EET method.
It might benefit the senior management of companies, whose remuneration comes in various forms other than salary such as ESOPs, cars and rent-free accommodation.
A new simplified Direct Taxes Code and Goods and Services Tax (GST) are two important tax reforms promised by the UPA Government. Indications are that GST may not be implemented from April 1 as a number of legislative, administrative steps are yet to be completed.