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Govt rejects move to raise tax slabs
April, 02nd 2014

The finance ministry has rejected several recommendations made by the Parliamentary Standing Committee on Finance, including a change in income tax slabs and removal of some of the cess, arguing that the move will result in a revenue loss of Rs 60,000 crore.

The panel headed by former finance minister finance minister Yashwant Sinha had said that income up to Rs 3 lakh should be exempted from tax, while those in the Rs 3-10 lakh should face a 10% levy, while individuals earning Rs 10-20 lakh should pay 20%, while those beyond Rs 20 lakh shell out 30% tax.

Similarly, the suggestion to link the exemption limit to the consumer price index has been trashed with the ministry, arguing that even the wholesale price index can be used as the basis, with a change in the base year and the composition of the index expected to complicate matters further. "Indexing the slabs to inflation index is not a comprehensive approach as the slab structure is dependent on a number of factors including other reliefs given to a taxpayer, potential revenue loss to the government, number of taxpayers who would go out of the tax net etc," the finance ministry said, while releasing the a draft Direct Taxes Code that has been in the works for close to a decade.

While the rejection of the two proposals will affect individuals, there is bad news for the markets too as the finance ministry is not in favour of abolition of the securities transaction tax (STT). It has argued that the levy is needed to regulate day trading and the burden has been reduced through as the rate has been reduced significantly.

But, there is some cheer for life insurance companies as the ministry has said that the tax rate should be retained at 15% instead of the proposed 30%. "In the Code, the tax base for a life insurance company is limited to the surplus generated for the company in the shareholders account, while the surplus determined in the policyholders' account (technical account) is not taxable. Therefore, rate of tax on such companies is aligned with that applicable to other companies, that is 30%."

Also, the ministry has rejected to proposal to levy dividend distribution tax on policyholders's investments, saying it may negatively impact the insurance industry. Instead, DTC proposes to levy Income Distribution Tax on equity-linked insurance. For life insurance products, where the premium paid or payable for any of the years does not exceed 10% of the capital sum assured, any amount including bonus will not be subjected to tax.

Further, the finance ministry had turned down a demand for allowing deduction for corporate social responsibility (CSR) expenditure in backward regions and districts. "Allowing deduction for CSR expenditure would imply that the government would be contributing one third of this expenditure as revenue foregone," it said.

The ministry said that of 190 recommendations made by the standing committee, 153 are proposed to be accepted either fully, or partially.

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