A Brief View on DT Code

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A brief view on DT Code

by manikantaraju on 06 J anuary 2010

Introduction:

One of the most critical drafts of Indian statutes was Income tax Act, 1961. In order to simp lify the current tax structure govern ment of India comes with a proposal of introduction of Direct Tax Code (DTC).

The new Tax draft has given Comm on man more than what he had expected ; it is not only beneficial to individual tax payer, but also corporate hou ses and forei gn houses . There is a drastic reduction (at least, it looks like that prima facie) on the amount of taxes most of the emp loyed people will pay goingforward .

When come to international taxation, as of now w e are enjoyin g the benefits of tax heavens, treaty agree ment and other DTAA. D ue to proposed DTC a lot chan ges might takin g p lace and someho w cause hard ship to assesses dealin gin international taxation .

The draft is availa ble to the public for the discussions and su ggestions and there are nine critical areas identified for modification . In the current topic we will discuss both beneficial and critical areas in DTC.

Benefits available to assesses :

The proposed Direct Tax Code-

L owers the incidence of tax on corporate and individual inco mes

Increased wealth tax slab to Rs. 50 Crores to be taxed at 0.25%

S cope of income tax expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm inco me

Removal of m ost exe mp tions

Tax exemp tion to PPF and other pension sche mes on withdra wals accu mulated up to March 31, 2011.

The code proposes to abolish S TT.

Capital gains on shares and securities to be taxed as inco me.

Distinction between lon g-ter m and short-ter m capital assets to go.

Wealth tax cap to be hiked to Rs 500mn.

Wealth to be taxed on net basis; amount in excess of Rs.500mn to be taxed at 0.25%

Moves the base year for calculation of capital gains tax to Ap ril 2000

H ike in tax deduction limit on savin gs to Rs.3 lakhs



H igher inco me tax slabs, lowerin g net paya ble taxes .

N ew tax slab

Up to Rs.1,60,000/ - N o tax

From 1,60,000 to 10,00,000/ - 10%

From 10,00,000/ - to 25,00,000/ - 20%

Over and above 25,00,000/ - 30%

Proposes highest tax rate of 30% on inco me of over Rs 25 lakhs

Tax breaks on housin g to be removed

Dividend will continue to be tax-free in the hands of investors

E ffective corporate tax rate at 25% with no surchar ge or cess

MAT to be levied on gross assets as against book profits now

MAT to be 0.25% for bankin g and 2% for others

MAT carry forward to be disallo wed

B usiness losses to be carried forward indefinitely

N o tax deduction on interest paya ble on any govern ment security

Wealth tax liability to be dischar ged by payment of prepaid taxes

Income from certain transfers not to be treated as capital gains

Rationalization of taxes for all non- profit organizations

Annual disclosure of profits of non-life insurance businesses

G ovt . may enter overseas agree ments for dou ble taxation avoidance

N o tax deduction on interest paya ble to bankin g firms and insurers

The direct law code also proposes to take away certain benefits that are currently availa ble.

The imp ortant among the m are cap tured below:

In DTC all long-ter m savin gs to come under EE T-

In the current scenario we have EEE syste m for some savin gs (PFand other retire ment savin gs), that is the inco me is exemp t at the time of contri bution, accrual and with dra wl.

Where as in the proposed tax syste m it exemp t at the time of contri bution and accrual but it is taxa ble at the time of with dra wl at mar ginal tax rate prevailin g at the time of such withdra wals.

The newly-introduced N ew P ension S yste m (N PS ) will continue to be in EE Tregime. H owever, withdra wals fro m accu mulated balance till March 31, 2011will not be taxed . Again, the retire ment benefits would be exemp t fro m taxes if saved in the Retire ment B enefit Am ount (annuity ). H owever, the proceeds from life insurance policy, includin g bonus, would be exemp t from tax if it is a pure life insurance policy.



There will not be any tax deduction availa ble on home loan interest up to Rs 1.5 lakhs . The govern ment aims to club this benefit under the savin glimit of Rs 3 lakhs .

E mp loyee benefits such as rent-free accomm odation, medical

reimb urse ments, leave travel concessions, etc., would be clubbed together in an individual·s inco me.

This draft Tax code will be discussed in parlia ment and if it gets the green signal will be imp lemented for assess ment year 2011. It will include a proper discussion involvin g all the points mentioned earlier . S o we have at least cou ple of years to live with current Tax structure .

N ine critical areas identified after interactions with all stakeholders are: The conce pt of Minimum A lternate Tax based on gross assets

Capital gains taxation in the case of non-residents The Income-tax Act and the dou ble taxation avoidance agree ment

(DTAA)

G eneral anti-avoidance rule (G AAR)

Issues relatin g to effective mana gement control and taxation of forei gn comp anies in India

Taxation of charita ble organizations and

shift from EEE (E xemp t E xemp t E xemp t) to the EE T (E xemp t E xemp t Tax) taxation syste m.

Our finance minister Prana b Mukarjee assured promising action will be taken

on the above issues to take away the difficulties involved .

A Brief View on DT Code

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