Impact of DTC on taxation for salaried individuals
It’s here! With the amount of anticipation that normally accompanies a hotly-publicised Bollywood movie, the Direct Taxes Code (DTC) Bill is finally here.
The DTC will replace the Income Tax Act and ring many changes in personal and corporate taxation. It will come into effect from April 1, 2012.
Here we analyse the impact of the DTC on personal taxation for salaried individuals.
Following its original proposal last year, the government had issued a revised discussion paper in June 2010.
In its original form, the DTC was expected to bring about far-reaching changes in the personal taxation slabs and exemptions.
But what has been tabled in the Parliament appears to be a watered-down version of the DTC.
Same tax slabs for both men and women
The big change is that the same tax slabs will apply to both men and women and the tax exempt savings have been recast.
The Income Tax Act offers individuals an annual deduction of Rs 1 lakh under 80C that can be used for instruments such as PPF (up to Rs 70,000), PF, NPS, ELSS, premium for pure life insurance or ULIP, principal repayment of home loan, NSC, fixed deposits with a maturity of five years, payment of tuition fees for full-time education for up to 2 children.
In the current year, one can get an additional deduction of Rs 20,000 for investing in certain notified infrastructure bonds under 80CCF.
Additionally, 80D gives a deduction of Rs 15,000 towards medical allowance.
Annual deduction raised to Rs 1.5 lakh
Under the DTC Bill, the annual deduction has been raised to Rs 1.5 lakh.
We expect more details on this deduction. It appears that investments in PPF, PF, NPS, pure life insurance policies, savings schemes as notified by the government are eligible for this deduction under EEE category.
EEE refers to tax exemption at time of investment, accumulation and withdrawal. Based on available information, it is unclear whether ELSS and premium for ULIP will be eligible for deduction or not.
If they are eligible for deduction, it will only be under the EET category — exempted from taxation at time of investment and accumulation, but taxable at the time of withdrawal.
Deduction for principal repayment of home loans has been done away with.
(The writer is co-founder, iTrust financial advisors)
The potential revenue loss from exemptions has forced the government to scrimp on the hikes in the threshold levels of personal income tax. Yet the govt has estimated a revenue loss of over Rs 15,000 cr.
The proposed new direct taxes law will take away the special treatment that women have so far enjoyed and force individuals to overhaul the way in which they plan their savings.
Women will be put on the same footing as men. Tax-free savings schemes will be fewer, with the government knocking off many from the among the 16 odd available now. DTC has been cleverly packaged. The total amount of amount of tax deduction that will be available to individuals, including interest on housing loans will be around Rs 3 lakh, roughly the same as now.
“The new Bill has only tinkered at the fringes, with no significant benefits for the aam admi. The re-packaging of the savings schemes will significantly lower the savings potential”, said Sandip Mukherjee, executive director, PwC. “The exemption of Rs 2 lakhs is four time the per capita income, which is a generous limit,” countered a senior tax department official. The maximum a person can save on her tax burden is Rs 24,000 and that too if she earns more than Rs 8 lakh a year.
The door on the tax breaks front has been shut for the principal amount paid on home loans, bank deposits, equity linked savings schemes of mutual funds, national savings certificate, infra bonds and unit linked pension plans.
The government has, however, opened a new window, empowering itself to notify schemes for tax breaks and exempting such schemes from tax at all three stages — contribution, accumulation and withdrawals.
This means pension schemes on a unit linked platform could stage a backdoor entry. The other big blow is scrapping the incentives on leave travel allowance and home travel concession. Only long term savings schemes such as the public provident fund, new pension scheme, recognised provident funds will qualify for the tax deduction of Rs 1 lakh under what is now called Section 80 C of the Income Tax Act and be exempt from tax at all stages.
The move to allow an exempt exempt exempt (EEE) method of tax treatment will help individuals build a retirement nest as the country does not have a social security net, reckon officials.
Expenses on tuition fees, pure life insurance premia and health insurance too will qualify for tax benefits, but within an overall limit of Rs 50,000 a year. On top of this, individuals will continue to enjoy a tax-deduction of upto Rs 1.5 lakh on the interest they pay on home loans. Political expediency has prevailed over economic logic to retain the incentive. Loans for higher education will also be tax free. But there really no extra benefit for a tax payer on both these counts.
A J Majumdar, Former Member CBDT and senior consultant with Ernst and Young said the government need not have been liberal with tax exemptions for the middle class. “A tax relief of Rs 4,000 by raising the exemption limit to Rs 2 lakh does not mean much to this segment. The revenue loss was avoidable.”
The savings for 3.5 crore tax payers in the country would have been substantially higher had the government accepted the tax slabs proposed in the original DTC. The new Bill, placed in Parliament on Monday, marks a significant departure from the original code that promised structural changes to end exemptions and broaden the tax base.
The potential revenue loss from exemptions has forced the government to scrimp on the hikes in the threshold-levels of personal income tax. Yet the government has estimated a revenue loss of over Rs 15,000 crore just on widening the slabs.
NEW DELHI: The proposed Direct Taxes Code contains several industry-friendly measures, but there are a number of issues left unaddressed, say tax consultants. First the positives: the 7.5% surcharge on corporate tax is set to be scrapped. There will be no cess on taxes, at least in the short term. Dividends distributed by companies to parents in a vertical structure will not be subject to double taxation, as the cascading effect of the tax on dividends will be removed.
Minimum alternate tax (MAT) will be levied on book profits and not on gross assets as proposed in the original draft. Companies will be allowed to carry forward credit for taxes paid as MAT for 15 years when it begins to pay the regular corporate tax. The proposal to allow companies to offset losses made on infrastructure projects against profits of other infrastructure projects or corporate income is seen as a welcome measure, especially for companies engaged in power, road and oil & gas business.
But the decision to retain the corporate tax rate at 30% instead of 25% proposed in the draft DTC comes as a disappointment, particularly as the average rate across the world is around 25%. The decision to subject special economic zones created in future to MAT too has not been taken too kindly.
“Looking at the overall scheme of things, it is difficult to understand why the government has proposed to tax companies at 30%. After all, there are no big give-aways in the form of exemptions and SEZs are being subjected to MAT,” said Amitabh Singh, tax partner and national leader, human mobility services at Ernst & Young.
Similar views were expressed by Rahul Garg, leader, direct tax practice at PricewaterhouseCoopers. “The current code has accepted most of the suggestions of the industry. But there is an unfinished agenda. Indian businesses need a more competitive tax environment,” he said. And that’s a quibble industry chambers Ficci and Phdcci too have with the bill introduced in the Lok Sabha on Monday and may come into force from April 1, 2012.
Other significant changes proposed include wholesale shifting to investment-linked incentives from the existing profit-linked deductions for availing unexpired portion of area-based and profit deductions. A small beginning in this direction was made last year when the investment-linked deductions were allowed to some select sectors.
Profit-linked incentive schemes are seen as inefficient and inequitable, leading to revenue losses and increased litigation. However, SEZ developers will be allowed profit-linked deductions for all SEZs notified by March 31, 2012 and so would be all units that commence commercial operations by March 31, 2014.
“The extension of tax holidays for new units set up by March 31, 2014, will boost economic development in these special areas. However, the tax-free status is partly taken away by the imposition of 20% MAT on such units though the MAT will be creditable in coming years,” notes Neeru Ahuja, partner, Deloitte Haskins & Sells.
The Bill has also introduced the concept of controlled foreign company and aligned the concept of residence of a company with double tax avoidance treaties by introducing the concept of place of effective management. These two provisions will allow the revenue department to seek tax from foreign companies if it is proven that they are controlled from India. The Bill is, however, silent on allowing credit for taxes paid overseas.
That would introduce an element of double taxation of some portion of the a controlled foreign company, according to tax experts.
DTC bill tabled in Lok Sabha; proposes exemption limit of Rs 2 Lakh
NEW DELHI: The Government on Monday tabled the much-awaited Direct Taxes Code bill (DTC) in the Lok Sabha which proposed to raise the exemption limit on income tax from the current Rs 1.6 lakh to Rs two lakh.
The bill, introduced by Finance Minister Pranab Mukherjee, seeks to widen income tax slabs to levy 10 per cent rate on income between Rs 2 lakh to 5 lakh, 20 per cent on between Rs 5-10 lakh and 30 per cent above Rs 10 lakh.
For senior citizens, tax exemption is sought to be raised to Rs 2.5 lakh from Rs 2.40 lakh.
Currently, income between Rs 1.6-5 lakh attracts 10 per cent tax; between Rs 5-8 lakh, 20 per cent and beyond Rs 8 lakh, 30 per cent.
The proposed tax slabs are much lower than originally suggested in the draft DTC bill -- 10 per cent for Rs 1.6 lakh to Rs 10 lakh, 20 per cent between Rs 10-25 lakh and 30 per cent for income above Rs 30 lakh.
The bill seeks to fix corporate tax at the current 30 per cent but without surcharge and cess. With surcharge and cess, the current tax liability on corporates comes to over 33 per cent.
The legislation also proposes to increase MAT from 18 per cent to 20 per cent of book profit of a company. It seeks to levy dividend distribution tax at 15 per cent.
When enacted, DTC will replace archaic Income Tax Act.
Revised DTC rings in good tidings for stock investors
MUMBAI: The decision to keep long-term capital gains tax on share investments unchanged at 0% and relaxations in short-term capital gains tax will encourage investors to deploy part of their savings in equities, tax consultants said.
According to the revised direct taxes code, 50% of the short-term capital gains will be exempt from tax, while the remaining 50% will be taxed at the income tax rate applicable to the investor. So the effective tax rate on short-term capital gains would be 5%, 10% and 15%, depending on which the tax bracket the investors falls in. This move would be more beneficial to small investors who fall in the lowest tax bracket.
“It is a better scheme as it encourages people in the lower income bracket to invest in shares and mutual funds. The DTC bill is more equitable and fair,” said Sudhir Kapadia, partner, tax, at consulting firm Ernst & Young.
The earlier draft had sought to tax long-term capital gains, which had caused unease among investors. In addition, the draft had also recommended subjecting foreign institutional investors to long-term capital gains tax, which, many felt, would have impacted capital flows into the country.
While FIIs have been spared of long-term capital tax gains, there are other hurdles, especially for portfolio investors coming from countries with which India has signed double taxation avoidance treaties.
“Any claim for a tax treaty benefit will now be subject to the rigour of the general anti-avoidance rule,” says Abhisek Goenka, partner, BMR Advisors.
The rule has been put in place to avoid what is known in market parlance as ‘treaty shopping’, whereby investors in other jurisdictions route their money through tax havens to take advantage of the double taxation avoidance treaties.
“To an extent, some of these conditions may not be very effective safeguards. Investors who come in from tax havens like Mauritius will now be at the mercy of the tax official in India,” says N C Hegde, partner, Deloitte Haskins & Sells.
And there are some other clauses which have implications across investor classes. For instance, long-term gains such as in the case of a buyback or open offer the concessional rate of 20% will no longer apply and tax will have to be paid as per the applicable rates.
“There is also uncertainty on how income of FIIs from derivative transactions, which are of short-term nature, will be charged,” said Shefali Goradia, partner, BMR Advisors.
DTC may make tax payers richer by up to Rs 41,040 annually
NEW DELHI: People earning more than Rs 10 lakh a year may save up to Rs 41,040 in income tax, if slabs proposed by the Direct Taxes Code (DTC) bill come into effect, experts said.
Similarly, tax burden would reduce by Rs 21,540 for those earning annual income between Rs 5 lakh and Rs 10 lakh, while those making Rs 2 lakh to 5 lakh could be richer by Rs 7,660, Deloitte Haskins & Sells Partner Neeru Ahuja said.
According to the bill presented in the Lok Sabha today, income from Rs 2-5 lakh is likely to attract tax rate of 10 per cent; 20 per cent in the Rs 5-10 lakh bracket and 30 per cent above Rs 10 lakh.
At present, income between Rs 1.60 lakh and Rs 5 lakh attracts 10 per cent tax, while the rate is 20 per cent for the Rs 5-8 lakh bracket and 30 per cent for above Rs 8 lakh.
The bill proposes to raise income tax exemption limit to Rs 2 lakh from the current Rs 1.60 lakh.
"For the individuals, DTC tax slabs are certainly beneficial. Their tax liabilities will go down," DSK Legal Partner Balbir Singh Mastan said.
For senior citizens, exemption limit is proposed to be raised to Rs 2.5 lakh from Rs 2.40 lakh.
Individuals over 65 years, or senior citizens, could see tax burden lessen by Rs 4,420, if they earn Rs 5 lakh a year, while those earning Rs 10 lakh will save Rs 18,300 tax.
Senior citizens earning Rs 15 lakh annually could save Rs 37,800 in case the bill is enacted.
Increased exemption limits under DTC to benefit 96pc taxpayers
NEW DELHI: The proposed increase in exemption limits in the Direct Taxes Code (DTC) Bill will benefit an overwhelming 96 per cent of taxpayers, who earn less than Rs 5 lakh a year.
The DTC Bill, which proposes to exempt income up to Rs 2 lakh from payment of income tax, compared to the existing limit of Rs 1.6 lakh, was introduced by Finance Minister Pranab Mukherjee in the Lok Sabha today.
"The objective of increasing the exemption level and providing little more relief at the low end has been targetted to get benefits across to the largest number of taxpayers," said Revenue Secretary Sunil Mitra.
The government plans to roll out the new direct tax regime from April 1, 2012.
Briefing newsmen after the Bill was tabled in Parliament, Mitra said around 96 per cent of India's taxpayers are in the earning bracket of Rs 1 lakh to Rs 5 lakh.
"95.75 per cent, to be precise, of India's 3.25 crore tax payers are in the slab of Rs 1 lakh to Rs 5 lakh of income. They pay around 30 per cent of our total taxes.
"The slab of Rs 8 lakh and above accounts for 2.2 per cent of our taxpayers, but they pay 60 per cent of the taxes, that leaves 10 per cent which is in the Rs 5 lakh to Rs 8 lakh," Mitra said.
According to the Bill, annual income from Rs 2-5 lakh is likely to attract tax at the rate of 10 per cent, while the Rs 5-10 lakh bracket will be taxed at 20 per cent and above Rs 10 lakh at 30 per cent.
At present, income between Rs 1.60 lakh and Rs 5 lakh attracts 10 per cent tax, while the rate is 20 per cent for the Rs 5-8 lakh bracket and 30 per cent for above Rs 8 lakh.
People earning more than Rs 10 lakh a year may save up to Rs 41,040 in income tax, if the slabs proposed by the DTC Bill come into effect, experts said.
Similarly, the tax burden would reduce by Rs 21,540 for those earning an annual income between Rs 5 lakh and Rs 10 lakh, while those making Rs 2 lakh to 5 lakh could be richer by Rs 7,660, Deloitte Haskins & Sells Partner Neeru Ahuja said.
Dropping retirement benefit account system from DTC was unfortunate
Dhirendra Kumar, CEO, Value Research
The new Direct Tax Code is now well on its way to becoming the law of the land. From April 1, 2011, many things will change, but compared to the original draft of the code, the changes are not nearly enough.
Now that the dust has settled and we know exactly what has made it into the final bill, it’s instructive to discuss the ideas that were dropped.
Of all the opportunities missed, the one that’s the most unfortunate is the dropping of the proposed Retirement Benefit Account system.
It’s interesting that of all the changes that have been made since the original August 2009 draft of the code, this was the only one that was universally recognised as desirable, and yet was dropped because it was said to be impractical.
As envisaged in the August 2009 draft, this would have been an account into which all retirement benefits would have been kept by individuals. The deposits could have come from VRS, gratuities and other post-retirement payouts. Within the account, these could have been kept in a savings instruments like the NPS and others which would be approved for the purpose.
As long as the money stayed in the account, it was not taxable. It could also have been moved around within the approved instruments without attracting tax. This account would have meant that not only would post-requirement payouts received at age 60 would not have been taxed at the time, but they could have been earning compounding returns for years or decades without being taxed. The extra returns could easily have compensated for the (deferred) taxation.
But that was not to be. The June 2010 revision of the DTC said that “maintaining individual Retirement Benefits Account by permitted savings intermediaries on behalf of all employees would require a centralised, nation-wide authority to regulate and manage crores of retirement benefits accounts of employees and to deduct tax on withdrawal which entails creation of a separate institutional mechanism, complex logistics and substantial costs.”
So this is not a flaw in the concept itself, but an implementation problem. Actually, the concept of an account like this should actually be extended in other ways, as in the US, the 401(k) account has been extended to the so-called Roth 401(k).
While the 401(k) is much like the retirement benefit account of the original DTC, the Roth 401(k) is a sort of a T-E-E account. In an account like this, if deposits are made with tax-paid funds and then held till retirement, then the there’s no further taxation at any stage.
Such unified accounts would doubtless be beneficial in every way to the retiree as well as to the tax authorities. Even if they are too complex to implement now, that could change within a few years.
There’s no reason that such a system should now be forgotten till 2061, when (extrapolating from the track-record), the Direct Tax Code is due for the next overhaul. If the government thinks the UID feasible, then at some point in the next decade or so, a unified retirement account should be possible.
I mean how complex can it be? It’s not as if it’s something truly difficult like, for example, organising an international sports event.