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The revised discussion paper on direct tax code has been released on 15th of June, 2010 after the stormy criticism of the first discussion paper which was released in August, 2009. Most of the concerns that have been raised have been taken care of and few of the taxation aspect not conceived originally have also slithered again in to the realm of taxation under DTC. It appears that the government is biased with the revenue raising which it wishes to calibrate at each go and not intending to sacrifice the same.

The Security Transaction Tax is again peeping to seek entry in to DTC as per the revised discussion paper though the first discussion paper sought to abolish the same. One wonders how this rich source of revenue could be abolished in the previous exercise as it could establish audit trail of share transaction besides filling the tax kitty too.   

Introductory: The revised discussion paper is divided in to specified paragraph such that the first paragraph takes us back to the DTC proposals and the second paragraph brings out the concerns that have arisen in various forums and the third paragraph settles the issues in the manner that appeals most to the framers of the proposed legislation though some purposeful outcome have seen the light of the day too. The article just tries to tracks three aspects herein below with some comments that flashes across after reading the text.

Issues primary addressed in the revised discussion paper are in respect of the following:

1.MAT 2.EET as against EEE 3. Taxation of income from employment-retirement benefits and perquisites. 4. Taxation of income from House Property. 5. Taxation of Capital Gains. 6. Taxation of NGOs 7. SEZ- Taxation of existing units 8. Concept of residence for companies incorporated outside India 9. DTAA as against the domestic laws 10. Wealth Tax 11. GAAR-General Anti-avoidance Rules.

1. Minimum Alternate Tax:

Chapter XIII of DTC dealt with it which proposed MAT on the basis of “value of gross assets” based on the fact that the tax incentives are excessive having reference to the computation of the total income resulting in low or zero tax and that every business aspires to attain minimum return on the investment made by it in the business. Therefore, a presumptive scheme tax was to be adopted for overcoming such an eventuality.

The revised discussion paper makes way for computing MAT with respect to the book profits after considering host of factors like MAT credit denial, impact on loss making companies, companies that have long gestation period where the asset based tax would cause immediate problems that are avoidable by switch over to book profits. Reverting to book profits is a welcome step in the revised discussion paper.

The unpleasant aspect in paragraph three in my view is the stone like silence as to the carry forward or tax credit in subsequent years which should have been amply clarified as the earlier discussion paper said that the tax so computed would be final. The method of computation is not spelled out and the inclusion exclusion of items from book profits is kept under pale of gloom and darkness, we all have to stay put till the manner of computation of such book profits is set out and keep guessing till the final draft legislation.

2. Tax Incentive on savings:

The first discussion paper dealt in Chapter XII of DTC with the EET (Exempt-Exempt-Tax-concept of tax savings. There appears to be relevant considerations for not adopting EET method of taxation in view of lack of social security system at national level as is present in most countries which is a distant cry so far as India is concerned. There is no technology back up for the gigantic record keeping in respect of more than three crore account holders with no central authority for record keeping to enable tax deduction at the time of withdrawal with segregation of taxable and non taxable income and the huge cost that shall be involved that appears to have been a deterrent to the exercise as well as easy way out and cost saving too.

The revised paper now follows the EEE method of taxation for government provident fund, public provident fund, and recognised provident fund and the pension scheme regulated by the PFRDA (Pension Fund Regulatory and Development Authority) and approved life insurers. EEE pre-supposes that such savings shall be utilised over a long period of time by the tax payers and therefore, the government is framing rules in this regard on uniform basis.

It has further been clarified that the investment made before the date of commencement of DTC in instruments that enjoy EEE method of taxation under current law would continue to be eligible for EEE treatment for full duration of the financial instrument.

This is very essential to stipulate the repeal or savings whenever a new piece of legislation is introduced so as to bring ease of switchover from one regime to the other. It dispels doubt about the continuity or otherwise of the existing framework. But keep guessing till the time the rules are out as stated. Only approved plans of savings have the scope not all the form of saving included that are currently in vogue under S.80C as at present.

Tax Incentive from Retirement Benefits or Perquisites:

Income from employment is to be taxed on the basis of gross salary as reduced by the permissible deduction. Salary includes under Chapter VII of DTC value of perquisites, profits in lieu of salary, amount received on voluntary retirement or termination, leave salary, gratuity, annuity or pension or any commutation thereof. Salary would include rent free or concessional accommodation provided by the employer whether government or otherwise, value of any leave travel concession, amount received on encashment of un-availed earned leave on retirement or otherwise, medical reimbursements, value of free or concessional medical treatment paid or provided by the employer. DTC also stipulated that the RFA shall be determined for all employees including government employees also in the same manner as is presently determined with respect to the employees of the private sector. It is here that the fear of the government employees could be assuaged which are allayed later.   

It was provided that to be eligible for grant of exemption in respect of the specified items the same were required to be deposited in the Retirement Benefit Account. These related to the compensation on voluntary retirement scheme, amount of gratuity received on retirement or death, amount received on commutation of pension. The RBA was required to be kept with the approved intermediaries like Provident Fund, Superannuation Funds, Life Insurers and the NPS-New Pension System Trust in accordance with the scheme approved by the government. It was proposed to exempt these when deposited in the retirement benefit scheme account and also the accretions therein but to tax them upon withdrawal whenever made in the year in which such withdrawals were made under whatever circumstances.

The concerns were shown that existed in the tax treatment in respect of tax on savings such as lack of social security in the country and that there is no benefit as is presently available in respect of medical reimbursement or allowance which makes the taxation aspect very harsh. The market value would be adopted for the government employees in respect of the rent free accommodation too would prove harsh. But this was not expressly so provided in the discussion paper. Here also the government felt the lack of institutional mechanism to handle the huge number of accounts in the Retirement Benefit Scheme and to ensure deduction on each withdrawal a massive exercise.

Contributed By: CA. Vijay Kumar Kalia

Source: Revised Discussion Paper at-

Published by

Vijay Kalia
(Chartered Accountants)
Category Income Tax   Report

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