Union Finance Minister Pranab Mukherjee said on Wednesday that the draft of the new Direct Taxes Code was designed to provide stability in the tax regime as it was based on well-accepted principles of taxation and best international practices.

Releasing the code that proposes to consolidate and amend the law relating to all direct taxes, Mr. Mukherjee expressed the hope that it would eventually pave the way for a single unified taxpayer reporting system and meet the aspirations of the young and professionally mobile population.

While the code proposes abolition of the controversial Securities Transaction Tax (STT), it also suggests reintroduction of tax on long-term capital gains on securities trading. However, the code proposes that all capital gains arising before April 1, 2000 will be exempted.

Written from scratch

Home Minister P. Chidambaram who, during his tenure in the Finance Ministry, had initiated work on the code said it was a brand new code written from scratch. He said the present IT Act had virtually become a happy hunting ground for lawyers.

He said there was no point in referring to Income Tax provisions while discussing the new draft code, as this would not amend the old law, but would replace it. He said the underlying philosophy behind the code was the philosophy of the government, which was wedded to a well-regulated free market system.

Mr. Chidambaram said the code would probably become law by 2011, the golden jubilee year of the Income Tax Act.

In his Budget speech on July 6, Mr. Mukherjee promised to bring the draft code within 45 days for public comment. However, it was released a week before the scheduled time.

The code also proposed to increase tax deduction on savings to Rs. 3 lakh. Besides, it suggested that all perquisites be included in the income of the assessee for the purpose of income tax. It proposed that retirement benefits be exempted from tax, but only if saved in the Retirement Benefits Account.

All withdrawals from the accounts will be taxed to encourage long-term savings, as per the proposals. It also suggests replacing the current profit-linked tax incentives for businesses with investment-linked incentives.

The code suggests introduction of a general anti-avoidance rule to combat tax avoidance.