The Income Tax Act was passed in 1961 and has been amended every year through the Finance Act. Thus the Income Tax Act today is very difficult to interpret and has resulted in many disputes and court cases. Now such tax system is required which is broad base, simple and transparent as well as which fulfills the international need. Keeping this in view, there has been proposal to replace the existing Income Tax Act, 1961. Direct Tax Code,2009 is a draft proposal to make existing tax structure easy and simple so that tax payers themselves can compute and file Income Tax return .DTC is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best international practices. 12th August 2009, DTC Bill 2009 discussion paper released. The basic objective of this tax code is to broad base the tax umbrella. It is expected that the new code will facilitate higher consumerism and thereby promote economic growth.
HIGHLIGHTS OF DTC, 2010
MAT will be calculated on ‘Book Profit’ as against the ‘Value of Gross Assets‘.
Salary – Exempt Exempt Exempt (EEE) scheme will be applicable for GPF, PPF, RPFs, Pension Scheme, Approved pure life insurance products and annuity schemes instead of Exempt Exempt Tax(EET).
Amount received under Gratuity, voluntary retirement scheme, commutation of encashment of leave will be exempt, subject to specified limits, for all employees.
Rent free accommodation will not be taxed at market value.
In case of house property which is not let out, the gross rent will be nil.
In case of self occupied property exemption upto 1.5 Lakhs will be allowed.
Capital gains on other assets held for more than one year will be computed on indexed cost method basis (base year will be 1.4.2000).
If STT is payable, only half of short term capital gain will be taxed and long term capital gain are still exempted.
Difference between INCOME TAX ACT, 1961 & DIRECT TAX CODE BILL, 2010
INCOME TAX ACT, 1961
MAT at 15% is levied on ‘Book Profit’. Further MAT tax credit is allowed to be carried forward up to ten assessment year.
Income from salary includes all perquisites such as house rent, leave travel assistance, children education allowances, etc. is exempt up to a certain limit.
Self occupied house property whose gross rent is taken as NIL, used to get deduction for repair based on annual value in case of rented house property is 30%
There is no such provision for upfront determination of the arm’s length pricing or pricing methodology.
DIRECT TAX CODE BILL, 2010
Basis for levy of MAT is 20% on book profits, carry forward of such MAT tax credit has been denied.
All such exemption withdrawn.
Self-occupied house property whose gross rent is taken as NIL, will not get deduction of interest on loan. Deduction for repair on annual value in case of rented house property is proposed to reduce to 20%.
Transfer Pricing matter will be well settled under proposed Advance Pricing Agreement (APA), under which an agreement between the taxpayer and the tax authorities for the upfront determination of the arm’s length pricing/pricing methodology of an international transaction will be made but shall not be effective for more than five consecutive years.
|Rate of tax on income||Income slab as per Income tax act, 1961||Direct Tax Code, 2010|
|Tax free income||Up to 1,60,000 p.a.||Up to Rs 2,00,000 p.a.|
|10% taxation||Rs 1,60,000 to Rs 5,00,000 p.a.||Rs 2,00,000 to Rs 5,00,000 p.a.|
|20% taxation||Rs 5,00,000 to Rs 8,00,000 p.a.||Rs 5,00,000 to Rs 10,00,000 p.a.|
|30% taxation||Rs 8,00,000 and above p.a.||Rs 10,00,000 and above p.a.|
KEY ISSUES AND ANALYSIS
The Draft Direct Taxes Code, 2009 that was published for public feedback had the intent of simplifying tax legislation and widening the tax base. The Bill reverses some of the provisions of that Draft Code.
Tax exemptions for individuals have been retained while most exemptions for corporates removed. The tax rates for individuals have been lowered. The taxes paid by corporates will form a greater part of the government’s revenue than earlier.
The Bill may increase the burden of compliance in two ways. There are no guidelines to indicate in what situations the General Anti Avoidance Rules will be implemented. Additionally, the Bill requires income from different units of the same business to compute their tax liability separately.
The Bill retains the Dividend Distribution Tax and the Security Transaction Tax. These taxes are levied at a uniform rate irrespective of the amount of income or profit, and go against the principle of progressive taxation of individuals.
The Bill seeks to tax foreign companies if their place of ‘effective management’ is in India at any time of the year. It is unclear as to what would constitute effective management of a foreign company in India.
From DTC, 2010, Projection for loss of revenue for the exchequer and impact on fiscal deficit are as follows:
The Direct Tax Code (DTC) Bill, 2010 has lapsed with the dissolution of the 15th Lok Sabha. “There is no great merit in going ahead with the Direct Tax Code as it exists today. Most of the provision of the DTC have already been included in the Income Tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present budget”, said Finance Minister while presenting the Budget for 2015-16 in the month of February, 2015.
However, “The government should go ahead with the DTC with its good provisions and implement the same within a stipulated deadline along the lines of the GST regime,” the Standing Committee on Finance said in its report, which was tabled in Parliament on 24th April, 2015. The committee also underlined the need for preparing a time-bound plan to realise the tax arrears which are not disputed and can be collected. The quantum of undisputed or uncollected arrears in direct taxes in 2012-13 was Rs 1.07 lakh crore, which rose to Rs 1.32 lakh crore in 2013-14. “The huge pendency of tax arrears clearly shows failure of tax policy and administration”, the report said.
The Government of India has to take a required step to implement DTC as early as possible with fresh look & criticism from others.