No big bang change in Direct Tax Code Bill: PwC

August, 30th 2010

The new Direct Tax Code is now well on its way to becoming the law of the land. From April 1, 2011, many things will change, but compared to the original draft of the code, the changes are not nearly enough.

Now that the dust has settled and we know exactly what has made it into the final bill, it’s instructive to discuss the ideas that were dropped.

Of all the opportunities missed, the one that’s the most unfortunate is the dropping of the proposed Retirement Benefit Account system.

It’s interesting that of all the changes that have been made since the original August 2009 draft of the code, this was the only one that was universally recognised as desirable, and yet was dropped because it was said to be impractical.

As envisaged in the August 2009 draft, this would have been an account into which all retirement benefits would have been kept by individuals. The deposits could have come from VRS, gratuities and other post-retirement payouts. Within the account, these could have been kept in a savings instruments like the NPS and others which would be approved for the purpose.

As long as the money stayed in the account, it was not taxable. It could also have been moved around within the approved instruments without attracting tax. This account would have meant that not only would post-requirement payouts received at age 60 would not have been taxed at the time, but they could have been earning compounding returns for years or decades without being taxed. The extra returns could easily have compensated for the (deferred) taxation.But that was not to be. The June 2010 revision of the DTC said that “maintaining individual Retirement Benefits Account by permitted savings intermediaries on behalf of all employees would require a centralised, nation-wide authority to regulate and manage crores of retirement benefits accounts of employees and to deduct tax on withdrawal which entails creation of a separate institutional mechanism, complex logistics and substantial costs.”

So this is not a flaw in the concept itself, but an implementation problem. Actually, the concept of an account like this should actually be extended in other ways, as in the US, the 401(k) account has been extended to the so-called Roth 401(k).

While the 401(k) is much like the retirement benefit account of the original DTC, the Roth 401(k) is a sort of a T-E-E account. In an account like this, if deposits are made with tax-paid funds and then held till retirement, then the there’s no further taxation at any stage.

Such unified accounts would doubtless be beneficial in every way to the retiree as well as to the tax authorities. Even if they are too complex to implement now, that could change within a few years.

There’s no reason that such a system should now be forgotten till 2061, when (extrapolating from the track-record), the Direct Tax Code is due for the next overhaul. If the government thinks the UID feasible, then at some point in the next decade or so, a unified retirement account should be possible.

I mean how complex can it be? It’s not as if it’s something truly difficult like, for example, organising an international sports event.

Source : https://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/Dropping-retirement-benefit-account-system-from-DTC-was-unfortunate/articleshow/6458530.cms

August, 31st 2010

The Direct Tax Code (DTC) bill was tabled in Parliament on August 30, 2010. Made up of more than 400 pages, what are its key highlights? The corporate tax rate has been proposed at 30%, profit linked exemptions for special economic zones (SEZs) and the long-term capital gains exemption on listed equities stays along with Securities transaction tax (STT), short-term capital gains will be taxed at half your slab rate that is 5-10-15%, depending on which slab you fall under.

As far as individual taxation goes, the exemption limit has been hiked to2 lakh and a wealth tax of 1% on assets more than1 crore will be levied. Now the new DTC is expected to be applicable from April 1, 2012.

So at the end of what seems to be a three-year very long exercise, what kind of new law are we faced with? Media had an in-depth conversation with Deputy CEO & Chairman-Tax at KPMG, Dinesh Kanabar, who sees the new bill as a simplistic version of the existing income tax act which should not have been the case.

Here is the verbatim transcripttt of his interview.

Q: A quick impact analysis. Any materially different impact on both companies as well as individuals, as compared to where we are today, under the existing income tax act, it doesn’t seem to me like life will change much, will it?

A: I don’t think there is a dramatic change in the corporate sector. We have certain things like foreign companies being regarded as resident in India, if their place of effective management is in India. We have this whole change on overseas transfers with an underlying value in India, which again is a sea change.

There is an introduction of controlled foreign company regulations and finally we have the general anti-avoidance regulations (GAAR) which I would say are the four-five big changes in the way we are approached taxes hitherto for. But certainly a sea change from where the position was in terms of the first draft.

What was there in the second discussion draft and what has finally emerged as the position with the government is taking in terms of presenting the bill. A very shifting of stance. At one level you could come back and say have the lobbying groups got their pound of flesh? The other way you can come back and say is the government listening to people and doing things?

I will again give you a perspective. Probably about four-five years back, the government embarked on a mission to say can we rewrite and simplify the law. A committee was set up to review the tax laws.

That was given a go and then a whole new law was sought to be enacted with minimum alternate tax (MAT) on gross assets etc and we now seem to have come back at the original position. Just simplify the law, keep it as it is, don’t change the overall framework, do away with all the exemptions, do away with all the explanations etc and have a law which people can simply understand.

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Q: We have just ended up with a simpler version of the existing income tax act after two years of heated debate on a new direct tax code?

A: I would agree with that but simplification itself is not a very good objective to have.

Q: But it didn’t require two years of debate then.

A: I agree with you, but the two years of debate, came from a position, where the government moved from just one objective of simplification to a lowering of a tax base. The position was can we get a tax rate lower to 25%. If you wanted to get the tax rate lowered down to 25%, then you have to do something else to balance and raise resources and you wanted to then have assets based MAT taxation etc. When you removed that objective, everything changed. It was shifting of the government’s objective and focus in the interregnum which led to these whole changes.

Q: You pointed out all the efforts made by the tax department and the finance ministry to usher in a whole new regime of taxation where you have lowered the tax ability on individuals and then brought 3.5 lakh companies into the tax net by imposing a MAT on assets, doing away with the capital gains exemptions so as to be revenue neutral. You have not been able to do that, because various interest groups have lobbied away various aspects? India Inc lobbied very hard against MAT on assets, the market sector lobbied against any change on capital gains and so at the end of the day we were not be able to accomplish much, we should have been able to accomplish more?

A: I don’t know whether you need a new tax code for a new economy. It was a question whether the government wanted to make a statement that we are competitive in the market place and we are getting the tax rate down from 35% almost to 25%. We have now come back to lowering the rate of tax to 30%, is good enough so long as we have simplified. I would like to believe that you did not have to go through this entire circus for the last two years, but effectively what we have been able to achieve is this one goal of saying, can we have a tax rate which is simple.

The issue about wanting to tax companies which are not hitherto under the tax net. Either your compliance mechanism is not right in which case if these companies are making profits, you have not been able to catch them or if these companies are not making profits because they have got exempt income, then do you want to tax assets, is that what you want to do on the income tax act? That is something which the government needs to answer

Source : https://www.moneycontrol.com/news/management/dtc-bill-tabled_481845.html

September, 01st 2010

There are many good reasons for the cautious and conservative approach the Union finance ministry has adopted towards direct tax reform. Expectations of a radical reform of tax policy have understandably been belied because of the government’s cautious approach. The most important reason for such cautious conservatism would be the likely revenue implications of the changes being proposed.

The Union revenue secretary has let it be known that the government would be giving away as much as '53,000 crore in the first year of implementation of the new direct taxes code (DTC). Clearly, this fact may have also shaped the government’s decision to delay the implementation of the new tax code by an year. No finance minister can afford to take chances with revenues and reform when the fiscal deficit and the budgetary deficits of the government are so high.

Fiscal policy and public finance purists may like neat and decisive reform, while taxpayers would like simplicity of procedure and clarity in language, but fiscal authorities worry more about the revenue implications of tax reform. The government cannot afford to risk reduced revenues at a time when there is such uncertainty about growth and deficit management. Further, given the recent decline in the savings rate, the government may have also been wary of reducing the incentives for saving.

As a consequence of such concerns, the final DTC has proved to be less radical in scope and intent than was widely expected. Critics would say the government has missed an opportunity to undertake more wide-ranging reform. But the fact is that tax reform is always a continuing process and no government can afford to put a full stop to policy change unmindful of the revenue and deficit management implications of such change.

Even so, it is necessary to ensure reasonable stability, predictability and transparency in policy. Hence, whatever the change the government now intends to bring should remain in place for a reasonable period of time to enable individuals and firms to plan and manage their incomes, savings and investment decisions.

The government’s decision to offer some comfort to lower middle-class families is well taken, especially when inflation continues to hurt them, and so also its decision to end gender preferences, considering that in India the phenomenon of single mother households is still not significant and most women taxpayers belong to double-income families. However, it is not clear why the government wishes to keep in place so many exemptions. The scope of exempt-exempt-exempt ought to have been reduced and that of exempt-exempt-tax widened. Health and education expenditure and retirement benefits are about the only items that ought to benefit from tax exemptions.

There is no reason why any other sort of income or expenditure should attract tax exemption. It is the margin for discretion and the lack of clarity that complicate tax systems and their administration. These considerations must inform policy on general anti-avoidance rules (GAAR) so that the taxpayer is not at the mercy of tax administration and tax consultants. GAAR principles must be clearly defined by the government and not left to tax authorities to decide. At the end of the day, even the simplest of policies can become a nightmare for the honest taxpayer if authorities have the leeway to harass