The readers are informed in advance that the following article may appear bit lengthy but may contain important information, so kindly bear with the same.
Everyone is waiting for the much discussed Direct Tax Code, but I have noticed some points in the said code, which should be considered for rectification. The article also provides the view point of the Standing Committee on the Code.
1. Carbon Credits: Carbon Credits is one of the hotly discussed topic and which the code has understood. Clause 32(2) (xi) includes consideration accrued or received on transfer of credits. There is no corresponding provision at present in the Income Tax Act, 1961.
2. Corporate Social Responsibility: CSR is an important point in the Companies Law and is also expected from Corporate Houses ethically. Till date the present act has nothing relating to this effect, and to our dismay, Code hasn’t provided any benefit in this area.
The Committee also feels that deduction for CSR expenditure in backward regions and districts should be provided.
3. Partnership to LLP: Continuing the lines of the present Act, the Code doesn’t expressively provide for exemption of Capital Gains in case a partnership firm is converted into a LLP. This point was also observed by the Committee.
4. Partnership into Company: At present, the Income Tax Act specifically provides that in case of conversion of a partnership firm being converted into a Company, Capital Gains will be exempted on fulfilling of certain conditions. But sadly this kind of provision is absent from the Direct Tax Code.
5. CG on sale of Securities: The provision of the present Section 10(34) can be found in the code also, but there is slight amendment with regard to sale of equity related securities as mentioned in Section 10(34).
If held for less than 1 year before transfer, a deduction of 50% of the income shall be allowed. The balance will be merged with total income and taxed at applicable rate of 10%/20%/30% in case of individual/HUF. If capital gain is a negative figure, the same will also be slashed by 50%.
6. Distribution of assets on liquidation: As per Section 55(2)(b)(iii) of the present act says that if the assessee received any asset on liquidation of company and the same has been taxed as capital gains under the act, the cost of the asset shall be fair market value of the asset on the date of distribution. But it seems that revenue failed to put this clause in the code. Absence of this clause has created an ambiguous picture with respect to such kind of assets.
7. Section 50C of the Income Tax Act: Clause 50(2) (h) of the code amends this section to a large extent. As per the new clause, the FVC in case of asset being land or building shall be the stamp duty value. This is irrespective of whether the consideration shown in the agreement is higher or lower than the stamp duty value and irrespective of whether the stamp duty value exceeds the fair market value on the date of transfer.
Though the committee agreed to this effect, but what I feel is that taking away the assessee’s right to object to the deemed FVC is not correct.
8. Option of taking value at 01.04.1981: The option in present act of taking the value at 1981 is being amended as to the date to be considered. Now assessee will have the option to choose the value as on the date 1st April, 2000. Further this clause should be amended to include the amount incurred by the purchaser to bring the asset to his location, like transportation cost. Such kind of expense shall be allowed as cost of asset, which is till date not considered.
9. Carry forward and set-off of losses: The code is lacking any transitional provision regarding losses as per the provision of present Act. There is no clause in the code for adjustment of such losses.
10. Threshold limit for TDS: The present section 194J provides an exemption limit or threshold limit for TDS for professional fees and royalty/non-compete fees, but this limit seems to be absent under clause 200(A) (o), which could be very cumbersome for small amounts of these specific services.
These are some of the important points with regard to DTC that came into my view.
The author is a future member of ICAI.