FOR THE MONTH OF SEPTEMBER

Transcription

1 NEWS LETTER FOR THE MONTH OF SEPTEMBER 2009 INDEX 1. NEW DIRECT TAX CODE 2. LIGHT HOUSE Page1

2 The Direct Taxes laws prevailed from 1961 till date, It required long due relook and changes to make it simple. The Government of India has come out with the Direct Tax Code Bill, which needs discussions among various economic constituents, before it is made the act. The article below gives an overview of what is in store in the New Direct Tax law. Direct tax codes CONTENT 1. Income tax rates proposed in direct tax codes for Partnership Firm, LLP, Foreign Companies, Domestic Companies, Individual and HUF 2. Proposal related to wealth Tax in Direct Tax code 3. Converting charitable trust into for-profit commercial entity set to become taxable under the direct tax code 4. Major changes proposed in Direct Tax Code related to Capital Gain tax 5. Set-off & Carry Forward of losses in direct tax code: Carry forward of loss permitted only if return filed within due date 6. Detailed study of MAT provisions under direct tax code and its impact on tax liability 7. Penalty provision in direct tax code in case there is a under reporting of tax base by the taxpayer 8. New direct tax code and taxability of Provident Fund 9. Direct tax code will not provide deduction for donation to religious trust and may tax NGOs

3 1. Income tax rates proposed in direct tax codes for Partnership Firm, LLP, Foreign Companies, Domestic Companies, Individual and HUF For Individuals and Hindu Undivided family Rates of income-tax I) In the case of every individual,,other than women and senior citizens: (1) Where the total income does not Nil exceed Rs 1,60,000 (2) Where the total income exceeds 10 per cent of the amount by which the Rs 1,60,000, but does not exceed Rs total income exceeds Rs 1,60,000 (3) Where the total income exceeds Rs but does not exceed Rs 25,00,000 Rs 84,000 plus 20 per cent of the amount by which the total income exceeds Rs (4) Where the total income exceeds Rs 3,84,000 plus 30 per cent of the amount Rs 25,00,000 by which the total income exceeds Rs 25,00,000 II) In the case of women below the age of 65 years at any time during the financial year: (1) Where the total income does not Nil exceed Rs 1,90,000 (2) Where the total income exceeds Rs 1,90,000 but does not exceed Rs (3) Where the total income exceeds Rs, but does not exceed Rs 25,00, per cent of the amount by which the total income exceeds Rs 1,90,000 Rs 81,000 plus 20 per cent of the amount by which the total income exceeds Rs

4 (4) Where the total income exceeds Rs 25,00,000 III) In the case of senior citizens: (1) Where the total income does not Nil exceed Rs 2,40,000 (2) Where the total income exceeds Rs 2,40,000 but does not exceed Rs (3) Where the total income exceeds Rs but does not exceed Rs 25,00,000 (4) Where the total income exceeds Rs 25,00,000 Rs 3,81,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00, per cent of the amount by which the total income exceeds Rs 2,40,000 Rs.76,000 plus 20 per cent of the amount by which the total income exceeds Rs Rs 3,76,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00,000 IV) In the case of Hindu Undivided family (HUF): (1) Where the total income does not Nil exceed Rs 1,60,000 (2) Where the total income exceeds Rs 1,60,000, but does not exceed Rs (3) Where the total income exceeds Rs but does not exceed Rs 25,00, per cent of the amount by which the total income exceeds Rs 1,60,000 Rs 84,000 plus 20 per cent of the amount by which the total income exceeds Rs Education cess of 3% is leviable on the amount of income-tax.

5 The basic exemption limit will be Rs 1,90,000 in case of resident women below the age of 65 years and Rs 2,40,000 in case of resident individuals of the age of 65 years or more. Income Tax Rate for Domestic Companies, Foreign Companies, Partnership Firm and Limited Liability Firs (LLP) Description A) Domestic company Regular Tax (Income Tax) 30.90% where total 25 income is equal to or less than Rs.1 crore else Minimum Alternate Tax (MAT) 33.99% % (of book profits) Dividend Distribution Tax 17.00% 15 (DDT) B) Foreign company Regular Tax 41.20% (Income Tax) where the total income is equal to or less than Rs. 1 crore else 42.23% C) Firm and LLP Regular Tax (Income Tax) %(of gross assets) and 0.25 % of gross assets in case of banking company 25% and Branch of foreign company shall be additionally liable to branch profits 15%

6 Note: Above rates are Inclusive of applicable surcharge and education cess of 3 %. 2. Proposal related to wealth Tax in Direct Tax code Provisions in relation to the Wealth Tax are proposed to be applicable to every individual, Hindu Undivided Family and Private Discretionary Trust; The Companies are proposed to be taken out of the Wealth Tax net; The DTC has proposed to enhance the basic exemption under the wealth tax form Rs. 30 Lakhs to Rs. 50 crores. However, at the same time all the assets (including financial assets, productive assets, business assets, etc.) will be liable to Wealth Tax; Rate of Wealth tax is proposed to be reduced from 1% to 0.25%. That means the tax on the net wealth is proposed to be 0.25% of the amount by which the net wealth exceeds Rs. 50 crores; The term assets for the purpose of Wealth Tax is not separately defined under the DTC. Further, under the generic definition of the term assets provided in DTC, all types of business as well as investment assets are covered. However, at present the wealth tax is not leviable on the agricultural land, business assets (such as motor car, yachts, etc.) and productive assets.

7 3. Major changes proposed in Direct Tax Code related to Capital Gain tax The new draft Direct Taxes Code proposes to tax capital gains as regular income at normal tax rates, thereby removing the benefits of lower rates for long-term capital gains on sale of shares. It is proposed that the Securities Transaction Tax be abolished and the exemption or relief granted to long-term and short-term gains on the sale of shares on the stock exchange be withdrawn. Advancing the date for substituting the cost with the fair market value for computing from April 1, 1981, to April 1, 2000, is a welcome change. Thus, effectively appreciation in the value of assets between April 1, 1981, and April 1, 2000, will not be taxed. The Code makes a distinction between investment assets and business capital assets. Gains on transfers of investment assets will continue to be taxed as capital gains but gains on transfer of business capital assets and slump sale will be taxed as business income. The concept of shortterm and long-term capital assets is removed. The Code proposes indexation benefits for all types of investment assets which are held for one year or more. The exemption for gains arising on the transfer of investment assets between a holding company and its wholly-owned

8 subsidiary was available provided that the holding-subsidiary relationship was maintained and the transferee did not convert the asset into stock-in-trade for a period of eight years. The Code proposes to remove the cap of eight years; therefore, the exempted gain will be taxed whenever any condition is violated at any point of time without limitation. Mercifully, the gain will now be taxed in the year of violation and not revert to the year of original transfer. The ratio of the Supreme Court s decision in case of B C Srinivasa Shetty that if the cost of an asset could not be ascertained, the computation mechanism fails and the gain on the transfer of such an asset would not be liable to tax is sought to be nullified by proposing that the cost of acquisition shall be deemed to be nil in all cases where cost cannot be determined. Now the transfer of all investment assets including self-generated assets will be liable to tax. The scope of income deemed to accrue in India is sought to be enlarged by including income accrued from the indirect transfer of a investment asset situated in India. This is an attempt to tax Vodafone type of overseas transfers. Business Reorganisation is now defined to mean the reorganisation of two or more residents, involving an amalgamation or a demerger. In view of the above, gains arising from reorganisation involving a foreign company may not be eligible for tax neutrality unless such company is regarded as resident

9 under the expanded definition. The Code exempts gains arising on the transfer of investment assets under Business Reorganisation and in the hands of the shareholders. In the case of amalgamation of companies, the losses of the predecessor can be set off by the successor, subject to compliance with the test of Continuity of Business. These conditions are now applicable also in cases of a demerger. The welcome change is that all types of losses are now eligible and the eligibility to carry forward losses is not restricted to companies having industrial undertaking which was required under the existing provisions. Also, the losses will be allowed to be carried forward for any number of years without limitation. The discussion paper rightly suggests that the losses relating to the demerged undertaking will be allowed to the resulting company. However, s.61 of the Code provides that the entire loss of the demerged company will be available to the resulting company. This seems to be an anomaly in the relevant provisions of the Code. 4. Set-off & Carry Forward of losses in direct tax code: Carry forward of loss permitted only if return filed within due date Set-off & Carry Forward of losses [Sections 58 to 60] Income from various sources falling within any head of income shall be set-off. Income / Loss from Capital Gains can be set-off against Loss / Income from any other head of income (from Ordinary Sources), since the differential tax rates in respect of income from capital gains are proposed to be abolished.

10 Income / Loss from special sources cannot be set-off against Income / Loss from ordinary sources. No time is limit prescribed for carry forward of unabsorbed losses. Hence, unabsorbed losses can be carried forward indefinitely. Under the IT Act, the long term capital loss cannot be set-off against short term capital gains or any other heads of income due to differential tax rates. However, in the Direct Tax Code (DTC), such differential treatment has been eliminated. Hence, the losses from capital gains are proposed to be allowed to be set-off against any other head of income. Further, business loss can be set-off against income from salaries. There is no distinction between unabsorbed depreciation and business loss; and both the aforesaid shall form part of unabsorbed current loss from ordinary sources Set-off & Carry Forward of losses in case of re-organisation [Sections 61] The unabsorbed losses of the predecessor shall be allowed to be carried forward by the successor subject to fulfillment of business continuity test. The business continuity test is similar to existing provisions. Under the IT Act, the loss of the predecessor in case of amalgamation could be carried forward only if the predecessor satisfied certain conditions. The condition of fulfillment of such requirements by the predecessor has been eliminated under the DTC.

11 The benefit of carry forward of losses of the predecessor by the successor in case of an amalgamation has been extended to taxpayers irrespective of the nature of activity carried out by them. Hence, the benefit of carry forward of loss in case of an amalgamation would now also be available to taxpayers engaged in service sector. Carry forward of loss permitted only if return of income filed within due date [Section 64] Under the DTC, unabsorbed current loss from any source shall be allowed to be carried forward for set-off against income of the succeeding years only if the return of income is filed within the due date. The DTC states that if the amount of unabsorbed preceding year loss exceeds the current income then the absolute value of the amount obtained after aggregating the unabsorbed preceding year loss with the current income shall be deemed to be unabsorbed current year loss. Thus, in case the return of income for any is year is not filed within the due date, the entire brought forward loss shall not be allowed to be carried forward, irrespective of the fact that the return of income for the year in which the loss was actually incurred was filed within the due date. 5. Penalty provision in direct tax code in case there is a under reporting of tax base by the taxpayer The new Direct Tax Code has proposed some stringent penalty provisions in case of willful attempt to evade tax, but maximum penalty mooted will not be more than two times

12 the amount of tax payable in respect of the amount of tax base underreported. Imprisonment for a term which may extend to seven years and with fine has been proposed for a person who willfully attempts in any manner to evade any liability in respect of tax, interest or penalty. Penalty provision in case there is a under reporting of tax base (Section 224 of Direct Tax Code). The Direct Tax Code (DTC) states that a person shall be liable to penalty if he has under reported the tax base for any financial year. The DTC further states that a person shall be deemed to have willfully under reported the tax base if his assessed income exceeds the disclosed income. The penalty shall be a sum which shall not be less than, but which shall not exceed two times, the amount of tax payable in respect of the amount of tax base under reported for the financial year. The DTC tends to make the penalty provisions mechanical and hence underscores the very nature of a penalty provision in a taxing statute to be applicable only where there is a deliberate attempt to conceal income by any action of the taxpayer. The penalty provisions which are activated merely due to differences of opinion between the taxpayer and the revenue authorities would go against the principle of equity and justice. Thus, the DTC provisions do not seem to be in line of various judicial pronouncements as regards levy of penalty. The penalty provisions proposed in the DTC are

13 drastically different from those present under the IT Act. THE PROPOSED PROVISIONS ARE FINALISED AFTER DELIBERATIONS AMONG DIFFERENT SECTS OF THE ECONOMY. THEN IT SHOULD BE PASSED BY BOTH RAJYASABHA AND THE LOKSABHA. LATER ONCE THE BILL RECEIVES THE ASSENT OF THE PRESIDENT IT BECOMES THE ACT. LIGHT HOUSE Change Your Thinking It will take just 37 seconds to read this and change your thinking. Two men, both seriously ill, occupied the same hospital room. One man was allowed to sit up in his bed for an hour each afternoon to help drain the fluid from his lungs. His bed was next to the room's only window. The other man had to spend all his time flat on his back. The men talked for hours on end. They spoke of their wives and families, their homes, their jobs, their involvement in the military service, where they had been on vacation.

14 Every afternoon, when the man in the bed by the window could sit up, he would pass the time by describing to his roommate all the things he could see outside the window. The man in the other bed began to live for those one hour periods where his world would be broadened and enlivened by all the activity and color of the world outside. The window overlooked a park with a lovely lake. Ducks and swans played on the water while children sailed their model boats. Young lovers walked arm in arm amidst flowers of every color and a fine view of the city skyline could be seen in the distance. As the man by the window described all this in exquisite details, the man on the other side of the room would close his eyes and imagine this picturesque scene. One warm afternoon, the man by the window described a parade passing by. Although the other man could not hear the band - he could see it in his mind's eye as the gentleman by the window portrayed it with descriptive words. Days, weeks and months passed. One morning, the day nurse arrived to bring water for their baths only to find the lifeless body of the man by the window, who had died peacefully in his sleep. She was saddened and called the hospital attendants to take the body away. As soon as it seemed appropriate, the other man asked if he could be moved next to the window. The nurse was happy to make the switch, and after making sure he was comfortable, she left him alone. Slowly, painfully, he propped himself up on one elbow to take his first look at the real world outside. He strained to slowly turn to look out the

15 window besides the bed. It faced a blank wall.. The man asked the nurse what could have compelled his deceased roommate who had described such wonderful things outside this window. The nurse responded that the man was blind and could not even see the wall. She said, 'Perhaps he just wanted to encourage you.' Epilogue: There is tremendous happiness in making others happy, despite our own situations. Shared grief is half the sorrow, but happiness when shared, is doubled. If you want to feel rich, just count all the things you have that money can't buy. 'Today is a gift, that is why it is called The Present.'