Direct Taxes Code: An Overview

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1 IJBSF, Volume 2 Number 1 January-June, 2012 pp ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Direct Taxes Code: An Overview Laxman Ram Paliwal 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The thrust of the code is to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base Pranab Mukherjee -Finance Minister ( ) INTRODUCTION The draft direct tax code is a brave attempt by the Finance Minister to clean the maze; India s income tax law had become complex with innumerable amendments carried out in the past three decades. And ideal direct tax regime should be simple to understand and administrate, equitable and progressive, and reward economic activity and above all it should provide buoyancy to the government revenue. Thus, there is no better way to usher in a new direct taxes code than rewrite the whole thing from scratch, and that is precisely what the Finance Minister has done in a little more than three years, in form of DIRCT TAX CODE. The Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to improve upon the present Act. In drafting the Code, the Central Board of Direct Taxes the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, itwould be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, 1961 (Para 1.7) RATIONAL FOR DIRCT TAX CODE The direct tax code will replace the existing Income Tax Act, 1961 and wealth tax Act, It is an attempt to rationalize and simplify the law relating to the direct taxes, because of following shortcomings in the present Tax Laws: 1. Assistant Professor, Department of Commerce, Swami Shradhanand College, (University of Delhi) Alipur Delhi

2 118 LAXMAN RAM PALIWAL 1. Complexity: In order to foster the growth of the economy and change in business trends, the Act has been undergone several amendments due to which it has lost its original shape and has become complex. 2. Conflicting Judgments: Very often conflicting judgments has been passed by the Courts at different level. 3. Increased in Cost of Compliance and Administration: Any complex tax legislation increases cost of compliance as well as administration. 4. Narrow Tax Base: Under Income tax Act. the marginal tax rates have been steadily lowered and the rate structure rationalized to reflect the best international practices. Any further rationalization of the tax rates may not be feasible without corresponding increase in the tax base. Thus, there is clearly a strong case for rewriting the law relating to direct tax on a new slate with farsightedness, so that the provisions do not need frequent amendments for a reasonable time. IMPORTANT PROPOSALS OF THE CODE ARE AS FOLLWS I. In General 1. The terms previous year and assessment year has been replaced with financial year to eliminate confusion. 2. Income Tax Act and Wealth tax Act will be replaced by Direct Tax Code. 3. Only status of Non Resident and resident exists. The other status of Not Ordinarily resident has been removed. 4. The definition of assessee will also include the person who is eligible for refund or voluntarily files return under the code. 5. For the purpose of TDS of TCS, Government assessee is also covered in the code. 6. No change in the system of Advance Tax, TDS and also self Assessment Tax. 7. General anti avoidance rule introduced to combat tax avoidance. 8. Amalgamation and demerger provisions rationalized to allow for tax neutral business reorganization. Rate of tax Schedule-I 9. Section-10 replaced by schedule-6(33 items) 10. Section-80C now renamed Section All definitions given in Section-2 covered in Section 284(total 318 concepts) 12. Rate of depreciation- schedule Clubbing Section under Section 64- Sec Business losses can be c/f indefinitely 15. No tax deduction on interest payable on any govt. securities 16. No difference of long term and short term capital asset.

3 DIRECT TAXES CODE: AN OVERVIEW 119 II. Computation of Total Income For the purpose of computation of total income of any person for any financial year, income year, income from all sources shall be classified into: III. Income from Special Source In case of income from Special Sources no deduction is given and what is earned is taxed directly. The steps for computation of income from special sources are as under: Step 1: Compute the income in respect of each of the special source. The income so computed with respect to each of such special sources shall be called current income from the special source Step 2: Aggregate the current income from the special source with the unabsorbed loss from that special source at the end of the immediate preceding the financial year, if any. The result of the immediate preceding the financial year, if any. The result of such aggregation shall be the gross income from the special source. IV. Income from Ordinary Sources It is divided into further categories, (discussed later) are: 1. Income from employment. 2. Income from House Property 3. Income from Business. 4. Capital gains 5. Income from Residuary Sources. The steps for computation of income from ordinary sources are as follows: Step 1: Compute the income in respect of each of these sources. Step 2: Aggregate the income from al the sources failing within a head to arrive at a figure of income assessable under that particular head. The result of such computation may be a profit or loss under that the head. The aforesaid two steps will be followed to compute the income under each head. Step 3: Aggregate the income under all the heads to arrive at the current income from ordinary sources. Step 4: Aggregate the current income with the unabsorbed loss at the end of the immediate preceding financial year, if any, to arrive at the gross total income from ordinary sources if the result of aggregation is a loss, the gross total income from ordinary sources shall be nil and the loss will be treated as the unabsorbed current loss from ordinary sources at the end of the financial year.

4 120 LAXMAN RAM PALIWAL Small Saving Instruments-Taxability in the Hands of the Investor Instrument Stage Existing Proposed Provident fund Investment Exempt Exempt Income Exempt Exempt Withdrawal Exempt Exempt Supreannuation fund Investment Exempt Exempt Income Exempt Exempt Withdrawal Exempt Exempt Mutual funds- Investment Exempt - Equality linked Income Exempt Exempt Withdrawal Long Term Capital Capital gain Gains Tax Able Exempt Mutual funds-debt Investment Exempt Exempt Income Taxable Taxable Withdrawal Exempt Exempt V. EET Method of Taxing Savings The code proposes to introduce the Exempt Exempt Taxation method of taxation of savings. Only new contributions on or after the commencement of this Code will be subject to the EET method of taxation. Tax Incentives Earlier terms Deductions under Chapter VI A will be treated as Tax incentives. Increment in the limit of savings exempted from tax to Rs.3lacs as against the present limit of Rs.1lac. Reduction in the avenues for saving by excluding Mutual funds, 5 year Term deposits of Banks, NSCs, Post Office Term Deposits, Principal repaid on housing loans etc. New provision comes for Handicapped individuals to get deductions upto Rs.75, 000. Taxation of Companies Minimum Alternative Tax (MAT) (a) Base for computing MAT is proposed to be shifted from book profit to gross assets. (b) Tax rates:

5 DIRECT TAXES CODE: AN OVERVIEW 121 Type Rate Banking Company 0.25% Other Company 2% (c) Computation of gross assets will be aggregate of following (as at close of the financial year) (i) Value of gross block of fixed assets less accumulated depreciation. (ii) Value of capital work in progress. (iii) Book value of all other assets excluding debit balance of Profit of Loss Account (d) Amount as per Schedule VI of the Companies Act, 1956, to be considered for the value of gross assets. (e) MAT will be a final tax and it will not be available as tax credit in subsequent years. Dividend Distribution tax (DDT): (a) In new code Dividend Distribution Tax shall be 15% for every domestic company. (b) DDT exemption for SEZ developer to be discontinued. (c) DDT also extended to payments (by way of advance or loan) made by closely held companies which are deemed as dividend. Major Change in Oincome Slabs In case of every Individuals: In the case of every - operative society, there is no change in income slab. Old Income Slab New Income Slab Tax Rate 0 10, ,000 10% % % Any other Society, Local Authority, partnership Firm, AOP, BOI will be taxed separately as an Unincorporated Body at a maximum marginal rate of 30%. In the case of Company (both domestic and foreign) 25% Foreign companies will be subject to branch profits Due Date for Filing Returns of Tax Bases Sl. No. Type Date 1. Non Business/ Non - Corporate 30 th June 2. Others 31 st August

6 122 LAXMAN RAM PALIWAL Wealth Tax The code proposes to tax net wealth in the following manner: Wealth tax will be payable by an individual, HUF and private discretionary trusts. Wealth tax for companies is proposed to be removed. Wealth tax will be levied on net wealth on the valuation date i.e. the last day of the financial year. Net wealth will be defined as assets chargeable to wealth tax as reduced by the debt owed in respect of such assets. The net wealth of an individual or HUF in excess of Rs. 50 Corers will be chargeable to wealth tax at the rate of 0.25 per cent. The threshold limit of Rs. 50 Corers will not apply to a private discretionary trust. References Direct Tax Code DTC India 2009 Deciphering DTC - Ernst & Young - India Business Line : Features / Mentor DTC s impact on India Inc Direct tax code highlights