Finance minister Pranab Mukherjee on Wednesday unveiled a roadmap for reforms in direct taxes that promises to drastically cut the tax 
liability of most individuals by considerably raising tax slabs. The new direct taxes code, proposed to be implemented from April 2011, aims to moderate effective tax rates in the hope that this will encourage more people to pay up.

The most significant changes proposed are in personal income tax, which could lead to tax savings of up to Rs 2.67 lakh each year. The 10% tax rate, currently applicable for incomes between Rs 1.6 lakh and Rs 3 lakh, will apply to incomes between Rs 1.6 lakh and Rs 10 lakh, which means those with incomes between Rs 3 lakh and Rs 10 lakh could save up to Rs 1.17 lakh from their annual tax liability.

The next slab of 20% would be applicable for incomes between Rs 10 lakh and Rs 25 lakh instead of as is currently between Rs 3 lakh and Rs 5 lakh and the 30% slab would be for incomes exceeding Rs 25 lakh, which now kicks in at Rs 5 lakh. The benefits to taxpayers with annual incomes of Rs 25 lakh or more as a result of these changes would be about Rs 2.67 lakh per annum.

As the icing on the cake, the new code proposes to allow for exemptions on savings up to Rs 3 lakh rather than the Rs 1 lakh now allowed under Section 80C of the I-T Act. There is a catch, though. There is no mention of any exemption for housing loans, though the exemption for higher educational loans will stay.

The exemption limit at which taxes kick in will continue to be higher for women and senior citizens. For women, their tax meter will start ticking when their income exceeds Rs 1.9 lakh per annum, whereas senior citizens will have to pay tax only if they earn more than Rs 2.4 lakh a year.

A change that could be problematic for many individuals is in the treatment of post-retirement benefits like provident fund. The adoption of the EET (exempt-exempt-tax) method will mean that any withdrawal of money from your PF account, for whatever reason, will attract a tax since the amount withdrawn will be treated as part of your income for that year. This will, however, apply only to amounts that accrue April 2011 onwards.

Like personal taxes, the corporate tax rate too is to be cut from the existing 30% (excluding cesses and surcharges) for domestic firms to 25%. Also, companies can carry forward losses for as long as they like, while earlier, a loss in a year could be set off against profits only within the next eight years.

In the case of foreign companies, however, in addition to this 25% tax, there will be a 15% tax on ``branch profits''. Branch profits, the code explains, are defined as total income minus corporate tax. This seems to suggest that the effective tax rate for foreign firms could actually be slightly higher than the current 35%.

Another big change is inclusion of financial assets like shares and deposits in the calculation of wealth tax. The whammy is sought to be offset by a reduction in the wealth tax rate from 1% to 0.25% and an increase in the threshold limit to Rs 50 crore. It's also proposed to do away with the securities transaction tax, and change the manner in which tax holidays for infrastructure industries is given.

Explaining the rationale behind these changes, the FM said: ``The aim of the direct tax code is better compliance and better realization with likely expansion in the tax base.'' He added, ``All direct tax laws have been brought under one umbrella and laid down in a manner that it will eliminate the scope of litigation.''

Former FM and union home minister P Chidambaram who had begun the process of rewriting the tax laws after Budget 2005-06 said: ``It underlines the philosophy of the government, that is, a regulated free market system... The new direct tax code will promote economic activity and entrepreneurship.''

The code has been put up on the finance ministry's website and the government has invited suggestions. It plans to introduce a draft bill to enact the new code in Parliament in the Winter Session.