Direct Tax Code
INTRODUCTION
• 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.
NEED FOR NEW DIRECT TAX CODE
• 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 TAX SLAB
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 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
TAX SLABS, WOMEN
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, SENIOR CITIZEN
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
DTC SAVING LIMIT
• 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
Rs 120,000 (including
Rs20,000 for investment
in infrastructure bonds)
Proposed Limit
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 IN CASE OF RETIREMENT
Retirement is the stage of life after working.
Existing Limit
Proposed Limit
Any withdrawal from the Retirement New proposed DTC exempts even
Benefit Account (RBA) is taxable.
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.
DTC IN CASE OF MEDICAL
REIMBURSEMENT
Medical reimbursement means compensation claim in case of any medical
treatment or claim in case of money spent on any medical services.
Existing Limit
Proposed Limit
Medical reimbursement of only Medical reimbursements of up to Rs
15,000 a year should be exempt 50,000 a year will be proposed to be
from the tax.
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.
CAPITAL GAINS
•
•
1.
2.
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:
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.
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.
DTC IN CASE OF CAPITAL GAINS
Existing 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.
Proposed Limit
New
DTC
has
retained the same
policy of tax on long
term capital gains as
it exists in the IT Act.
Existing Limit
Short term capital gains are
now taxed at the rate of
15% for all (17% including
surcharge and cess).
Proposed Limit
From 1-04-2012 onwards
around 50% of the gain
will be exempt and the rest
will taxed at the income
tax rates 15%
DTC IN CASE OF INCOME FROM
HOUSE PROPERTY
Existing Limit
Proposed Limit
Under the present provisions of According to the new code, it will
the Income Tax Act, letting out an be taxable under the head 'income
inseparable building along with from house property' .
plant and machinery is taxable
under 'business income' or 'other
sources' .
The concept of notional rent Income from house property is to
would be consider in the present be considered only if the property
income tax act.
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 Deductions for Rent and
Maintenance in case of house Maintenance in case of house
property would be 30%.
property will be reduced to
20% in the proposed DTC.
DTC IN CASE OF DIVIDENDS
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
According to the income In the proposed direct tax
tax act 1961, dividend code dividend distribution
distribution tax is 16.61%. tax will decreased to 15%
DTC IN CASE OF LTA
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
In the present system,
leave travel allowance is
completely exempted from
tax.
Proposed Limit
In the proposed DTC, LTA
will form part of your total
income but qualify for
deduction.
DTC FOR NRI
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
NRI is liable to pay tax on
global income if he is in
India for a period more
than 182 day
Proposed Limit
In the new bill or proposed
bill, this duration has been
changed to just 60 days.
PENALTY IN CASE OF DTC
Existing 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.
Currently, the penalty for tax
evasion will 300% of the tax due.
Proposed Limit
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.
In new proposed DTC the penalty
for tax evasion will reduced to
200% of the tax due.
DTC IN CASE OF CORPORATE TAX
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
The existing corporate tax rate is The new DTC has proposed a decreased
33.33% including both surcharge and corporate tax rate to 30% for a domestic
cess
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 The tax rate for foreign companies will
40% in current IT act.
be same as domestic companies instead
of 40% as per IT Act.
DTC IN CASE OF MAT
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.
Existing Limit
Proposed Limit
18% or (19.93% including surcharge Increased to 20% on Book Profits.
or cess).
Time period for Minimum Alternate Time period for Minimum Alternate
Tax (MAT) credit is 10 years.
Tax (MAT) credit is extended to 15
years.
DTC IN CASE OF SEZ ZONE
• 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.
DTC IN CASE OF SEZ ZONES
Existing Limit
Proposed Limit
Special Economic Zones developers The existing tax breaks will continue
get tax breaks for all the zones to be available if they commence
notified up to end March 2012
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.
DTC IN CASE OF EDUCATION CESS
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.
.