One of the most critical drafts of Indian statutes was Income tax Act, 1961. In order to simplify the current tax structure government of India comes with a proposal of introduction of Direct Tax Code (DTC).
The new Tax draft has given Common man more than what he had expected; it is not only beneficial to individual tax payer, but also corporate houses and foreign houses. There is a drastic reduction (at least, it looks like that prima facie) on the amount of taxes most of the employed people will pay going forward.
When come to international taxation, as of now we are enjoying the benefits of tax heavens, treaty agreement and other DTAA. Due to proposed DTC a lot changes might taking place and somehow cause hard ship to assesses dealing in international taxation.
The draft is available to the public for the discussions and suggestions 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-
v Lowers the incidence of tax on corporate and individual incomes
v Increased wealth tax slab to Rs. 50 Crores to be taxed at 0.25%
v Scope of income tax expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm income
v Removal of most exemptions
v Tax exemption to PPF and other pension schemes on withdrawals accumulated up to March 31, 2011.
v The code proposes to abolish STT.
v Capital gains on shares and securities to be taxed as income.
v Distinction between long-term and short-term capital assets to go.
v Wealth tax cap to be hiked to Rs 500mn.
v Wealth to be taxed on net basis; amount in excess of Rs.500mn to be taxed at 0.25%
v Moves the base year for calculation of capital gains tax to April 2000
v Hike in tax deduction limit on savings to Rs.3 lakhs
v Higher income tax slabs, lowering net payable taxes.
ü New tax slab
Up to Rs.1,60,000/-
From 1,60,000 to 10,00,000/-
From 10,00,000/- to 25,00,000/-
Over and above 25,00,000/-
v Proposes highest tax rate of 30% on income of over Rs 25 lakhs
v Tax breaks on housing to be removed
v Dividend will continue to be tax-free in the hands of investors
v Effective corporate tax rate at 25% with no surcharge or cess
v MAT to be levied on gross assets as against book profits now
v MAT to be 0.25% for banking and 2% for others
v MAT carry forward to be disallowed
v Business losses to be carried forward indefinitely
v No tax deduction on interest payable on any government security
v Wealth tax liability to be discharged by payment of prepaid taxes
v Income from certain transfers not to be treated as capital gains
v Rationalization of taxes for all non-profit organizations
v Annual disclosure of profits of non-life insurance businesses
v Govt. may enter overseas agreements for double taxation avoidance
v No tax deduction on interest payable to banking firms and insurers
The direct law code also proposes to take away certain benefits that are currently available.
The important among them are captured below:
v In DTC all long-term savings to come under EET-
ü In the current scenario we have EEE system for some savings (PF and other retirement savings), that is the income is exempt at the time of contribution, accrual and with drawl.
ü Where as in the proposed tax system it exempt at the time of contribution and accrual but it is taxable at the time of with drawl at marginal tax rate prevailing at the time of such withdrawals.
The newly-introduced New Pension System (NPS) will continue to be in EET regime. However, withdrawals from accumulated balance till March 31, 2011 will not be taxed. Again, the retirement benefits would be exempt from taxes if saved in the Retirement Benefit Amount (annuity). However, the proceeds from life insurance policy, including bonus, would be exempt from tax if it is a pure life insurance policy.
v There will not be any tax deduction available on home loan interest up to Rs 1.5 lakhs. The government aims to club this benefit under the saving limit of Rs 3 lakhs.
v Employee benefits such as rent-free accommodation, medical reimbursements, leave travel concessions, etc., would be clubbed together in an individual’s income.
This draft Tax code will be discussed in parliament and if it gets the green signal will be implemented for assessment year 2011. It will include a proper discussion involving all the points mentioned earlier. So we have at least couple of years to live with current Tax structure.
Nine critical areas identified after interactions with all stakeholders are:
ü The concept of Minimum Alternate Tax based on gross assets
ü Capital gains taxation in the case of non-residents
ü The Income-tax Act and the double taxation avoidance agreement (DTAA)
ü General anti-avoidance rule (GAAR)
ü Issues relating to effective management control and taxation of foreign companies in India
ü Taxation of charitable organizations and
ü shift from EEE (Exempt Exempt Exempt) to the EET (Exempt Exempt Tax) taxation system.
Our finance minister Pranab Mukarjee assured promising action will be taken on the above issues to take away the difficulties involved.