A Critical analysis of Direct Taxes Code

Direct Taxes Code a.k.a DTC a much expected new tax structure designed to make the Indian tax laws as simple as it can be and to improve the tax compliance in the country on an overall basis. The Government at the draft stage of the code told that the code will bring variety of benefits for both the companies and the individuals by reducing the tax rates for companies and increasing the slab rates for the individuals. The code also consolidates income tax and wealth tax. The concepts like “Assessment year” and “Previous year” are abolished and new terminology called “Financial year” is introduced for the first time in the Indian Income Tax Law. But the few areas which made few butterflies to fly in the stomach of many were the concepts like EET, taxing MAT based on the gross assets, removing various tax exemptions. This brought dissent from various people including professionals and experts and with the revised discussion paper the DTC was made relatively a people/tax payer friendly code.

The government in the original draft has messed up with the method of taxing Capital Gains. But the bill passed in the parliament contains decently modified capital gain taxation.

The DTC introduced in the Lok Sabha is completely a different one compared to the original draft. The tabled one has much lesser benefits and exemptions. The new code is expected to be made applicable form 1^st April 2012 as against the original proposed date of 1^st April 2011.

Here come the highlights of the DTC as it stands today:

1. The tax rates and slabs are –

          Men and women are at par in DTC

1. Various items earlier allowed as deduction under Chapter VI A are removed under the new DTC. Items such as Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan principal repayment, etc. are not considered for allowing deductions. However, the concept of EEE is retained in the place of proposed EET.
2. The deduction on income for investments has been retained at Rs. 1,00,000/-. Further an additional Rs. 50,000/- is allowed as deduction for contribution towards pure insurance.
3. Exemption of Rs. 1,50,000/-per year for interest on housing loan for self-occupied property is retained.
4. The levies surcharge and education cess are abolished.
5. Income from House Property : Standard deduction has been reduced to 20% of Gross Rent from the previous 30%. Concept of deemed to be let out is abolished in DTC.
6. Medical Reimbursement benefits have been increased to Rs.50,000/- from the current limit of Rs. 15,000/-.
7. Dividend Distribution Tax has been fixed at a rate of 15%.
8. A very bad news for the NRIs is the change in definition of residential status. A person will be a resident in India if he satisfies the following two conditions :

(a) for a period, or periods, amounting in all to one hundred and eighty- two days

or more in that year; or

(b) for a period, or periods, amounting in all to—

(i) sixty days or more in that year; and

(ii) three hundred and sixty-five days or more within the four years

immediately preceding that year.

Foreign Company are to be treated as resident in India if the control and management of its affairs is situated wholly or partly in India in the financial year.

1. MAT has been proposed to be taxed at 20% of the Book profits and not on the Gross assets as proposed earlier.
2. Capital gain Long term is now from asset held more than one year.
3. Indexation Base year to be changed to 01.04.2000 from 01.04.1981 so no tax on gains realised between 1981 to 2000.
4. No Tax on Long term capital gain on securities & equity linked mutual funds, For short term capital gain tax rate is 50 % of normal slab rate applicable to the asseessee.
5. There is no relaxation to the tax payer in the case of short term capital gains. Tax will be required to be paid on the STCG as any other income on the normal rates.

Folks wait for more information and latest updates on DTC in the coming days.

I hope the information provided above was helpful. The readers are welcome to add their points on latest developments in DTC.