Housing loan, PF in EET net to offset tax sop losses

Housing loan, PF in EET net to offset tax sop losses
The Financial Express, August 14, 2009, Page 2

Surabhi, New Delhi

The finance ministry estimates that scrapping tax deduction on housing loans and bringing provident funds including those for government employees under the EET (Exempt-Exempt-Tax) system will compensate for the lower tax rates proposed in the Direct Taxes Code. A day after the Code was unveiled; the finance ministry is already preparing its stand on the issue, which it expects could lead to huge political opposition .

“You can’t have everything. If tax rates are low, the tax base needs to be widened in order to sustain collections,” a finance ministry official said. The Direct Taxes Code Bill is scheduled to be tabled in Parliament in the Winter Session, where the ministry expects to face a huge debate on these provisions.

The Code, which is expected to come into effect from April 1, 2011, seeks a drastic re-jig of the income tax slabs. The threshold will be Rs 1,60,000 for individual assessees, a 10% tax would be levied on income between Rs 1,60,001 and Rs 10,00,000 while a 20% tax along with Rs 84,000 would be levied on income between Rs 10 lakh and Rs 25 lakh. On annual income over Rs 25 lakh, individual assessees would be expected to pay 30% tax along with Rs 3,84,000.

To make up for this revenue loss, it has suggested scrapping all exemptions for savings instruments, other than the omnibus Rs 3 lakh annual deduction from individual income. The finance ministry estimates given in the budget documents say, the deduction for repayment of housing loans and the savings scheme has cost it Rs 27,389 crore in 2008-09.

The code proposes the EET method of taxation for all savings schemes including approved super annuation funds. According to data with the direct tax department, there are about 2.5 crore income tax assesses in the country, a large percentage of whom use some form of tax savings instruments including the Public Provident Fund as well as the government Provident Fund, Employees Provident Fund and others.

The only exemptions that will continue are for medical and education loans, that together account for Rs 130 crore per year to the exchequer. The Direct Taxes Code also plans to remove area-based and profit-linked exemptions, which account for a large chunk of revenue losses. Instead, it calls for investment-linked incentives for nine activities such as developing special economic zones, exploration of production of mineral oil and natural gas, cold chain facilities. As per the Budget document, the Centre lost out on Rs 68,914 crore of direct tax due to exemptions to corporate.