DIRECT TAX CODE Applicable W.E.F

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1 DIRECT TAX CODE Applicable W.E.F Key Highlights 1

2 New Tax Rates For Individuals Personal Tax Income Tax Rates For Individuals, Hindu Undivided Family, Association of Persons and Body of Individuals Income Tax Rate In case of a Women assessee below the age of 65 years Total Income Up to INR. 1,60,000 INR. 1,60,001 to INR. 10,00,000 INR. 10,00,001 to INR. 25,00,000 Tax Rates NIL 10% 20% Total Income Up to INR. 1,90,000 INR. 1,90,001 to INR. 10,00,000 INR. 10,00,001 to INR. 25,00,000 Tax Rates NIL 10% 20% INR. 25,00,001 and above 30% INR. 25,00,001 and above 30% Income Tax Rate In case of a resident individual of the age of 65 years or above Total Income Up to INR. 2,40,000 INR. 2,40,001 to INR. 10,00,000 INR. 10,00,001 to INR. 25,00,000 Tax Rates INR. 25,00,001 and above 30% 2 NIL 10% 20%

3 Concept of Total Income Total Income: A resident in India will be liable to tax in India on his world wide Income. However Non residents will be liable to tax in India only in respect of accrual or in India including deemed accruals or receipts The concepts of taxing Source based Income and Residence based Income continues to be present in the DTC. However, DTC to modify the test for determining the residence of a Company by providing that existence of even a partial control and management would result into residence in India Rules regarding source based income also to be modified impacting the tax heaven jurisdictions in a huge manner. Indirect transfer of capital asset situated in India to be considered as Income deemed to accrue or arise in India. Rendering service in India not a criterion for taxing service Income The present dual system of previous year and assessment year simplified with a unified concept of Financial Year DTC seeks to classify income into two sources- Ordinary Source & Special Source Special Sources of Income like Royalty Fees for Technical Services etc are specified in the fourth schedule. Special sources to be taxed on Gross Amounts i.e. no deductions allowed Ordinary Source of Income to be constituted and classified under five different heads Income from employment (Salaries) Income from house property Income from business Capital Gains Income from residuary sources (Other Sources) Total Income of the taxpayer is aggregate of Special Income and Ordinary Income. Business losses can be carried forward indefinitely, Whereas Capital losses cannot be set off against ordinary income 3

4 Sources of Income Income from Employment: The DTC proposes to introduce Exempt-Exempt- Taxation (EET) method of taxation wherein contributions and annual accumulations into the funds are not taxed; however any withdrawals from the funds will be taxed Other provisions of Income from Employment remain by and large same as the IT Act 1961: E.g. Taxing on due or receipt basis, Taxing of Allowances and Perquisites, Deductions etc Income from Capital Gains: Any Income from transactions in assets other than business assets will be termed as Capital Gains. Present distinction of Long term Short term to be eliminated and income to be clubbed with the other income from ordinary sources. The base date for calculating the indexed cost of acquisition will now be shifted from to As a result all capital gains between and will not be liable to tax Income from House Property: Gross rent will be higher of (a) amount of contractual rent for the year (b) presumptive rate calculated at 6 % P.A. ratable value fixed by the local authority The deductions in respect of property taxes, standard deduction towards repairs & maintenance (Now only 20 % instead of 30 % allowed earlier) and interest expenditure to be allowed. However, no deduction in respect of self occupied property Securities Transaction Tax abolished and hence all capital gains arising from transfer of equity shares in a company or units of an equity oriented fund will form part of the computation process In case of Capital asset which is transferred after one year from the end of financial year in which it is acquired, the cost of acquisition and cost of improvement will be adjusted on the basis of cost of inflation index to reduce the inflationary gains The capital gains will be aggregated with the unabsorbed capital loss at the end of immediate preceding financial year to arrive at the total amount of income under the head Capital Gains. If the result of aggregate is a loss then total amount of capital gains will be considered as NIL and loss to be treated as unabsorbed capital loss eligible to be carried forward 4

5 Sources of Income Income from Business: Every business will constitute a separate source and therefore income will be computed separately for each business. All assets to be classified into business assets and investment assets. Business assets will be further classified into trading and non-trading assets All accruals and receipts derived from or connected with business will form part of gross earnings irrespective whether income derived from business trading asset or business capital asset For e.g. profit on sale of business capital asset will not longer be treated as capital gains, profit on sale of an undertaking under a slump sale will be business gains and not capital gains Business expenditure to be classified into three mutually exclusive expenditure categories (1) operating expenditure (2) permitted financial charges (3) capital allowances Operating expenditure includes all expenditure laid out wholly and exclusively for the purpose of business. The Code also contains a negative list of expenses which shall not be termed as operating expenditure Permitted financial charges are defined as expenses on account of interest payable on borrowed capital. Deduction in respect of interest payable to banks/financial institutions shall continue to be allowed on actual paid basis Capital allowances relate to deductions in respect of depreciation and allowance for scientific research Scope of weighted average deduction for scientific research is extended for all industries across the board Loss on sale of business capital asset which is treated as a capital loss under IT Act 1961 will be treated as an intangible asset and depreciation will be allowed on same. Effectively a tax payer will be allowed to set-off only a fraction of a loss every year. This will act as a guardian against asset stripping and loss manipulation Separate income determination regimes for businesses such as operating and maintaining a hospital, processing and packaging of fruits and vegetables, business of insurance, operating and maintaining any infrastructure facility etc 5

6 Corporate & Partnership Firms Tax Corporate Tax:: Companies will be taxed at a flat rate of 25% as against the current tax rate of 30% DDT has been retained in the tax code as well. All dividends that have suffered DDT will be exempt in the hands of shareholders The code provides fro Minimum Alternate Tax calculated with reference to the value of gross assets. The shift in the MAT base from book profits to gross assets will encourage optimal utilisation of the assets and thereby increase efficiency Value of gross assets will be the aggregate of the value of gross block of fixed assets of the company, value of capital work in progress of the company, the book value of all other assets of the Company as on the last day of the financial year reduced by accumulated depreciation and P&L debit balance Rate of MAT is 2% of the value of gross assets and 0.25% in case of banking Companies. Under the code MAT will be the final tax and hence the exercise of comparing MAT liability with the Tax liability will be redundant. Also, MAT wil not be allowed to be carried forward for claiming tax credit in subsequent years DTC seeks to replace profit based tax holiday incentives with investment based incentives. The tax payer will be allowed to recover all the capital and revenue expenditure (Except land and goodwill). That means THE ENTIRE PERIOD CONSUMED FOR RECOVERING all capital and revenue expenditure will be the period of tax holiday Reorganisation of businesses has been considered as tax neutral in the code. However these provisions are subject to such conditions as are necessary to prevent abuse. Reorganisation means amalgamation or demerger between two or more residents in India. Taxation for Partnership Firms: Any amount of salary, bonus, commission or remuneration will be allowed as a deduction. However the same will be taxed in the hands of partners. Thus the limits for paying remuneration and interest are done away with. unabsorbed losses and depreciation can be carried for an indefinite period. However, any change in the constitution of an partnership firm, then the firm will not be entitled to carry forward so much of the loss as is attributable to the deceased / retiring participant. 6

7 Miscellaneous Wealth Tax: Wealth tax to be payable by individuals, HUF and private discretionary trusts on net wealth as on valuation date. Hence Companies left out of the wealth tax ambit As against present threshold limit of INR 30 lakhs the DTC seeks to increase the basic exemption limit to INR 50 Crores. The rate of wealth tax would be reduced from the current rate of 1 % to 0.25% on the net wealth EXCEEDING the basic exemption limit Assets chargeable to wealth tax will mean all assets including financial assets. Small exclusion list provided such as assets used in stock in trade, one property acquired before April 2000 etc. Valuation will be done on Cost or Market Value whichever is less Return Filing: The due date for filing the returns of tax bases under the code will be June 30 of the year following the financial year for all non business non corporate taxpayers and August 31 for all other tax payers. Hence essentially August 31 st for all the taxpayers at the same time Persons who do not file their returns voluntarily will be categorised into two categories namely stop filers and non filers. The code provides that a notice may be issued to non filers and stop filers calling for their income bases and reasons for not filing return of tax if applicable. Under the Code selection of cases for scrutiny will be made at centre level in accordance with the risk management strategy framed by the board. This will eliminate all discretionary powers of selection presently vested with the Assessing Officer Transfer Pricing & DTAA DTC proposes to widen the scope of the definition of associated enterprise by fixing the threshold limit at 10% holding as against 26% under the IT Act The central government to be empowered to formulate schemes for introducing arm s length pricing methods in relation to the international transactions. Central Government also empowered to enter into a tax treaty for relief from Double Taxation and for EXCHANGE OF INFORMATION. Neither DTC nor DTAA to have a preferential status in case of conflict between the two, the latter shall prevail. 7

8 Miscellaneous General Anti Avoidance Rules: The DTC proposes to introduce GAAR to serve as a deterrent against tax evasion and avoidance and to dissuade taxpayers from violating tax implications CIT will be empowered to invoke GAAR and to declare an arrangement as an impermissible avoidance agreement if he thinks that such a transaction has been entered into with an malicious objective of tax evasion / avoidance The onus will be on the tax payer to prove that the transaction was not entered with a SOLE OBJECTIVE of tax savings/avoidance Penalties: The basic condition for levy of penalty will be willful under reporting of tax base. Primary failure to file tax return by the due date, assessment of tax base at an amount higher than the amount disclosed in the tax return etc are considered to be willful under reporting of tax base Other provisions worth a glance: All perquisites to be included in the salary income itself Any amount exceeding INR and accepted or repaid otherwise than by account payee cheque will be termed as income and taxed accordingly Any sum received under Life Insurance policy including any bonus shall be exempt from tax provided it is a pure life insurance policy Mutual funds, Venture capital funds and Life insurance Companies will be considered as a pass through entities Any expenditure where the sources of funds are unexplained will be disallowed Non profit organisations like scientific research associations, news agencies, professional associations, religious trusts, medical institutions and trade unions etc will be allowed concessional tax treatments 8

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