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Will direct tax code revamp see light of day?
July, 29th 2008

The long awaited revamp of the direct tax code might take longer than expected. Serious differences within the Finance Ministry may prevent the direct tax code from being operationalised during the current tenure of the UPA government.

A fresh wave of economic reforms may be the flavour of the season, but the revamp of the direct tax code is perhaps one area, which could be put on the backburner. Sources said even the long awaited final draft of the code, which was expected by the end of June has not been finalised. The reason for this is strong disagreements within the Ministry on key issues on which the code would be revamped.

Sources said the opinion is strongly divided on whether retirement benefits such as Provident Fund and Gratuity should be subjected to tax at the stage of withdrawal or EET (Exempt Exempt Tax) in tax parlance, or whether the current system which exempts retirement benefits at all stages, or EEE (Exempt Exempt Exempt), should be continued.

There are strong differences on whether sunset clauses for the IT sector especially EOUs, or Export Oriented Units, and STPIs, or Software Technology Parks of India, should be extended beyond 2010.

Also, in a bid to increase the tax base, the authors of the code are trying to include as many groups within the tax ambit as possible. Income definitions under different heads like salary, housing and income from business are being widened, but this has attracted stiff opposition from corporates and other experts.

This has delayed the finalisation of the code, which once finalised will be put up for comments from the public, after which the law ministry will vet it. Post clearance from the Law Ministry and clearance from the cabinet, the bill could be introduced in Parliament but has to be sent to the Parliamentary Standing Committee on Finance for its comments. But with a small legislative window available to the government and a slew of bills to be passed, the tax code may well be low on the priority list.

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