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Your income may rise, for tax purposes
May, 14th 2007

Your income, at least for taxation purposes, is likely to rise in the eyes of the government. The finance ministry is planning to bring in a few more income streams, including earnings currently exempt from tax under double taxation avoidance agreements (DTAAs) with various countries.

Expatriates and locally placed employees of software companies may feel the pinch of a higher tax if the proposal goes through. These changes in the definition and scope of income will be reflected in the Direct Tax Code, likely to be tabled by the finance ministry in Parliament during the monsoon session.
A finance ministry official said, We are reviewing the definition of income to bring it in step with international standards. Internationally, we see a harmonious flow of capital under the income head and we want to emulate this in India as well.

At present, taxable heads under income include tax on salaries and wages, pensions, gratuities, bonus, fees and commissions, annuity, advance salaries and perquisites, allowances, deferred compensation, income from real estate property and capital gains.

The government is studying international models to decide what can be included under personal income. One option being considered is to bring dividend income in the ambit of personal income, a practice followed by the US. At present, dividend in India is taxed in the hands of companies.

Finmin says internationally, a harmonious flow of capital under income is maintained and it wants to emulate this in India
Expatriates working in India and domestic employees of IT cos may feel the heat, if this proposal goes through
The changes will be reflected in the Direct Tax Code, which may be tabled in Parliament in the monsoon session
The US lumps some other earnings such as income from certain retirement accounts, alimony received, rental income, royalty income, farm income and unemployment compensation under personal income.

The official said the government was of the view that income streams that had escaped taxation under DTAAs might be added to personal income in the future. All tax treaties are reviewed by the government periodically and changes made to them with mutual consent.

Alternatively, North Block may also consider emulating some bits of the income tax system in OECD countries. Most OECD countries now have a dual tax structure. This is used to tax capital income at low and proportional rates, while labour income is taxed at a higher and progressive rate. Others have a flat taxa single-tax rate schedulethat allows no special tax relief.

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