Indian Direct Tax Code: An Overview


By

Dr. Mahendra Singhai
M.Com., Ph.D.
Assistant Professor - Commerce
Govt. Geetanjali Girls College
Bhopal

Vikas Saraf
M.B.A., IFDP–IIM Indore
(Former Joint Director–ICWAI)
Additional Director
Vidyasagar Institute of Management
Vallabh Nagar [BHEL], Bhopal (M.P)–462021
 


Overview

In simple layman's language, there are basically two types of taxes:-

1. Direct Tax and
2. Indirect Tax.

Direct tax is one which is taken by taking into consideration the individual characteristics of the tax payer such as Income Tax. While, Indirect Tax means the tax which is levied by taking into consideration the number of transactions such as Sales Tax.

Recently the IT department of India put the new proposal for Direct Tax in front of Govt. of India and this is known as Direct Tax Code (DTC). The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India - and would be presented in the winter session of the Parliament. The aim of DTC is to make the current tax structure in India easy. Well, yes. This is the basic aim of DTC. India needs a new taxation system. So if this proposal gets approved, our new tax code will be Income Tax Act 2010 or 2011 something. An important part of the budget every year has been the detailing of the tax rates. However, with the introduction of the new direct tax code, the tax rates will not be part of the budget presented to Parliament every year.

"In fact the Indian Government has unveiled the draft of a brand new direct tax law, which will replace the four-decade Income-Tax Act".


The new code will completely overhaul the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents. It has been drawn with inspiration from the prevailing tax legislation in US, Canada and UK. It is a topic of interest and a matter of concern for every taxpayer in India. 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 coffers.

The budget has estimated about USD 92 billion in direct tax receipts for the year that ends in March 2011.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 expected to streamline tax rates and administration for foreign institutional investors, for whom India is a top destination. The code aims to provide greater tax clarity and stability to investors who want to invest in Indian projects and companies. The officials have said the government would not like to tinker with tax rates every year to provide a greater degree of tax certainty to corporates, investors and individuals.

The direct tax code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation. It is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best international practices. It will eventually pave the way for a single unified taxpayer reporting system.

Salient features of the code are:


The new DTC also seeks to take the bold step of moving from EEE (Exempt-Exempt-Exempt) to EET (Exempt-Exempt-Taxed) system of taxation for various investment avenues. It is proposed to provide the EEE (exempt-exempt-exempt) method of taxation for government provident fund, public provident fund and recognized provident funds. The EET (exempt-exempt-tax) regime should be restricted to new savings instruments after DTC comes into effect, and the same should not apply to existing saving instruments. Ulips or unit-linked insurance plans - which have been at the centre of a public debate of late - have been brought under the EET regime after the DTC comes into force. Similarly, stocks investors will no longer be able to enjoy tax-free gain from long-term investment in equities as the DTS proposes to treat both short-term capital gains as well as long-term capital gains for tax calculation purposes.

The most striking feature is the rationalization level of tax slabs at various levels. The proposed slabs suggest a major overhaul in the intent of CBDT (Central Board of Direct Taxation). A glimpse of the intended structure has already been seen in the Union Budget 2010 wherein the tax slabs have been liberalized to a great extent. Higher income tax slabs, lowering net payable taxes. The so-called Direct Tax Code, which is scheduled to come into force from financial year 2011-12, had prescribed removal of almost all tax rebates in individual investments but also proposed raising the income limits for various tax slabs drastically. The following is the comparison of income tax which we will be paying for this financial year and the next financial year when new direct tax code is implemented.

Income tax slab for  ay  11-12 and ay  12-13 (new tax code) comparison

Income Tax Slabs for Resident Senior Citizens

S. No.

Tax percentage

ay 11-12 / fy 10-11

ay 12-13 / fy 11-12

1

No tax / exempt

Up to 2,40,000/-

Up to 2,50,000/-

2

10%

 2,40,001/- to 5,00,000/-

 2,50,001/- to 5,00,000/-

3

20%

 5,00,001/- to 8,00,000/-

 5,00,001/- to 10,00,000/-

4

30%

Above 8,00,000/-

Above 10,00,000/-

Income Tax Slabs for Others and  Men & Women

S. No.

Tax percentage

ay 11-12 / fy 10-11

ay 12-13 / fy 11-12

1

No tax / exempt

Up to 1,60,000/-

Up to 2,00,000/-

2

10%

 1,60,001/- to 5,00,000/-

 2,00,001/- to 5,00,000/-

3

20%

 5,00,001/- to 8,00,000/-

 5,00,001/- to 10,00,000/-

4

30%

Above 8,00,000/-

Above 10,00,000/-

Abbreviations:     ay:- Assessment Year, fy :- Financial Year.


On going through the above proposed amendments, proposed by the government, it looks pretty clear that it is nothing but a cosmetic change, and one can even go to the extent to say that the Direct Tax Code is more of a bane than a boon, since people earning at the higher end of the spectrum of the tax slab have never been the biggest contributors towards the exchequer, since they form a very small chunk of the Salaried Employee's matrix.

The government has marginally lowered the tax burden for individuals and has effectively left corporates with largely similar tax rates as before, hoping that these changes will make the new code revenue positive. Though the exact impact is not yet known, finance ministry officials have said the new code will help shore up the tax-GDP ratio significantly from around the current 11 percent level.

On the face of it, the corporate tax rate has been reduced from a little over 33% to 30%. But tax experts say whether a company pays more tax or less will also depend on a key provision called the Minimum Alternate Tax (MAT). MAT is applicable to those companies who do not show book profits liable to tax, as they claim a plethora of exemptions on account of being in capital intensive industries. The MAT rate has now been increased from 18% to 20% in the new code. Foreign corporates today pay a higher rate of tax. However, the new rate of taxation for foreign corporates is not yet known.

In conclusion, the last Tax code in India was designed in 1961 and that's why we call it Income Tax Act 1961. But after half a century everything is changed and we can not simply rely on the age old tax system. There are some disadvantages also but over all right now it looks that it has many advantages.

The DTC is proposed to make all the tax laws simple. It has also increased the limits of income tax and wealth tax by several folds. This is surely a reason to smile. India's social security system is still in developing stages, and any change in this method might have posed significant challenges for tax payers as well as collectors.

But there are always two sides of any coin. The Direct Tax code in India is very much discussed and criticized now a day. Even though, the basic aim behind DTC is simple and helpful to the people, it is very much criticized because many provisions under this proposal may harm the investors and FIIs. The flip side here is the loss of revenue to the government due to the concessions being provided and what the finance minister may do to counter that.  It is possible the proposed tax slabs and the tax rates may be calibrated to ensure that the loss of revenue to the exchequer is minimized. As the proposals are also at the discussion stage, the matter will only be cleared when the revised bill is drafted. It is expected to be passed in the monsoon session of 2010 and is expected to be enforced from 2012. During the budget 2010 presentation, the finance minister Mr. Pranab Mukherjee reiterated his commitment to bringing into fore the new direct tax code (DTC) into force from 1st of April, 2011. So let's hope that everything goes smoothly.

References

1. http://finmin.nic.in/DTCode/index.asp
2. http://www.pankajbatra.com/india/new-direct-tax-code-dtc-highlights/
3. http://www.deccanherald.com/content/19934/decoding-direct-tax-code.html
4. http://www.ndtv.com/article/business/new-direct-tax-code-pay-less-in-taxes-from-april-2011-47396
5. http://www.etaxindia.org/2010/08/direct-tax-code-2011.html
6. http://www.moneycontrol.com/.../proposed-direct-tax-code_481425.html
7. http://www.india.gov.in/allimpfrms/alldocs/12779.pdf
8. http://www.citefin.com/5129-direct-tax-code-2010-a.html
9. http://www.pwc.com/in/en/services/DirectTax-Code.jhtml
10. http://www.hindustantimes.com/Direct-Tax-Code-a.../Article1-595962.aspx
11. http://www.assocham.org/events/recent/event_391/S_P_Singh.pdf
12. http://www.blogofindia.in/revised-direct-tax-code
13. http://www.investmentyogi.com/nri/impact-of-direct-tax-code-dtc-on-nris.aspx
14. http://taxguru.in/income-tax/direct-tax-code-impact-on-indian-companies.html
 


Dr. Mahendra Singhai
M.Com., Ph.D.
Assistant Professor - Commerce
Govt. Geetanjali Girls College
Bhopal

Vikas Saraf
M.B.A., IFDP–IIM Indore
(Former Joint Director–ICWAI)
Additional Director
Vidyasagar Institute of Management
Vallabh Nagar [BHEL], Bhopal (M.P)–462021
 

Source: E-mail October 10, 2010

          

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