Direct Tax Code

• Income Tax Act (IT Act) came into legislation in 1961.

• This Act has been criticized for being economically inefficient, incompatible with the current requirements and inequitable to all tax payers.

• So, in August 2009, the Ministry of Finance came out with the draft of Direct Tax Code (DTC) bill with the purpose of replacing the existing IT Act and also invited the public for discussions and feedback on the draft proposal.

• It will be a key tax reform by the government aiming at widening and deepening the tax net; and increasing tax revenue. But the draft bill had received lot of criticisms on certain amendments or changes in relation to the removal of existing tax subsidies, and modifications in the tax rate structure that it sought to introduce.

• So, in June 2010, the ministry again issued a new revised direct tax code bill, incorporating all the criticisms, and presented the draft to the Union Cabinet. As per the news reports, on 31st August 2010, the draft bill has been approved by the Cabinet as well as the Parliament and the new DTC will come into force from 1st April 2012.

• The rationale for introducing DTC is to increase the efficiency and equity of the tax system by eliminating the plethora of tax exemptions or subsidies that create distortions. Its major policies include reduction in the tax rates to bring more people and companies under the tax net. India wants to modernize its direct tax laws, mainly its income tax act which is now nearly 50 years old. The government, wants a modern tax code in step with the needs of an economy which is now the third largest in Asia.

• The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government's funds.

Income slab existing Rate of Income Tax

Income slab proposed by new

revised DTC 

Up to Rs 160,000 nil Up to Rs 200,000

Rs 160,001 to Rs 300,000 10% Rs 200,001 to Rs 500,000

Rs 300,001 to Rs 500,000 20% Rs 500,001 to Rs 1,000,000 

Above Rs 500,001 30% Above Rs 1,000,001

The basic tax exemption limit for an individual male and female has been raised and brought at par from Rs 1,60,000 and Rs 1,90,000 to Rs 2,00,000 per annum. Senior citizens, however, will now enjoy a tax exemption on income up to Rs 2,50,000 per annum instead of Rs 240,000 allowed now.

Income slab existing Rate of Income Tax

Income slab proposed by new

revised DTC 

Up to Rs 190,000 nil Up to Rs 200,000

Rs 190,001 to Rs 300,000 10% Rs 200,001 to Rs 500,000

Rs 300,001 to Rs 500,000 20% Rs 500,001 to Rs 1,000,000 

Above Rs 500,001 30% Above Rs 1,000,001

TAX SLABS, WOMEN

Income slab existing Rate of Income Tax

Income slab proposed by new

revised DTC 

Up to Rs 240,000 nil Up to Rs 250,000

Rs 240,001 to Rs 300,000 10% Rs 250,001 to Rs 500,000

Rs 300,001 to Rs 500,000 20% Rs 500,001 to Rs 1,000,000 

Above Rs 500,001 30% Above Rs 1,000,001

TAX SLABS, SENIOR CITIZEN

• Savings, in the form of provident funds whether public provident fund, government provident fund, or employees provident fund

• The new DTC savings limit allowed for deduction from the taxable income has been increased

Existing Limit Proposed LimitRs 120,000 (including Rs20,000 for investment in infrastructure bonds)

Rs 150,000 which is decomposed as Rs 100000 for investment in provident funds, pension funds and other approved securities like gratuity; and Rs 50,000 for child’s tuition fees, life insurance and health insurance premiums. If you invest in infrastructure bonds, deduction of an additional Rs 20,000 also can be claimed.

DTC SAVING LIMIT

Existing Limit Proposed Limit Any withdrawal from the Retirement Benefit Account (RBA) is taxable.

New proposed DTC exempts even withdrawal.

Employee’s contribution to his pension fund that will be deducted from his taxable income is 1,00,000 per annum.

Employee’s contribution to his pension fund that will be deducted from his taxable income has been increased to Rs 300,000 per annum.

Retirement is the stage of life after working.

Existing Limit Proposed LimitMedical reimbursement of only 15,000 a year should be exempt from the tax.

Medical reimbursements of up to Rs 50,000 a year will be proposed to be exempt from tax.

Tax practitioners said that the move will help salaried individuals meet the cost of some of the surgeries since the present limit was low and was mostly used up by consultation fees and cost of medicines.

Medical reimbursement means compensation claim in case of any medical treatment or claim in case of money spent on any medical services.

CAPITAL GAINS • Transfer of capital assets results in capital gains. A capital gains

tax is the tax levied on the profit released upon the sale of a capital asset. According to I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. are capital assets.

• For tax purposes, there are two types of capital assets:

1. Long term: Long term asset are held by a person for 3 years except in case of shares or mutual funds which becomes long term just after one year of holding.

2. Short term: Short term asset are held by a person for not more than 3 years and in case of shares period has been reduced to 12 months.

Existing Limit Proposed Limit

Long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been paid and through recognized stock exchange, then no tax is payable and if not then tax rate is 20%.

In case capital gain on transfer of house property is fully exempted, if assessee purchase another house within 2 years after the sale of the house or construct a new house within 3 years after the sale of the house.

New DTC has retained the same policy of tax on long term capital gains as it exists in the IT Act.

Existing Limit Proposed Limit

Short term capital gains are now taxed at the rate of 15% for all (17% including surcharge and cess).

From 1-04-2012 onwards around 50% of the gain will be exempt and the rest will taxed at the income tax rates 15%

Existing Limit Proposed Limit Under the present provisions of the Income Tax Act, letting out an inseparable building along with plant and machinery is taxable under 'business income' or 'other sources' .

According to the new code, it will be taxable under the head 'income from house property' .

The concept of notional rent would be consider in the present income tax act.

Income from house property is to be considered only if the property is let out. Thus, there will be no element of notional rental income any more as in the present regime.

In case of more than one house the annual value of self occupied house property is nil and tax should be paid on the other vacant house.

In case an assessee has more than one house for self-occupation , the benefit of nil gross rent will apply only for one self-occupied house at the option of the assessee. The computation of remaining houses will be made as if the properties are let out.

Deductions for Rent and Maintenance in case of house property would be 30%.

Deductions for Rent and Maintenance in case of house property will be reduced to 20% in the proposed DTC.

Existing Limit Proposed Limit

According to the income tax act 1961, dividend distribution tax is 16.61%.

In the proposed direct tax code dividend distribution tax will decreased to 15%

Dividends are payments made by a company to its shareholder members. When a corporation earns a profits or surplus, that money can be put to two uses: it can either be re-invested in the business called retained earnings, or it can be paid to the shareholders as a dividend.

Existing Limit Proposed Limit

In the present system, leave travel allowance is completely exempted from tax.

In the proposed DTC, LTA will form part of your total income but qualify for deduction.

Leave Travel Allowance (LTA) is basically defined as the cost of travel granted to employees to travel anywhere in India, while on leave from work. The amount of exemption depends upon the mode of travel, and it is allowed only towards the travel fare, and not for boarding and lodging.

Existing Limit Proposed Limit

NRI is liable to pay tax on global income if he is in India for a period more than 182 day

In the new bill or proposed bill, this duration has been changed to just 60 days.

A Non-Resident Indian is an Indian citizen who has migrated to another country, a person of Indian origin who is born outside India , or a person of Indian origin who resides permanently outside India. It also refers to a person of Indian origin staying in a different global location for employment, carrying on business or vocation.

Existing Limit Proposed Limit

Currently, a penalty is levied for concealing the particulars of your income and if you are able to convince the Government that you didn't intend to evade tax; you are let off without any penalty.

Under DTC, tax department will have more powers to force a penalty. In the new tax code, you will be levied penalty even for under-reporting.

Currently, the penalty for tax evasion will 300% of the tax due.

In new proposed DTC the penalty for tax evasion will reduced to 200% of the tax due.

Existing Limit Proposed LimitThe existing corporate tax rate is 33.33% including both surcharge and cess

The new DTC has proposed a decreased corporate tax rate to 30% for a domestic company. The Bill also seeks to remove surcharge and cess on corporate tax, which could provide relief to business houses.

The tax rate for foreign companies is 40% in current IT act.

The tax rate for foreign companies will be same as domestic companies instead of 40% as per IT Act.  

Corporate tax refers to direct taxes charged by various jurisdictions on the profits made by companies or associations and include capital gains of the company.

Existing Limit Proposed Limit

18% or (19.93% including surcharge or cess).

Increased to 20% on Book Profits.

Time period for Minimum Alternate Tax (MAT) credit is 10 years.

Time period for Minimum Alternate Tax (MAT) credit is extended to 15 years.

MAT means Minimum Alternative Tax charged u/s 115J(B) to the companies. It was first introduced by V.P. Singh when he was the Finance Minister of our country. He realized that companies declaring huge dividend and paying lesser tax as they claim a plethora of exemptions. To avoid such things he introduced MAT which is charged @ 19.93% on the book profit declared by the company. 

• A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws.

• India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

• With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones Policy was announced in April 2000.

• Usually the goal of a these Zones is to increase foreign direct investments by foreign investors, typically an international business or a multinational corporation (MNC).

• The main objectives of the SEZ Act are:• (a) generation of additional economic activity.

(b) promotion of exports of goods and services. (c) promotion of investment from domestic and foreign sources. (d) creationof employment opportunities. (e) development of infrastructure facilities.

Existing Limit Proposed Limit

Special Economic Zones developers get tax breaks for all the zones notified up to end March 2012

The existing tax breaks will continue to be available if they commence operations before the end of March 2014.

Presently, SEZ units get 100 percent tax exemption on profits earned for first five years, 50 percent for next five years, besides 50 percent exemption on re-investment. Also, SEZ developers get 100 percent tax exemption on profits for 10 years in a block of 15 years.

SEZ units don’t have intention to the invest the profits in the infrastructure growth of the country, given the continued tax exemptions. SEZ units will suffer additional tax in the form of MAT. SEZ units will also have to pay dividend distribution tax @ 15 percent.

MEANING-: To give a boost to primary education in the country and in conformity with the Common Minimum Programme of the UPA government, Finance Minister P.Chidambaram on July 2004 proposed to levy a Educationcess of two per cent on income tax, corporation tax, excise and customs duties and service tax. The new cess was expected to yield about Rs 4,000-5,000 crore (Rs 40-50 billion) per annum and the entire amount will be earmarked for education including provision of nutritious cooked mid-day meal. The education cess will be a 3 per cent surcharge on the total payable tax, and not 3 per cent of total income. SURCHARGE AND EDUCATION CESS ARE ABOLISHED.

• New DTC removes most of the categories of exempted income. ULIPs, Term deposits, NSC , house loan, principal repayment, stamp duty and registration fees on purchase of house property will loose tax benefits.

• Surcharge and education cess are abolished  and  Tax exemption on LTA (leave travel allowance) is abolished.

Terms Abolished under new DTC

• Earlier Income Tax Act and Wealth tax Act (Covering Income Tax, TDS, DDT, FBT and Wealth taxes) are abolished and single code of Tax, DTC in place.

• Concept of Assessment year and previous year is abolished. Only the “Financial Year” terminology exists.

• Only status of “Non Resident” and “Resident of India” exits. The other status of “resident but not ordinarily resident” goes away.

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