DIRECT TAX CODE
What is a Tax and different
types of tax?
To tax is to impose a financial charge or other levy upon a taxpayer
(an individual or legal entity) by a state or the functional equivalent
of a state such that failure to pay is punishable by law.
Taxation has four main purposes or effects: (4R’s)
Revenue,
Redistribution,
Re-pricing and
Representation
Types of taxes:
Direct Tax
Indirect Tax
Taxation System
Direct Tax Indirect Tax
Direct taxation is defined as Burden of tax is not
the tax which is directly completely paid by the
levied on the citizens of a payee & is passed on
country. These are the taxes
All individuals and business payable on an activity or a
concerns have to pay direct commodity.
taxes to the government on E.g. sales tax and excise
a regular basis. tax.
E.g. Income Tax
Direct Tax Code 2009 – General Provisions
• On August 10th 2009, Finance Minister, Mr Pranab Mukherjee
released the New Draft Direct Tax Code.
• The concept of previous year has been replaced with a new concept
of financial year which means a period of 12 months commencing
from the1st day of April.
• Every person is liable to pay income-tax in respect of his total
income for the financial year at the rates/conditions specified in the
Schedules to the DTC after all owing credit for prepaid taxes
(including foreign tax credits)
• Income has been proposed to be classified into two broad groups:
Income from Ordinary Sources and income from Special Sources
• Income from Ordinary Sources refers to:
- Income from employment
- Income from house property
- Income from business
- Capital Gains
- Income from Residuary Sources
General Provisions – Contd.
Income from Special Sources to include specified
income of non-residents, Winning from lotteries, horse
races, etc.
Losses arising from Ordinary sources to be eligible for
set off or carry forward and set-off against income only
from ordinary sources without any time limit.
Similar treatment for setoff and carry forward of losses
from Special sources.
Major Highlights of DTC - 2009
Income Tax
•Change in nomenclature: A unified financial year term replaces
assessment year and previous year
•Rise in tax slabs: The 10 per cent tax bracket raised up to Rs 10 lakh,
20 per between Rs 10 and 25 lakh and 30 per cent for over Rs 25 lakh.
•Salary perks as part of income: Would include perks like house rent,
leave travel allowance, medical imbursement
•Gratuity on change of jobs: Will be tax-exempt on change of jobs only
if it is invested in a retirement fund
•Income from ordinary source: Would include income from
employment, house property, business and so on.
•Income from special source: Would include capital gains on equity and
equity oriented funds, income of any other nature
Major Highlights of DTC – 2009 – Contd.
Wealth Tax and 80 C
•Wealth limit: Increased substantially from Rs 30 lakh to Rs 50 crore.
Will not apply to private discretionary trusts
•Rate of taxation: Reduced from 1 per cent to 0.25 per cent
•More instruments: Will include equity, mutual fund units purchased
and fixed deposit investments
•80C limit: From Rs 1 lakh at present to Rs 3 lakh for a hindu undivided
family (HUF) or individual
•Less instruments in 80C: Equity-link savings scheme and 5-year
fixed deposit will not be included
•Definition of higher education expanded under 80C: Higher
education will now include graduation and post graduation studies and
the tuition fees will be exempt
Major Highlights of DTC – 2009 – Contd.
Insurance
•Medical insurance: Existing exemptions retained for individuals,
senior citizens and the handicapped
•Tax-free: Pure life insurance and policies whose premiums less than 5
per cent of sum assured, even on bonuses
Exempt-Exempt-Tax (EET):
New tax regime for all provident funds, superannuation funds, life
insurance and New Pension Scheme (NPS). These investment to be
taxed on withdrawal
Grandfathering Clause: Withdrawal of any amount invested in
retirement and superannuation schemes as on March 31, 2011 will not
be taxed
Relief on rollover: The rollover of money withdrawn from one account
of the permitted saving to another will not be treated as withdrawal.
Major Highlights of DTC – 2009 – Contd.
Housing
•Housing Deduction: The deduction of Rs 1.5 lakh for housing loan
interest payment removed for a self-occupied residence
•Gross Rent Calculation: The gross rent for calculating income tax will
be based either on the rent that the house owner has contracted or on
the presumptive rent, whichever is higher.
•Presumptive Value: Presumptive rent to be considered as actual rent
or 6 per cent of the rate able value of a property fixed by local
authorities, or 6 per cent of the cost of buying or building the property
•Joint Ownership: If two people own the house, the tax will be levied
based on the proportion of their ownership
•Rent Deductions Capped: The deduction from gross rent for any
repair work or municipal taxes is capped at 20 per cent from the earlier
30 per cent
Major Highlights of DTC – 2009 – Contd.
Capital Gains
•Distinction Scrapped: The distinction between short- and long-
term capital gains tax scrapped
•Indexation benefit: One year cap remains to avail indexation benefits.
The same applied for house sold after one year
•Rate of Capital Gains: The rate of capital gains tax as per income
slab of the person
•Equity Investment: Investors will not enjoy zero tax on equity held for
over one year
•Dividend: Dividends paid out on equity investment are fully tax
exempt
•Exceptions: Capital gains will not apply to transfer of assets on
partition of Hindu undivided family, gifts, transfer under an irrevocable
trust, of any investment asset, other than sweat equity share
Comparison at a Glance
For women & senior citizen the initial exemption limit would be at
2.5L which is at present 1.9L & 2.4L respectively
Tax Rates for corporates.
Type Of Tax Existing rate(%) Proposed rate (%)
Corporate Tax 33 30
Minimum alternative Tax (MAT) 18 20
• The current tax rate for domestic companies, including surcharge and
cesses, comes to about 33.22 per cent, while foreign companies pay over
40 per cent.
• The bill sought to levy the same corporate tax rate on domestic and foreign
companies.
• The corporate tax rate is sought to be retained at the present level of 30 per
cent, but there will not be any surcharge or cesses on it.
• In addition, the DTC also proposed to increase the minimum alternate
tax rate to 20 per cent of book profit, from the current 18 per cent. However
The government has removed the concept of gross asset tax and has
rounded off the MAT rate to 20 per cent to factor in surcharge and cess.
Corporate Tax: Down from 30 per cent to 25 per cent
Business losses can be carried forward indefinitely
Area based incentives will be replaced with incentives on
investments
MAT will be on gross assets as against book profits
• The Tax Code prescribes stiff penalties and
prosecution for non-compliance with the tax
laws, it proposes that every tax offense under
the Code will be punishable by both
imprisonment and fine
Importance to Indian Firms &
Foreign Investors
One of the key aims of the new tax code is to provide a
system which takes into account increased cross border
mergers and acquisitions by Indian corporates over the last
few years.
The new code is also expected to streamline tax rates and
administration for foreign institutional investors, for whom
India is a top destination.
Despite the crisis in the euro zone, capital flows have been
robust this year with an inflow of USD 8.5 billion so far
DOUBLE TAXATION AVOIDENCE AGREEMENTS ( DTAA).
Discussion paper deals with relief from double taxation. Ordinarily, countries
follow both residence-based taxation and source-based taxation. it could lead
to double taxation of the same income. Hence, countries have agreed on
certain principles to avoid double taxation and accordingly, entered into
Double Taxation Avoidance Agreements (DTAA).
Apprehensions have been raised that the aforesaid proposal would lead to
treaty override and the existing DTAAs could be rendered otiose.
The current provisions of the Income-tax Act provide that between the
domestic law and relevant DTAA, the one which is more beneficial to the
taxpayer will apply.
This limited treaty override is in accordance with the internationally accepted
principles. Since anti-avoidance rules are part of the domestic legislation and
they are not addressed in tax treaties, such limited treaty override will not be
in conflict with the DTAAs. Further this will not deprive any taxpayer of any
intended tax benefit available under the DTAAs