Why do we need a new direct Tax code?

• The Current Income Tax Act in India which was enacted more than 50 years ago in 1961, is not in tune with the radical transformation that the economy has undergone during this period .A simple ,stable ,robust and modern tax regime is what the economy needs today. Therefore, while presenting the Union Budget 2005-06, the Government had announced its intention to revise, simplify, rationalize and consolidate laws and procedures relating to direct taxes, The purpose of the code therefore is to consolidate and amend the law relating to all direct taxes, that is 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-Gross Domestic Product(GDP) ratio. Another objective is to reduce the scope for disputes and minimize litigation.

If enacted, when would the DTC 2010 come into force?

• In enacted the Direct Tax code 2010 would come into force from 1^st April 2012.

What are the salient features of the code?

• The main features of the Cod are a single code for all direct taxes with unified compliance procedures, use of simple language, reducing scope for litigation by avoiding ambiguity, providing flexibility to statute so that it can be modified according to the needs of growing economy, to ensure better understanding of the laws and provisions, attempt has been made to simplify the laws and reflect them in the form and consolidate all procedures, the regulatory function of taxing statute has also been  withdrawn.

How is income classified under the DTC 2010?

• Income has been proposed to be classified into two broad groups- Income from Ordinary Sources and Income from Special Sources. The former refers to income from employment, from house property, from business, capital gains and income from residuary sources. Income from Special Sources would include specified income of non residents, wining from lotteries, horse races, etc.

• Losses arising from Ordinary Sources would be eligible for set off or carry forward and set-off against income only from ordinary sources without any time limit. Similarly losses from Special Sources would be set off against income from Special Sources.

What are broad provisions relating to salary income under the code?

• Salary/Emplacement income is proposed to be computed as the gross salary due, paid or allowed, minus the aggregate of the specified deductions. Exemptions such as house rent allowance, leave encashment and medical reimbursements have been retained. The exemption for medical reimbursements would be increased to 50,000 rupees.

• An allowance to meet personal expenses has been introduced Leave travel concession and non-monetary perquisites have been done away with. Receipts under the voluntary retirement Scheme, Gratuity and Commuted Pension deductible from employment income subject to limits without he condition to make anjy prescribed investments.

• For purposes of Residency, th category of ‘Not Ordinarily Resident’ is proposed to be abolished and only two categories of taxpayers would remain-viz. residents and non-residents. A citizen of India or person of Indian origin living outside Indian and visiting India will trigger residency by staying in India for more than 59 days.

What are the proposed tax rates under the Code?

For Individuals and Hindu Undivided Families

Upto Rs 200,000- NIL; 200,001-500,000- 10%; 500,001-1,000,000-20%; 1,000,001 and above -30%. Basic exemption for a resident senior citizen (65 years or above), is proposed to be 250,000. I

For co-operation societies

Up to Rs 10,000-10%; R s10,001-20,000-20%; Rs 20,001 and above -30%

Societies other than co-operative societies -30%

For non-profit organizations

Up to Rs 100,000 Nil; Rs 100,001 and above- 15%

For domestic companies -30%

For foreign companies-30% Profits of branches of foreign companies are taxable at 15%

Total Income Tax Rates

• Minimum Alternate Tax (MAT)

• MAT is proposed at 20 % of the adjusted book profits in case of those companies where normal income-tax payable is less than 20 percent of the adjusted book profits

• MAT credit is available for 15 years .

Wealth tax

• Wealth tax is proposed at 1 % on the value of specified assets held by the taxpayer on the valuation date (31 March) in excess of the basic exemption of Rs 10,000,000

Dividend Distribution Tax (DDT)

• Domestic Companies are liable to pay DDT at 15 % on dividends. Any dividend to a company or non-resident in respect of which DDT has been paid, is exempt from income-tax. For the purposes of computing DDT payable by a domestic company, the amount of dividend received by a domestic company will be reduced if - such a dividend is received from its subsidiary or if the subsidiary has paid DDT on such dividend. An equity-oriented mutual fund is liable to pay income distribution tax of 5 percent. Income received by unit holders from an equity-oriented mutual fund is exempt from income-tax. The life insurer of an approved equity oriented life insurance scheme is liable to pay income distribution tax of 5 percent. Deduction is available to policy holders in respect of income on which such distribution tax has been paid.

Special rates for non-residents

The following incomes in the case of non-resident are proposed to be taxed at special rates:

• Dividend at 20 percent (other than dividends on which DDT has been paid); Interest at 20 percent; Income received in respect of units of a fund at 20 percent (other than income on which tax on distributed income has been paid); Royalty or fees for technical services at 20 percent; Income by way of insurance including reinsurance at 20 percent; Income from lottery or crossword puzzle, race including horse race, games, gambling or betting at 30 percent. Tax on non-resident sportsmen or sports association on specified income at 10 %.

Capital Gains

• No special rates are provided for capital gains under the DTC. Capital gains tax is to be levied at normal rates as mentioned above. However, in respect of capital gains arising on transfer of equity shares or a unit of an equity-oriented fund on which STT has been paid, deduction would be allowed as follows:

• 100 percent in case aforesaid investment assets are held for more than one year

• 50 percent in case aforesaid investment assets are held for one year or less.

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