Brief On Revised Discussion Paper For Direct Tax Code (DTC) For Capital
Gains
Current Situation: Short-term capital gains (STCG) arising on transfer of
listed equity shares or units of equity oriented funds are being taxed at 15%
and Long term capital gain (LTCG) arising on transfer of listed equity shares or
units of equity oriented funds are exempt from tax.
Proposed in DTC:
Under DTC distinction between short-term investment asset and long-
term investment asset on the basis of the length of holding of the asset
have been eliminated.
Income under the head Capital Gains will be considered as income from
ordinary sources in case of all taxpayers. It will be taxed at the rate
applicable to respective taxpayer.
Currently for Non resident Income under the head Capital Gains is taxed
at nil rates if held for more than 1 year.
Under DTC in case of non resident Income under the head Capital
Gains will be considered as income from ordinary sources and will be
taxed at the rate of 30%
Limitation of Capital Gain Tax as proposed in DTC:
The withdrawal of the current scenario of charging 15 % for STCG and
LTCG exempt regime will raise the tax liability and may cause
fluctuations in the capital market.
Also charging at the rate of 30 percent is very high as compared to nil
rate. Foreign Institutional Investors play a significant role in the Indian
capital market. Various countries, including emerging markets, offer
non-residents a special tax regime to attract investments and promote
depth of capital markets.
Proposed in Discussion Paper for DTC:
Income under the head Capital Gains will be considered as income
from ordinary sources in case of all taxpayers including non-
residents. It will be taxed at the rate applicable to that taxpayer.
In case of listed equity shares or units of an equity oriented fund
held for period of more then 1 year Capital Gain will be computed after
allowing a deduction at a specified percentage of capital gains without
any indexation. This adjusted capital gain will be included in the total
income of the taxpayer and will be taxed at the applicable rate. The loss
arising on transfer of such asset held for more than one year will also be
treated in similar fashion.
For instance: If the capital gain before deduction at the specified rate
comes to Rs.100, it would stand reduced to Rs.50 (if the specified
deduction rate is 50 percent). The capital gain of Rs.50 would then be
included in the taxpayer’s total income and taxed at the applicable rate.
In this example, for a taxpayer in the tax bracket of 10%, such gain will
bear an effective tax at the rate of 5% and for taxpayers in tax bracket of
20% or 30%, the effective tax rate would be 10% or 15% respectively.
In case of Capital gains on other asset held for more than one year
the base date for determining the cost of acquisition will now be shifted
from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains on
such assets between 1.4.1981 and 31.3.2000 will not be liable to tax.
The capital gains will be computed after allowing indexation on this
raised base. The capital gains on such assets will be included in the total
income of the taxpayer and will be taxed at the applicable rate.
The Capital gain arising from transfer of any investment asset held
for less than one year from the end of the financial year in which it is
acquired will be computed without any specified deduction or indexation.
It will be included in the total income and will be charged to tax at the
rate applicable to taxpayer.
Brief On Revised Discussion Paper For Direct Tax Code (DTC) For
Minimum Alternate Tax (MAT) :
Current Situation:
MAT applicable on Book profit
Proposed in DTC:
The DTC has proposed a MAT on companies calculated with reference to the
“value of gross assets”.
Limitation of MAT to be applied on basis of Gross Assets
Computation of MAT with reference to gross value of assets will require
all companies to pay tax even if they are loss making companies or
operating in a cyclical downturn.
An asset based MAT on loss making companies would result in
significant hardship since they would not have the resources to pay the
tax.
Logically Income tax should be on real income and any method for
presuming income should also be reasonable enough to come closer to
the real income.
Proposed in Discussion Paper for DTC:
MAT will be computed with reference to Book Profit.
Proposed MAT will not allow any carry forward
What will be the Impact of above on Corporate?
Corporate would end up paying more overall tax in a low profit year. Also
there will be no relief against above average profits earned in a
subsequent year.
DTC introduced in Parliament with marginal benefits (DTC Rates):
Diluting some of the promises, government on Monday introduced in the Lok
Sabha the Direct Taxes Code Bill seeking to increase exemption threshold for
income tax payers and reduce corporate taxes while removing the preferential
treatment for women.
The 319-clause bill, tabled by Finance Minister Pranab Mukherjee, seeks to
replace the five-decade old Income Tax Act, 1961, and will come into effect from
1st April, 2012, one year later than promised earlier, if passed by Parliament.
Under the Code, the income tax exemption threshold will go up from Rs. 1.6
lakh per annum to Rs. 2 lakh, while the corporate tax rate will come down from
33.2 percent to a flat 30 percent.
Income from Rs. 2-5 lakh is proposed to be taxed at 10 percent; Rs. 5-10 lakh
at 20 percent and 30 percent thereafter.
Though senior citizens, persons above 65 years, will get additional benefit,
women tax payers will not be accorded special treatment available to them in
the IT Act.
The new tax slabs will help save up to Rs. 41,040 for people earning more than
Rs. 10 lakh a year and Rs. 7,660 for income up to Rs. 5 lakh.
The tax exemption on savings and as also payment of interest up to Rs. 1.5
lakh on housing loan have been retained in the proposed Bill along with the
EEE (exempt-exempt-exempt) mode of taxation for insurance and pension
funds.
The moderation of taxes together with concessions are estimated to result in a
revenue loss of Rs. 53,172 crore in 2012-13 if the present rates were to be
applied.
The gross tax revenue from direct taxes will come down from an estimated Rs.
5.80 lakh crore to Rs. 5.27 lakh crore under the proposed code.
The Bill, which will also replace the Wealth Tax Act besides the IT Act, has
been referred to a Parliamentary Committee for scrutiny and suggestions.
The new code will have 319 sections and 22 schedules as against 298 sections
and 14 schedules of the existing IT Act.
As per the DTC Bill, the exemption limit for senior citizens, is proposed to be
raised marginally to Rs. 2.5 lakh from Rs. 2.40 lakh now.
Currently, income from Rs. 1.6-5 lakh attracts 10 percent tax; from Rs. 5-8
lakh, 20 percent and beyond Rs. 8 lakh, 30 percent.
The proposed tax slabs are much lower than originally suggested in the draft
DTC bill - 10 percent for Rs. 1.6 lakh to Rs. 10 lakh, 20 percent from Rs. 10-25
lakh and 30 percent for income above Rs. 25 lakh.
According to estimates, an individual tax payer earning more than Rs. 10 lakh
would save up to Rs. 41,040 annually under the DTC vis-a-vis the current tax
rates.
The legislation also proposes to increase Minimum Alternate Tax (MAT) from 18
percent to 20 percent of book profit of a company, an issue which evoked sharp
reaction from industry.
It seeks to levy dividend distribution tax at 15 percent.
When enacted, DTC will replace archaic Income Tax Act. (SS-30/08)
DTC: No spl tax status for women, more rebate for sr citizens
While senior citizens will continue to enjoy greater tax exemption, women tax
payers will lose their special status under the proposed Direct Taxes Code.
The Bill proposes to raise the tax exemption limit for senior citizens above 65
years to Rs. 2.5 lakh per annum from Rs. 2.4 lakh at present.
The income tax exemption limit for general tax payers has been proposed at Rs.
2 lakh, up from Rs. 1.6 lakh at present.
The Bill, however, is silent on women tax payers.
Under the existing rules, the income tax exemption limit for women tax payers
is Rs. 1.9 lakh per annum, as compared to Rs. 1.6 lakh for general tax payers.
As there is no special category for women, their incomes will be taxed at the
rates applicable for general tax payers.
However, tax experts believe that the government will later on include a
'women' category in the Bill when it comes up for deliberation in the Parliament
Committee.
"The women category would be included later on in the DTC Bill. It is possible
that the exemption limit would also increase," PWC Executive Director (Tax and
Regulatory Services) Ajay Kumar said.
Direct Tax Code at Glance (released 15th June, 2010)
Summary Points
The new direct tax law proposes sweeping taxation changes to promote long
savings and retirement benefits. Save more money and save more tax, that
seems to be the principle guiding the government's new direct tax code that
allows higher tax exemptions for long term savings and retirement benefits.
Provident fund investments would continue to be treated under exempt
exempt and exempt (EEE) regime which means that the investments would be
tax exempt at the investment stage, earnings stage (when interests are
earned) and withdrawal stage.
The new draft has proposed EEE method of taxation for Government
Provident Fund (GPF), Public Provident Fund (PPF) and Recognised
Provident Funds (RPFs) and the pension scheme administered by Pension
Fund Regulatory and Development Authority. Approved pure life
insurance products and annuity schemes will also be subject to EEE method
of tax treatment.
Investments made, before the date of commencement of the DTC, in
instruments which enjoy EEE method of taxation under the current law, would
continue to be eligible for EEE method of tax treatment for the full
duration of the financial instrument.
the current distinction between short-term investment asset and long-
term investment asset on the basis of the length of holding of the asset will
be eliminated. Income under the head Capital Gains will be considered as
income from ordinary sources in case of all taxpayers including non-
residents. It will be taxed at the rate applicable to that taxpayer.
Indexation facility would be available to all investment assets held for
more than one year.
The cost of acquisition is generally with reference to the value of the asset on
the base date or, if the asset is acquired after such date, the cost at which the
asset is acquired. The base date will now be shifted from 1.4.1981 to
1.4.2000.
Currently, short-term capital gains arising on transfer of listed equity shares
or units of equity oriented funds are being taxed at 15 per cent and long term
capital gain arising on transfer of such assets is exempt from tax. The
withdrawal of this regime will raise the tax liability and may cause
fluctuations in the capital market.
Personal Income Tax Rates
1.60 lakh annually : Nil tax liability. (1.6 lakh for men, Rs. 1.9 lakh for women,
and Rs. 2.4 lakh for senior citizens)
Rs. 1.6 to Rs. 10 lakh per annum : @ 10% (Existing Rs. 1.60 to Rs. 5 Lakh)
Rs. 10-25 lakh per annuam: @ 20% (Existing Rs. 5 to Rs. 8 Lakh)
over Rs. 25 lakh per annuam: @ 30% (Existing over Rs. 8 Lakh)
Reduciton in Wealth Tax
net wealth in excess of Rs. 50 crore will be charged at 0.25 per cent as
wealth tax. (Existing in excess of Rs. 30 lakhs @ 1%)
5
80C Limit Increase
It is proposed in the New Direct Tax Code to increase the 80C limit to Rs. 3
lakhs from the current Rs. 1 lakh. There may be a marginal increase in this
limit in the current budget. The increase in limit is proposed to be
applicable to individuals and HUFs (Hindu Unified Families).
Rent Deduction Reduction
In case of rental income 30% was the deduction allowed for maintenance of
the property. The New Direct Tax code plans to reduce this to 20%.
Any service tax paid for receiving services related to the house property is
deductible. This is a feature which is currently not available on any income for
individuals.
7
Perks to be Part of Salary
This will negate the increase in the tax slabs to some extent. The impact will be
felt by all salaried persons as currently items like Leave Travel Allowance,
House Rent Allowance and Medical Reimbursement can be tax free (or less
taxed) if supporting expenses documents are provided.
MAT
MAT to be computed on the basis of Book Profit (In earlier draft it was
proposed on Gorss Assets but particularily for loss makiing Company and
Companies having long gestation period would find it difficult to Pay MAT on
Gross Assets).