REVISED DISCUSSION PAPER-THAT SOOTHES THAT SEETHES

[vijay kalia]

Contributed By: CA.Vijay K Kalia

Sources: The Economic Times of 16th june and 23rd June, 2010

www.icai.org  

Introductory:

The DTC is set to set in at the appointed date with effect from 1st of April, 2011 and in the words of the Finance Minister, "It will be legislation for the 21st century, which will witness the emergence of an economically strong and vibrant India. I anticipate that the new code will usher in major changes in procedures and practices of direct tax."

The original path adopted in the first draft had more or less been eroded and the aim to reduce exemption as recommended by the Thirteenth Finance Commission and provide for low tax rates as well as broaden the tax base appears to be lost somewhere in the concerns shown by the stakeholders. There are changes in eleven areas of concern and the ratio of tax revenue to GDP of 12% shall remain at that level though it was intended to increase the tax GDP ratio and the 25% rate of corporate tax as stipulated in the discussion paper on DTC shall be difficult to imbibe in view of the changes.

The Economic times in its editorial of 16th June had termed the whole exercise as "back to square one". The statement of the FM is too premature in the light of the fact that there are abundant changes in the original approach as the revised paper is more replete with exemptions and tilted more towards the biggies as we would see in the area of SEZ for developers under the SEZ ACT, 2005 which is set to be grandfathered . The money squandered in agriculture debt relief, arrears of pay, stimulus and the guaranteed employment that need to be pared but for the profligacy of the government has already resulted in avoidable inflation.

House Property:

Chapter VII of the DTC deals with computation of house property income falling under ordinary source of income based on receipt or accrual basis. The tax is now imposable on the house property which is not occupied by the owner for the purpose of business or profession. Gross rent forms the basis subject to specified deduction. There are principally three deductions from the gross rent being taxes actually paid to the local authority including tax on services. Tinkering and paring the statutory deduction which is 30% presently to 20% for repair and maintenance is unthinkable in the present scenario of inflation and would lead to shelling more income under the head. The other deduction is with regard to interest on capital borrowed for various specified purposes taking host of events for similar treatment, though self occupied house property's gross rent shall be taken nil, naturally with no further deduction available for taxes and interest. The taxability of advance rent received shall offer one area where the income shall be spread for taxation in relevant years and likely to see planning for spread for mutual benefit of owner and the tenant both. The gross rent was set to be the amount contracted or presumptive taxation at 6% of rateable* value fixed and in its absence, the cost of construction or acquisition. Concerns were raised for incentive not been given for the interest as is presently available for Rs.1.50lacs and 6% of cost of construction to be unfavourable to those who are recent owners or acquirers as inflation would raise their cost as against those who became owners earlier. The revised paper proposes to take the rent received or receivable for the property let as the gross rent and the presumptive rate at 6% of cost of construction or acquisition is retained. But deduction is provided for any one property for interest on capital borrowed from gross total income up to maximum of Rs.1.50lacs in case of individual or HUF now for construction or acquisition but overall limit of deductions from savings shall be calibrated is what the RDP states.

Further, where the letting of building is inseparable from letting of furniture, plant, machinery etc. the same shall be included under the income from house property but earlier in such a situation the income used to be taxed under business or professional head or other income head. If income is separable then the difficulty would not be experienced as per the decision in 95 ITR 419(Cal.).

We shall have to see what shall be the tax impact after such calibration and the overall limit that might get pruned to that extent and it is no time to enjoy till then as most of us are led to believe. There is no inkling about the unrealised rent and its treatment in rent received or receivable for determining gross rent as was the case in S.23(1) read with explanation.

The DTC is meant not to be compared with provision of Income Tax Act, 1961 as was stated in the discussion paper to the DTC in Chapter-I of introduction to DTC but honestly speaking such comparisons are inescapable indeed and even the DTC discussion paper refers to the erstwhile provisions of the Income Tax Act, 1961 at many places.

The deduction of interest is set to be from the gross total income which is more or less like the existing system but for the fact that will be the aggregate of the ordinary sources income under five heads and not under the head of house property, therefore the loss from the house property income for set off would not be feasible as is presently the case.

Reducing the statutory deduction is retrograde step in the revised discussion paper as properties invariably demand repairs and maintenance and more so when the property is let. The concept of Rs.30000 where repairs or renewal in specified cases is no longer bothering as also the various complex ways in which the annual value was determined with simple manner now coined.

Miscellaneous Matters

While the earlier DTC first draft was shrouded in mystery with its lackadaisical approach, the revised discussion paper has been hastily brought to keep up the deadline of its subsequent passage and to be made effective from 1st of April, 2011. It has been scantily worded leaving room for many experts taking their own view of the possibilities as in the case GAAR as also the taxability of FIIs taxability issues though made fairly clear in respect of capital gains though the Mauritius or Cyprus route may look untouched with DTAA prevailing over the domestic laws. This is not going not to be un-scathing though when it undergoes the hammer of GAAR in specified situations of general anti-avoidance rules when branch profit taxability of foreign companies is to be seen and in the case of the controlled foreign corporation provisions where GAAR are to be invoked.

It is in the interest of all the stake holders to put forward their view untrammelled within this short span of time and not to leave the same for the parliamentarians who rarely discuss the provisions threadbare and the results is that the tax payers suffer immutably. There are certain areas that still needs to be uncovered as RDP has touched only eleven areas and the tax payers are likely to be hurt and more of that in my next despatch that experts have jolly well missed!