Some points from the Direct Tax Code Bill ,2009 indicating complexities and general tax matters.

[C.A. DEV KUMAR KOTHARI]

The draft Tax code Bill is expected to be placed and discussed in the Parliament in the ensuing  winter session and if it is enacted after following due process of legislation it will be implemented from the  assessment year 2011.

The Direct Tax Bill, 2009 is in the process of  reading, review,  inviting suggestions and objections, considerations and reconsideration of proposed clauses in view of rethought, suggestions, objections, and review before it is finalized. As indicated in the forward to the Bill, it is not to re-enact the existing laws or to amend the existing laws relating to direct taxes. The Bill is written as a new measure of simplification and rationalization of provisions on a new slate. Therefore, it is advised to avoid comparison with existing provisions.

There are 16 Chapters,  285 sections and 18 Schedules in the new Code. There are lot of changes in arrangements of various provisions, and one has to be very careful in finding out all relevant provisions in respect of a simple matter. This is because the relevant provisions may be available in bits and bytes spread over in various chapters, various  sections and various schedules. This is likely to make the work of tax compliance and administration tougher than it is at present.

The history of tax legislation and old cases laws will also remain  important for  interpretation of the new Code also.

Definition and interpretation sections are given at last.

The new trend noticed in drafting is that sections for definitions and interpretation are given as last two sections (but before Schedules to the Code. Usually we find these aspects in very beginning of any enactment in India. We find the following chapters and sections in this regard.

CHAPTER-XVI

284. Definitions B-159

285. Interpretation B-191

However, we find several definition clauses in other provisions.

Heads of income to be revised.

As per section 12 of the new code there will be more heads of income considered under two broad heads- namely special sources and ordinary sources. Special sources are all those items which are listed in the Table in rule 3 of the First Schedule.  Income from these special sources shall be as per provisions of Schedule XI on the new code.

As per Section 14 ordinary sources are the following:

A. Income from employment.

B. Income from house property.

C. Income from business.

D. Capital gains.

E. Income from residuary sources.

It appears that income from profession is not mentioned either in ordinary or special sources. Does the GOI want to exempt professionals or there are intricacies to be found in some other provision like definition of business.

Complexities:

It is apparent that the complexities will be much higher than in the existing tax laws.

Here are some salient points of the Bill concerning general taxpayers:

Liability -  The liability to pay income-tax, or the chargeability thereof, under the foregoing provisions, for any financial year, shall be determined in accordance with the provisions of this Code as they stand on the 1st day of April immediately succeeding the last day of the financial year.

Therefore, the concept of previous year as say first financial year or / say FY 2010 -11  and assessment year as the second financial year/ say FY 2011-12  shall continue.

It appears that there will be overall reduction in rate of tax with expectation of the Government that public will also co-operate in compliance and payment of tax at lower rate. Once tax rate is reduced it is expected that there will be no need of introducing income earned by A as income earned by B.

Here are some Highlights of the Draft Tax Code bill:

1. Lowers the incidence of tax on corporate and individual incomes

2. Incorporate  wealth tax and capital gains tax in the same enactment.

3. Income tax  will be on expanded  base to include value of perks, some gifts, profit in lieu of salary and capital gains. Agricultural income shall enjoy exemption.

4. Removal of most exemptions.

5. All long-term savings to come under EET

6. Tax exemption to PPF and other pension schemes on withdrawals of sums accumulated up to March 31, 2011. Accumulation thereafter it will be taxable on withdrawal.

7. Security transactions tax  to be withdrawn and capital gains to be taxed in new format.

8. Capital gains on shares and securities to be taxed as income.

9. Distinction between long-term and short-term capital assets to go.

10. Wealth tax  threshold exemption will be Rs 50 crores. 

11. Wealth to be taxed on net basis; Amount in excess of Rs50 crores  will be taxed @ 0.25%

12. Moves the base year for calculation of capital gains tax to April 2000 from 01.04.1981.

13. Incentive by way of  tax savings investments will be up to Rupees 3 lakhs

14. Few and higher income tax slabs will make rate structure simple and lower overall tax payable.

15. Tax rates for individuals/ HUF 

         Up to Rs1.6 lakh: No tax

         10% tax for income between Rs160,000 and Rs10,00,000

         20% tax for income between Rs10,00,000 and Rs25,00,000

         30% tax for income over Rs25,00,000

16. Tax incentive  on housing loans etc. will be removed

17. Dividend will continue to be tax-free in the hands of investors on payment of additional tax by distributor of dividend.

18. Effective corporate tax rate at 25% with no surcharge or cess

19. MAT  in form of WT to be levied on gross assets as against book profits now this will in essence a tax on wealth.

20. MAT to be 0.25% for banking companies and 2% for others on wealth.

21. MAT carry forward to discontinue - this also support that MAT will be in nature of WT.

22. Business losses to be carried forward indefinitely however, subject to complexities.

23. No tax deduction on interest payable on any government security- the rate of interest will generally be lower so these interest should be exempted. There is no use of paying higher interest and levying tax.

24. Wealth tax liability to be discharged by payment of prepaid taxes.

25. Income from certain transfers not to be treated as capital gains to continue in different manner.

26. Rationalization of taxes for all non-profit organizations but will involve complexities.