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The Implementation of the New Direct tax code based on the Revised Discussion Paper will definitely be a CBM (Confidence Building Measure) from a layman point of view. The new tax rates resemble those prevailing in a developed economy. However there are a couple of issues worth noticing, accompanied by suggested amendments for the same
1.      The withdrawal of HRA exemption means double taxation of the income once in the hands of the salaried individual and again in the hands of the Landlord. Somebody can argue what about the other allowances which also get axed. The point is HRA in most companies is a significant 25% of Basic pay.
2.      While it is heartening that the Maximum Marginal rate for Individuals starts only from above Rs.25 lacs, the elimination of exemption on HRA in entirety might drive up the Salary levels for high end White collared Jobs in the form of Non Monetary Perks, as individuals will bargain to compensate themselves for the tax burden. As we all know that in most cases the employer bears the tax on perks. Thus both perks plus the tax add to the employer cost. The result is, India might become less favorable Investment destination for outsourcing White collared jobs.
3.      Added to this, is the removal of interest deduction for self occupied property which does not augur well for transfer of jobs/migration to new location. Right now, the employee can get the benefit of deducting both the rent and interest if he is living in a rented accommodation close to place of employment. With this move there is an otherwise double blow on salaried class.
There are two suggestions to give counter effects/rationalize,
1.      Not to remove the deduction benefit available under the current Sec.80GG (Chapter VIA), but also make it more lucrative   than the current HRA Exemption. Currently this provision is rarely used, as HRA invariably forms a component of Salary in almost all companies.
2.      Make provisions to include the Interest on Borrowed capital for Housing as part of Cost of Acquisition/Improvement for computing Capital Gains on transfer of immoveable property as applicable. Right now such interests are not measured in Cost of Improvement as they are deductible. Such inclusion will also align the tax treatment with the one as per AS-16 (Borrowing cost).
Hoping to see some improvements along these lines during finalisation.

Published by

(IFRS Consultant)
Category Income Tax   Report

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