The long-awaited Direct Taxes Code 2009 is finally here. Finance

Minister Pranab Mukherjee released the draft of the Direct Taxes Code 2009 (DTC 2009) for discussion and debate after which the final Code will replace the IT Act, 1961 with effect from April 1, 2011.

The draft proposes drastic changes in personal taxation and tax administration. It seeks to simplify the tax structure by doing away with plethora of tax exemptions, ushering in moderate levels of taxation, improving the efficiency and equity of the tax system by eliminating distortions and expanding the tax base. It begins the simplification process by removing the confusion about ‘assessment year’ and ‘previous year’ (which confused the taxpayers about the year for which the returns were being filed) by replacing them with the unified concept of ‘financial year’. Now, to under-stand how the DTC 2009 proposes to simplify it further, let’s first look at the changes proposed in the tax structure.

Huge Relief for Taxpayers
The massive increase in income tax slabs was totally unexpected and created a huge buzz among individual taxpayers. Although the basic exemption limit has been retained at Rs 1.60 lakh (Rs 1.90 for women and Rs 2.40 lakh for senior citizens), the 10 per cent tax slab upper limit has been hiked from Rs 2.50 lakh to Rs 10 lakh, 20 per cent tax slab has been hiked from Rs 2.50 lakh-5.00 lakh to Rs 10 lakh-25 lakh, while the 30 per cent tax slab has been hiked from Rs 5 lakh to Rs Rs 25 lakh (See Table-I). Now, that’s a massive hike in tax slabs and, no wonder, the DTC 2009 has warmed the hearts of all taxpayers, especially salaried taxpayers.

The reason is simple. An individual taxpayer drawing an annual salary of Rs 6 lakh is presently liable to pay Rs 84,000 as tax, while his tax liability under the new tax code would be just Rs 44,000! That’s straightaway reduction in tax liability to the tune of Rs 40,000 and that too without availing any tax exemptions!

Similarly, a person drawing a salary of Rs 10 lakh is presently liable to pay a total tax of Rs 2.04 lakh (excl. cess), whereas under the new tax code, he will be liable to pay only Rs 84,000. Again, a person drawing a salary of Rs 25 lakh would be paying just Rs 3.84 lakh when the tax code comes into effect, whereas he now pays about Rs 7.19 lakh (incl. surcharge) as income tax under the present tax structure.