The second draft of the direct tax code (DTC) may drop the exempt-exempt-tax (EET) proposal for taxation of savings, sources told Media. The first draft had proposed a exempt-exempt-tax versus an exempt-exempt-exempt (EEE) for savings.

Sources in the Finance Ministry said that the revise draft of the direct tax code that is expected in June is likely to drop the EET method of taxing savings. This had been one of the most controversial clauses in the first draft of the DTC. The DTC had said that this was in line with international practices.

The Finance Ministry, sources said, now does not find it appropriate to implement this in an Indian context where the only method of social security is savings and the method may actually lead to a drop in savings.

Sources said EET may not apply to retirement benefits and would imply double taxation of income over Rs 3 lakh.

The tax liability under EET may exceed the relief obtained. The liability would be higher if taxpayers hit the higher slab in terminal year.

It is also difficult to segregate sums deposited prior to March 2011. The first draft of the DTC had proposed 2011 as cut-off year. Sources said the cost of maintaining records of interest is high.

The revenue foregone due to EEE is Rs 25,743 crore for 2007-08.