Q+A - India's proposed direct tax code

NEW DELHI Fri Aug 27, 2010 4:30pm IST

An employee counts currency notes at a cash counter inside a bank in Agartala, capital of Tripura, January 29, 2010. REUTERS/Jayanta Dey/Files

An employee counts currency notes at a cash counter inside a bank in Agartala, capital of Tripura, January 29, 2010.

Credit: Reuters/Jayanta Dey/Files

Related Topics

NEW DELHI (Reuters) - The cabinet approved a new direct tax code on Thursday that will replace archaic income and wealth tax laws in the country, a key reform initiative that is aimed at widening the tax net and increasing federal revenues.

The direct tax code bill will now be placed before parliament for approval on Monday. The government aims to implement it from April 1, 2011.

Here are some questions regarding the tax reform.

WHAT IS THE DIRECT TAX CODE ALL ABOUT?

India wants to modernise its direct tax laws, mainly its income tax act which is now nearly 50 years old. The government, wants a modern tax code in step with the needs of an economy which is now the third largest in Asia.

The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government's coffers.

The federal budget has estimated about $92 billion in direct tax receipts for the year that ends in March 2011.

WHY IS IT IMPORTANT FOR INDIAN FIRMS AND FOREIGN INVESTORS?

One of the key aims of the new tax code is to provide a system which takes into account increased cross border mergers and acquisitions by Indian corporates over the last few years.

The new code is also expected to streamline tax rates and administration for foreign institutional investors, for whom India is a top destination.

Despite the crisis in the euro zone, capital flows have been robust this year with an inflow of $8.5 billion so far.

WILL IT PROVIDE GREATER STABILITY TO INVESTORS?

The code aims to provide greater tax clarity and stability to investors who want to invest in Indian projects and companies.

These officials have said the government would not like to tinker with tax rates every year to provide a greater degree of tax certainty to corporates, investors and individuals.

WHAT WILL BE THE IMPACT ON INDIAN AND FOREIGN CORPORATES?

On the face of it, the corporate tax rate has been reduced from a little over 33 percent to 30 percent. But tax experts say whether a company pays more tax or less will also depend on a key provision called the minimum alternate tax (MAT).

MAT is applicable to those companies who do not show book profits liable to tax, as they claim a plethora of exemptions on account of being in capital intensive industries. The MAT rate has now been increased from 18 to 20 percent in the new code.

Foreign corporates today pay a higher rate of tax. However, the new rate of taxation for foreign corporates is not yet known.

WILL IT BE REVENUE POSITIVE FOR THE GOVERNMENT?

The government has marginally lowered the tax burden for individuals and has effectively left corporates with largely similar tax rates as before, hoping that these changes will make the new code revenue positive.

Though the exact impact is not yet known, finance ministry officials have said the new code will help shore up the tax GDP ratio significantly from around the current 11 percent level.

WILL THE ANNUAL BUDGET BE LESS IMPORTANT?

An important part of the budget every year has been the detailing of the tax rates. However, with the introduction of the new direct tax code, the tax rates will not be part of the budget presented to Parliament every year.

(Reporting by Abhijit Neogy ; editing by Alistair Scrutton and Surojit Gupta)

FILED UNDER:
  • Most Popular
  • Most Shared

Insight

REUTERS SHOWCASE

Border Talks

Border Talks

India names Ajit Doval as special envoy for China border talks.  Full Article 

WTO Deal

WTO Deal

U.S. seeks to step up India trade talks  Full Article 

Phone Masts

Phone Masts

American Tower to buy Bharti Nigeria phone masts for $1.1 billion  Full Article 

Infrastructure Plan

Infrastructure Plan

India targets private cash to build railways to its ports.  Full Article 

Shadow Banking

Shadow Banking

Reserve Bank planning more measures for NBFCs.  Full Article 

Auto Sector

Auto Sector

Hyundai Motor, Kia Motors lift 2014 global sales target on China, emerging markets  Full Article 

Oil Prices

Oil Prices

Some fund managers see oil falling to $60 without OPEC cut.  Full Article 

Project Shelved

Project Shelved

Jindal Steel shelves $10 bln project after coal setback.  Full Article 

Market Eye

Market Eye

Sensex, Nifty rise to record after China, ECB stimulus boosts risk appetite.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage