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Direct Taxes Code likely to retain
May, 05th 2010

The proposed Direct Taxes Code (DTC) is likely to retain the exempt-exempt-exempt (EEE) regime for taxation of individual savings. The finance ministry, which is giving final touches to the revised DTC draft, reckons that a shift to the exempt-exempt-tax (EET) regime, as proposed in the original draft of the code, may not pass muster.

In the current EEE regime, savings are exempt from tax in all the three stages: contribution, accretion and withdrawal. The EET method, which is considered to be the best global practice for taxation of savings, allows exemption at the first two stages, but provides for a tax on withdrawals at the personal marginal rate.

Government sources said that the via-media option of exempting withdrawals up to a certain threshold and taxing higher amounts could make things complex and invite charges of discrimination. We would be left with no option but to retain the present regime where the savings are exempt from tax at all three stages, a senior finance ministry official told FE.

The finance ministry is reportedly planning to set up a committee to suggest ways to link interest on small savings instruments, like public provident fund schemes, with market rates. The idea is that the administered interest rate for small savings which is a tad above the fixed term deposits of bankscauses distortions.

Analysts feel it would be pre-mature to suggest a change in the method of taxation of savings at this juncture, as accretion to savings is linked to interest rates. Another factor that weighs on the mind of policymakers is that since the intended purpose of the DTC is to make tax laws simpler, making a distinction between low and high savings could go against its very purpose.

According to the proposed DTC, the permitted savings intermediaries that were proposed to come under the EET regime were approved provident funds, approved superannuation funds, life insurer and the New Pension System Trust. Though the draft code had clarified that only new contributions to the saving schemes after the introduction of the DTC would be subject to the EET method of taxation, tax experts feel that the EET regime of taxing the savings would not be appropriate for the country at this point of time, since social security systems are still not robust.

The concept of EET is primarily prominent in developed countries which have comprehensive social security schemes. In India, in the absence of such schemes, small tax saving instruments for individuals like retirement kitty should not be taxed. The EET regime requires reconsideration, said Vikas Vasal, executive director, KPMG.

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