Background & Introduction
They say “the only thing that doesn’t change is change itself” and that is true for Direct Tax Laws. The taxation laws in our country undergo many changes. Direct Tax Laws is an important area of core competency of the Chartered Accountancy profession. But now the Direct Tax Laws are undergoing a change, and that too a big one. The Direct Tax Laws i.e. Income Tax Act, 1961 and Wealth Tax Act, 1957, are being replaced by Direct Tax Code.
The first draft of the Direct Taxes Code was released in August, 2009 along with a Discussion Paper for public comments. Thereafter, a Revised Discussion Paper was released in June, 2010. Based on the comments received, a Bill named “The Direct Taxes Code, 2010” has been introduced in the Parliament. The Direct Taxes Code Bill, 2010 introduced in the Lok Sabha on 30th August, 2010 is proposed to be made effective from 1.4.2012, which is a year later from the earlier proposed date of 1.4.2011.
Once the Direct Taxes Code (DTC) 2010 get approved by both houses of the Indian parliament, and receives the President’s assent, it would be enacted as law. The DTC 2010 proposes substantial changes to the current direct tax legislation and is likely to have significant impact on the business community. The business community would do well to assess the impact on their current structures and business models. It is widely expected that the DTC 2010 would be referred to a Parliamentary Committee for further deliberations and the Committee would have one more round of public consultation.
KPMG Executive Director Personal Taxation, IT & ESOP Vikas Vasal said “The new proposals are in the right direction. They will simplify regulations and reduce unnecessary litigations significantly.”
Bangalore Chamber of Industry & Commerce (BCIC) President K R Girish “The Code is a completely new law and not an amendment of the existing Income Tax Act. This is a commendable change as one has always experienced tinkering of existing laws.”
The proposed Direct Tax Code is a combination of major tax relief and removal of most tax-exempted benefits. It is expected to usher in a new tax regime of transparency and greater compliance. – Dilip Maitra, Deccan Herald
From a layman’s point of view, DTC i.e. Direct Tax Code is the new name for Income Tax. DTC is going to replace the existing direct tax system i.e. Income Tax Act, 1961 and Wealth Tax Act, 1957.
1. Concept of Assessment year and previous year is abolished. Only the “Financial Year” terminology exists.
2. Only status of “Non Resident” and “Resident of India” exits. The other status of “resident but not ordinarily resident” goes away.
3. Earlier the terminology of assessee was meant for the person who is paying tax and/or, who is liable for proceeding under the Act. Now it has been added with 2 more definitions namely a person, whom the amount is refundable, and/or, who voluntarily files tax return irrespective of tax liability.
This helps any person to file his returns and maintain the record of tax return filing.
4. Government assessee is covered in Direct Tax Code. Even though they are not liable for Income Tax / Wealth Tax, Government Assessees are required to comply with provision of TDS and TCS. (Current act was not covered with Government Assessees)
5. The DTC 2010 continues with the present system of combination of residence- based taxation and source-based taxation. It also seeks to continue to apply residence-based taxation to resident’s i.e. global taxation and source-based taxation to nonresidents.
6. The Code proposes to introduce a General Anti-Avoidance Rule (GAAR) to serve as a deterrent against tax avoidance. The burden of proof to prove that the arrangement is not for the purpose of tax avoidance would be on the tax payer and not on the tax administrators.
7. The Code also proposes to introduce CFC provisions so as to provide that passive income earned by a foreign company which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed. Consequently, it would be taxable in India in the hands of resident shareholders as dividend received from the foreign company.
8. Non-Profit Organisations to be taxed @15% of their total income in excess of Rs.1 lakh.
Highlights of the Bill
1. Classification of Income
For the purpose of computation of total income of any person for any financial year, income from all sources shall be classified as follows:
a. Income from ordinary sources
b. Income from special sources
The special sources (specified in a separate Schedule) generally reflect items like Royalty, Fees for Technical Services (FTS), investment income etc. All other sources of income will be ordinary sources. Special sources would be subject to tax on the gross amount.
The Total Income of the taxpayer for a financial year will be the aggregate of ‘Total Income from ordinary sources’ and ‘Total Income from special sources’
Further the income from ordinary sources will be divided into:
a. Income from employment
b. Income from House Property
c. Income from business
d. Capital Gains
e. Income from residuary sources. (Similar to other sources, with some minuses)
2. Tax Rates
a. The basic exemption limit for individuals has been increased to INR 200,000 under the DTC 2010 when compared with INR 160,000 under the Income-tax Act, 1961 (ITA) as well as under the DTC 2009 proposal. For a senior citizen, this exemption limit is enhanced to INR 250,000. The subsequent slab rates provide only marginal relief and are as follows:
where the total income does not exceed Rs. 2,00,000
where the total income exceeds Rs. 2,00,000 but does not exceed Rs. 5,00,000
10% of the amount by which the total income exceeds Rs. 2,00,000
where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000
Rs. 30,000 plus 20% of the amount by which the total income exceeds Rs. 5,00,000
Where the total income exceeds Rs. 10,00,000
Rs. 1,30,000 plus 30% of the amount by which the total income exceeds Rs. 10,00,000
Women assesses would not be eligible for a higher basic exemption limit, thereby gender discrimination is proposed to be removed. Their basic exemption limit would be the same as applicable for the male counterparts.
b. For Corporate Players (Companies)
Tax rate in case of companies is proposed at 30%. The tax rate is same for most of the other taxable entities including partnership firms, Limited Liability Partnerships (LLPs) and unincorporated entities.
While a domestic company is required to pay a dividend distribution tax (DDT) of 15% on dividends declared, distributed or paid, a foreign company is required to pay an additional branch profits tax of 15%.
Dividend income on which DDT is paid is exempt in the hands of the recipient shareholder.
3. Major Changes under the different heads
a. Income from House Property
The gross rent for taxation will be the actual rent received in case of houses that are let out. In other words, notional income from house property would not be taxable. Standard deduction @20% of gross rent is allowable as against the existing 30%. Deduction on interest payment for the loan taken by individual borrowers for acquiring (or constructing) a house property would continue to enjoy the tax benefit subject to a ceiling of Rs.1.5 lakh (only for one house that is used for residing purpose), provided a certificate is obtained from the Financial Institution from which the loan was taken. Therefore, it appears that such deduction would not be available in respect of loan taken from employers, unless the employer happens to be a financial institution. Further, there would be no deduction in respect of principal repayment of housing loan. It may be noted that there is no provision for excluding unrealised rent while computing income from house property.
b. Income from Employment
Employer’s contribution to provident fund, pension fund and superannuation fund would be eligible for deduction from gross salary subject to specified limits. Further, house rent allowance would also be eligible for deduction from gross salary subject to prescribed limits. However, leave travel concession is not eligible for deduction. The significant change as compared to the Act is that tax-free limit for the medical reimbursement is proposed to be raised from Rs. 15,000 to Rs. 50,000.
Contribution to approved superannuation fund exceeding Rs. 1,00,000 in respect of any employee is not taxable in employee’s hands under the Code. The same will be disallowed in employer’s hands. Thus, the Code proposes to reintroduce Fringe Benefit Tax through the disallowance route on such contributions
The exemption limit for retrenchment compensation is proposed to be increased from Rs.50,000 to Rs.5,00,000. The difference in exemption for commuted pension between Government employees and non-government employees is proposed to be done away with. All employees will enjoy exemption upto one-third of commuted value of pension (if gratuity received) and exemption upto one-half commuted value of pension (if gratuity not received). The present exemption to commutation of pension received under pension scheme of insurers is proposed to be withdrawn, displaying unnecessary bias against the self-employed class.
The amount received by an employee from the New Pension Scheme will be tax-free. Contribution by employer to NPS upto 10% of salary will not be taxed as “income from employment”. Employee contribution to NPS is entitled to deduction from gross total income. Thus, the present system of EET (Exempt-Exempt-Tax) regime for both employees and the self-employed under section 80CCD with exemption if rolled over – i.e. annuity purchased with money received in the financial year of receipt is sought to be changed to EEE (Exempt-Exempt-Exempt) only for employees
c. Income from business
1) An important change proposed by the DTC 2009 under this head of income is that every business will constitute a separate source of income, necessitating separate computation of income for each business
2) The limits of turnover/gross receipts for applicability of tax audit is proposed to be increased to Rs.1 crore in case of business and Rs.25 lakh in case of profession. Accordingly, such businesses can avail the scheme of presumptive taxation@ 8%, if their turnover is upto Rs.1 crore, subject to fulfilment of other prescribed conditions.
3) “Place of effective management” to determine the residential status of a company. In effect, if foreign companies are effectively managed from India, they would be treated as residents and their global income would become taxable.
4) The differential rate of tax between domestic companies and foreign companies has been partially removed. The rate of tax for all companies would be 30%. However, a foreign company would be liable to branch profits tax @15% in respect of branch profits of a financial year. This would be in addition to the income-tax payable by them. Branch profit is the income attributable, directly or indirectly, to the Permanent Establishment or an immovable property situated in India.
5) Minimum Alternate Tax is proposed to be levied on companies @20% of book profit, which is a marginal increase from the current 19.93% (18% plus surcharge @7.5% plus education cess@2% and secondary and higher education cess@1%). However, the credit for MAT paid would be allowed to be carried forward for upto 15 years (as against the present permissible period of 10 years) to be set-off against the excess of tax payable in the years in which tax computed under the normal provisions exceeds the tax on book profits.
6) SEZ developers to be allowed profit-linked deduction for all SEZs notified by 31st March, 2012. Further, units set-up in SEZs on or before 31stMarch, 2014 to be eligible for benefit of profit-linked deduction. However, SEZs would not be eligible for exemption from MAT.
7) Gross earnings will ordinarily include all accruals and receipts derived from or connected with business assets, whether trading or capital. Business expenditure will be classified into 3 mutually exclusive categories (i) Operating expenditure (ii) Permitted financial charges (iii) Capital allowances.
8) The weighted deduction has been enhanced to 200% for any expenditure (both revenue and capital except land and building) incurred on in house scientific research and development by a company is proposed for all industries (not restricted to manufacturing).
d. Income from Capital Gains
1) In case of transfer of any investment asset being land or building, the Code proposes to take the stamp duty value as the full consideration received or accruing on transfer. 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 the transfer. Presently, under section 50C, the assessee is allowed to claim before the Assessing Officer that the valuation adopted by the stamp duty authorities exceeds the fair market value on the date of transfer. If the stamp duty value is disputed in appeal or reference or revision before any other authority/Court/High Court, the Assessing Officer may refer to Valuation Officer to determine the fair market value of the asset. This right of the assessee is sought to be taken away by the Code.
2) Capital gains on listed equity shares or units of equity oriented fund held for more than one year, on which STT is paid, would continue to be exempt from tax.
3) Capital gains on listed equity shares or units of equity oriented fund held for less than one year, on which STT is paid, would be taxable at 50% of the applicable rates i.e. the rate would be 5%, 10% and 15% for a person falling under the 10%, 20% and 30% slab brackets, respectively. In case of companies, the rates of Capital Gains would be 15%.
4) In case of other assets held for more than one year from the end of the financial year of acquisition, benefit of indexation would be available. The base date for indexation would be 1.4.2000.
6) Similar to the existing provisions of the ITA, conversion of private company/unlisted company into LLP is tax exempt, on satisfaction of prescribed conditions.
e. Income from residuary sources
Presently, if rural agricultural land is received by an individual or HUF without consideration, the same is not liable to tax under section 56(2)(vii) of the Act as income from other sources. This exemption is sought to be withdrawn by the Code.
4. Set off and carry forward
a. Income from Ordinary Sources
1) Any loss from business, house property or residuary source is eligible for set off against income from employment' or capital gain from any investment asset (it may be noted that any gain or loss from business capital asset is treated as part of business income/loss). However, no loss from any ordinary source is eligible for set off against income from any of the special sources.
2) Loss from house property is eligible for set off even after carry forward against any income, except income from special sources. Similarly, loss from business could be set off against salary income, which is contrary to Section 71(2A) of the Income-Tax Act, 1961.
3) No time limit for carry forward and set off: No time limitation is put for carry forward of losses for set off in the subsequent financial years in the DTC and hence it seems that a loss quantified under DTC under any head is eligible for carry forward and set off indefinitely without any time limitation. However, the eligibility for carry forward of loss is subject to filing of return within the prescribed due dates mandated by Section 67 of the DTC.
b. Income from Special Sources
Income from special sources are clearly spelt out in Part 3 of the First Schedule to DTC and it covers winnings from lottery or crossword puzzle, income from horse racing, card game or any other game, gambling or betting. Additionally, the schedule covers income of non-residents from income by way of interest, dividend (on which no DDT was paid), non-resident sportspersons who are not citizens of India and non-residents sports association or institution.
Incomes from special sources are liable for flat rate of tax similar to present status with no basic exemption limit whatsoever.
In respect of the present section 80C deductions, the proposals in the Code are:
(a) Deduction to approved fund (approved provident fund/approved superannuation fund/approved gratuity fund/approved pension fund) to the account of individual/spouse/children deductible to the extent of Rs. 1,00,000 (clause 68).
(b) Life Insurance Premium, Health Insurance and fees for education of children – deduction for all these together not to exceeding Rs. 50,000 (clause 69). Thus, total deductions proposed under the Code is Rs. 1,50,000 for individuals. For HUFs only deduction upto Rs. 50,000 in (b) above is available. No deduction is allowable for re-payment of principal of housing loan/investment in NSC/ELSS under the Code.
Presently, under the 1957 Act, wealth tax is levied on the excess of net wealth over Rs.30,00,000. This threshold is proposed to be increased in the Code to Rs.1 crore. The liability to pay wealth tax under the 1957 Act is on individuals, HUFs and companies. Under the Code, every person other than a non-profit organization is liable to wealth tax.
The following items which do not attract wealth tax at present shall attract wealth tax under the Code:
I. Watch having value exceeding Rs. 50,000,
II. deposits of individuals and HUFs in banks located outside India,
III. such deposits not recorded in books of account in case of other persons,
IV. helicopter (not used in business of running on hire or held as stock-in-trade),
V. equity or preference shares held by a resident in a controlled foreign company,
VI. interest in a foreign trust or other body located outside India other than a foreign company.
VII. Under the 1957 Act, cash in hand in excess of Rs. 50,000 is includible in net wealth. This limit is proposed to be increased to Rs. 2,00,000.