Highlights of the Direct Taxes Code Bill, 2010

 

The Direct Taxes Code Bill, 2010 introduced in the Lok Sabha on 30^th August, 2010 is proposed to be made effective from 1.4.2012, which is a year later from the earlier proposed date of 1.4.2011.  The highlights of the proposals in the new Code introduced in the Lok Sabha are briefed hereunder –

 

Personal Taxation

 

1.       The tax slabs are proposed to be considerably watered down as compared to the  Direct Taxes Code Bill, 2009 released in August, 2009, though there is a marginal increase in the basic exemption limit from Rs.1,60,000 to Rs.2,00,000 (Rs.2,40,000 to Rs.2,50,000 for senior citizens).  The 10% slab rate would be for the income level upto Rs.5 lakh (as against the earlier proposed income level of upto Rs.10 lakh) and 20% slab rate would apply for the income level between Rs.5 lakh to Rs.10 lakh (as against the earlier proposed tax slab of Rs.10 lakh to Rs.25 lakh).  The highest slab rate of 30% would, therefore, be attracted for an income level of  above Rs.10 lakh,  a wide gap from the earlier proposed Rs.25 lakh.          

 

2.       Women assessees would not be eligible for a higher basic exemption limit, thereby gender discrimination is proposed to be removed.  Their basic exemption limit would be the same as applicable for the male counterparts.

 

3.       Income by way of royalty and fees for technical services of a non-resident is proposed to be taxed @20% as against the present rate of 10%.

 

4.       Employer’s contribution to provident fund, pension fund and superannuation fund would be eligible for deduction from gross salary subject to specified limits.  Further, house rent allowance would also be eligible for deduction from gross salary subject to prescribed limits.  However, leave travel concession is not eligible for deduction.  Reimbursement of medical expenses upto Rs.50,000 would not be treated as a perquisite in the hands of the employee.

 

5.       Notional income from house property would not be taxable.  Standard deduction @20% of gross rent is allowable as against the existing 30%.  Interest on loan borrowed for acquisition/construction of a property which is not let out would be allowable as deduction from “gross total income from ordinary sources” subject to a maximum limit of Rs.1,50,000, provided a certificate is obtained from the Financial Institution from which the loan was taken. Therefore, it appears that such deduction would not be available in respect of loan taken from employers, unless the employer happens to be a financial institution.   Further, there would be no deduction in respect of principal repayment of housing loan.  It may be noted that there is no provision for excluding unrealised rent while computing income from house property.

 

6.       An individual’s contribution to provident fund, public provident fund, superannuation fund, pension fund or any other  fund approved by the CBDT in accordance with the guidelines of the Central Government would continue to enjoy the benefit under EEE.   The maximum limit for deduction from “gross total income from ordinary sources” in respect of contribution to such funds is proposed at Rs.1,00,000.

 

7.       Payment of life insurance premium (not exceeding 5% of capital sum assured in a year), health insurance premium and tuition fees of children would qualify for deduction subject to a maximum of Rs.50,000.

 

Capital Gains Taxation

 

1.       Capital gains on listed equity shares or units of equity oriented fund held for more than one year, on which STT is paid, would continue to be exempt from tax.

 

2.       Capital gains on listed equity shares or units of equity oriented fund held for less than one year, on which STT is paid, would be taxable at 50% of the applicable rates i.e. the rate would be 5%, 10% and 15% for a person falling under the 10%, 20% and 30% slab brackets, respectively. In case of companies, the rates of Capital Gains would be 15%.

 

3.       In case of other assets held for more than one year from the end of the financial year of acquisition, benefit of indexation would be available.  The base date for indexation would be 1.4.2000.

 

4.       Individuals and HUFs can continue to avail the benefit of deposit in Capital Gains Deposit Scheme to reduce their tax burden.  The capital gains exemption would be available to them in the same proportion as the amount invested in the new investment asset and amount deposited in Capital Gains Deposit Scheme (within the specified time limit) bears to the net sale consideration on transfer of the original investment asset.

 

Business Taxation

 

1.       The limits of turnover/gross receipts  for applicability of tax audit is proposed to be increased to Rs.1 crore in case of business and Rs.25 lakh in case of profession.  Accordingly, such businesses can avail the scheme of presumptive taxation@8% , if their turnover is upto Rs.1 crore, subject to fulfilment of other prescribed conditions.

 

2.       “Place of effective management” to determine the residential status of a company.  In effect, if foreign companies are effectively managed from India, they would be treated as residents and their global income would become taxable.

 

3.       The differential rate of tax between domestic companies and foreign companies have been partially removed. The rate of tax for  all companies would be 30% (as against 25% proposed in the original DTC Bill, 2009).  However,  a foreign company would be liable to branch profits tax @15% in respect of branch profits of a financial year. This would be in addition to the income-tax payable by them.  Branch profits is the income attributable, directly or indirectly, to the PE or an immovable property situated in India.

 

4.       Minimum Alternate Tax is proposed to be levied on companies @20% of book profit, which is a marginal increase from the current 19.93% (18% plus surcharge @7.5% plus education cess@2% and secondary and higher education cess@1%).  However, the credit for MAT paid would be allowed to be carried forward for upto 15 years (as against the present permissible period of 10 years) to be set-off against the excess of tax payable in the years in which tax computed under the normal provisions exceeds the tax on book profits.

 

5.       SEZ developers to be allowed profit-linked deduction for all SEZs notified by 31^st March, 2012. Further,  units set-up in SEZs on or before 31^st March, 2014 to be eligible for benefit of profit-linked deduction.     However, SEZs would not be eligible for exemption from MAT.

 

6.       No time restriction is proposed for carry forward of losses.

 

Other Proposals

 

1.       The Code proposes to introduce a General Anti-Avoidance Rule (GAAR) to serve as a deterrent against tax avoidance.  The burden of proof to prove that the arrangement is not for the purpose of tax avoidance would be on the tax payer and not on the tax administrators.

 

2.       The Code also proposes to introduce CFC provisions so as to provide that passive income earned by a foreign company which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed. Consequently, it would be taxable in India in the hands of resident shareholders as dividend received from the foreign company.    

3.       Non-Profit Organisations to be taxed @15% of their total income in excess of Rs.1 lakh.

 

4.       The Treaty or Code, whichever is more beneficial, to prevail except when GAAR or CFC provisions are invoked or when Branch Profits Tax is levied.

 

5.       Wealth-tax is leviable @1% of the net wealth in excess of Rs.1 crore.  The present threshold limit is Rs.30 lakh.