KEY CHANGES IN THE REVISED DIRECT TAXES CODE
2013
Ø An indirect share transaction will be liable to
be taxed in India if 20% of the assets are based in India.
Ø New tax slab introduced; individuals earning
more than Rs10 crore a year to be taxed at 35%.
Ø No changes in other tax slabs for individuals;
age for senior citizens relaxed to 60 years from 65 years.
Ø Levy an additional 10% tax on the recipient of
dividend payments if the dividend income exceeds Rs1 crore.
Ø
Financial assets included under the ambit of
wealth tax as compared to only physical assets at present.
Ø Rationalization of provisions related to
non-profit organizations.
Ø Ring-fencing of losses from business availing
investment linked incentives.
Ø Provision of settlement commission removed.
Ø With
a view to provide parity in treatment of insurance products and mutual fund
products,the new Direct Tax Code proposes to levy income distribution tax on
equity linked insurance products on the lines of equity oriented mutual
funds
Ø The
revised DTC says the provisions of 'Income from house property' shall not apply
to the house property, or any part of the house property, which is used for
business or commercial purposes.
Ø The
new tax code says the amount of rent received in arrears or the amount of rent
which is not realised from a tenant and is realised subsequently shall be
deemed to be the income from house property of the financial year in which such
rent is received or realised.
Ø For
the purposes of deduction in respect of interest on loan taken for
self-occupied house property, the loan given by the employer should also
qualify for this concession.
Ø With
a view to provide smooth transition from IT Act to Direct Taxes Code, the new
tax code says provisions will be made for treatment of losses remaining to be
carried forward and set off as per the provisions of the existing Income-tax
Act on the date on which DTC comes into effect.
Ø Continuation
of GAAR
Ø Contains
325 Sections and 23 Schedules.
Ø Proposed
date is April 1, 2015.
Ø
Back ground
The India Income-tax Act was passed
in 1961 and has been amended every year through the Finance Act. The Wealth-tax
Act was passed in 1957 and has also been amended many times. Numerous amendments have
rendered the two Acts incomprehensible to the average taxpayers. Besides, there
have been several policy changes due to change in economic environment,
complexity in the market, increasing sophistication of commerce, and
development of information technology. There has also been a multitude of
judgments (at times conflicting) rendered by the courts at different levels.
This necessitated drafting of a Code to consolidate and amend the law relating
to all direct taxes. Accordingly, a draft Code along with a concept paper was
released on 12th August, 2009 inviting suggestions from the public.
The Code sought to consolidate and amend the law relating to all direct taxes
so as to establish an economically efficient, effective and equitable direct
tax system which would facilitate voluntary compliance and also reduce the
scope for disputes and minimize litigation.Having considered the suggestions
received from various stake holders a revised discussion
paper was released on 15th June, 2010. Thereafter, taking into
account the suggestions which were accepted by the Government, the Direct Taxes
Code Bill, 2010 was introduced in the Lok Sabha on 30th August,
2010. The Bill was referred to the Standing Committee on Finance (SCF) on 9th
September, 2010 for examination and report thereon. The SCF
presented its report to the Speaker, Lok Sabha in March, 2012. The report
contains general recommendations in Part-I and deals with specific
clause wise recommendations in Part-II. A large number of recommendations of
the SCF along with other suggestions which were forwarded at the examination
stage have been accepted by the Government. Further, the Kelkar Committee in
its report on ‘Road Map for fiscal consolidation’ submitted to the Government
in September, 2012 made the following observations on the Bill:-
“The Direct
Taxes Code Bill, 2010 which intends to revamp the law relating to direct taxes
is likely to result in considerable unacceptable losses on a continuing basis.
Given the low tax-GDP ratio and the existing fiscal crisis, there is absolutely
no fiscal space for such large revenue loss. Therefore, the Direct Taxes Code
Bill, 2010 should be comprehensively reviewed before it is enacted into law for
implementation.”
Since the
Direct Taxes Code Bill, 2010 was introduced in the Parliament, amendments were
carried out in the Income-tax Act, 1961 and the Wealth-tax Act, 1957 through
Finance Acts, 2011, 2012 & 2013. These amendments were consistent with the
policy laid down in the DTC Bill, 2010. Incorporating these amendments in the
DTC Bill, 2010 would require a large number of official amendments making the
Bill incomprehensible and the legislative process cumbersome. Hence, it was
decided to revise the Direct Taxes Code incorporating all the amendments and
presenting it as a fresh Bill. Accordingly, a new revised Direct Taxes Code was
drafted.
Recommendations
of SCF which are proposed to be accepted
Out of 190
recommendations made by the SCF, 153 are proposed to be accepted wholly or with
partial modifications. In addition to the recommendations forming part of the
report, 61 suggestions forwarded by the SCF at the discussion stage have also
been accepted for incorporation in the revised Code. Some of the recommendations
of the SCF which are proposed to be accepted are as under:-
(i)
Simplicity and comprehensibility of both structure and content thereby making
the statute more user friendly.
(ii)
Ensuring tax buoyancy by tapping high capacity/income and evasion prone
segments.
(iii)
Re-orienting departmental resources towards high-capacity as well as
avoidance/evasion prone categories/sectors.
(iv)
Modernisation and computerisation of all tax operations; equipping the
department with men and material to carry out the tasks assigned.
(v)
Moderation in tax rates for individual taxpayers with emphasis on voluntary
compliance.
(vi)
Deductions for individual taxpayers to be focused on long term needs like
social security.
(vii) The
age for senior citizens may be relaxed from 65 years to 60 years.
(viii) Area
base incentives may be considered on investment linked basis. However, the
general principle should be that all incomes and profits are to be taxed and
exemptions, if any, should be treated as a dynamic variable, by ensuring that
each exemption serves an
economic purpose.
(ix) Smooth
transition to investment linked incentives with focused coverage.
(x)
Maintaining uniformity in ‘grandfathering’ provisions so that the available
benefits for different categories under the existing Income-tax Act are phased
out in a uniform and non-discriminatory manner ensuring smooth transition to
DTC provisions.
(xi) The
definition of the term ‘place of effective management’ for the purposes of
determination of residency of companies may be modified as the definition in
the DTC Bill, 2010 is not very clear and provides room for uncertainty.
(xii) Clause
5(1)(d) read with Clause 5(4)(g) and Clause 5(6) of DTC Bill, 2010 seek to tax income of a
non-resident arising from indirect transfer of capital assets situated in
India. The Committee recommended that exemption should be provided for transfer
of small share holdings as application of these provisions in such cases
will cause hardship.
(xiii) For
the purposes of taxation of income under the head ‘Income from house property’
a distinction should be made between commercial and noncommercial renting of
properties. The concept of unrealised rent should also be built in as is the
position under the existing Income-tax Act.
(xiv) For
the purposes of deduction in respect of interest on loan taken for self
occupied house property, the loan given by the employer should also qualify for
this concession.
(xv) Tax
neutrality may be provided on conversion of a partnership firm under
the Partnership Act, 1932 into a limited liability partnership or a
company.
(xvi) Where
compensation is received on compulsory acquisition of an investment asset, the
period for acquiring the new asset for the purpose of relief from capital gains
should be reckoned from the date of receipt of such compensation.
(xvii) With
a view to provide smooth transition from IT Act to Direct Taxes Code, provision
be made for treatment of losses remaining to be carried forward and set off as
per the provisions of the existing Income-tax Act on the date on which DTC
comes into effect.
(xviii) The
non-profit organisation may be given an option to adopt either the cash system or accrual
system of accounting for computing their income under the Code.
(xix) The
Income-tax Act provides for carry forward of tax paid on book profit (MAT
credit). A provision may be made in the DTC Bill for carry forward of
unutilised MAT credit under the IT Act, on the date on which the DTC comes into
force.
(xx) The
General Anti Avoidance Rules may be reviewed to bring more clarity and
precision to the scope of the provisions. The onus of proof should rest on the
tax authority invoking GAAR. The constitution of the panel approving GAAR
should be reviewed. The taxpayers may also be permitted to obtain an advance ruling
to determine whether a transaction would attract GAAR.
Recommendations
of the SCF which have not been incorporated in the proposed DTC, 2013
The
recommendations of the SCF which were not in harmony with the broad taxation
policy of the Government have not been incorporated in the revised Code. Some
of the main recommendations of the SCF which have not been incorporated in the
revised Code are mentioned below along with the reasons for their nonacceptance:-
- Tax slab for Personal Income
Tax (PIT): SCF has recommended revised tax slabs as (a) 0-3
lakhs – Nil; (b) 3-10 lakh – 10%; (c) 10-20 lakh – 20%; (d) beyond 20 lakh
– 30%: The recommendation is not acceptable as it will
result in huge revenue loss. The total revenue loss on account of
recommended changes in PIT slabs and removal of cess works out to Rs.
60,000 crore approximately.
- The rate of tax for life
insurance companies may be kept at 15% instead of the proposed 30%: Under
the Income-tax Act, tax on a life insurance company is levied at the rate
of 12.5% of the surplus generated in the profit and loss account of the
company based on actuarial valuation. In the Code, the tax base for a Life
Insurance Company is limited to the surplus generated for the company in
the shareholders account while the surplus determined in the
policyholders’ account (technical account) is not taxable. Therefore, rate
of tax on such companies is aligned with that applicable to other
companies, that is 30 per cent.
- Exemption limit to be linked to
the consumer price index: It is not practicable to link
exemption limit to the consumer price index for a number of reasons.
First, it is not clear why the Consumer Price Index should be the base and
not the Wholesale Price Index. Further complications may arise if the base
of the index or the commodity basket changes. Second, it would lead to
changes which are not multiples of whole numbers. Third, indexing the
slabs to inflation index is not a comprehensive approach as the slab
structure is dependent on a number of factors including other reliefs
given to a taxpayer, potential revenue loss to the Government, number of
taxpayers who would go out of the tax net etc.
- Abolition of Securities
Transaction Tax (STT): The recommendation is not acceptable as STT is
required to regulate day trading. Further, the rate of STT has already
been reduced significantly by Finance Act, 2013.
- Levy of Dividend Distribution
Tax on policy holder’s investments may negatively impact the insurance
industry: With a view to provide parity in treatment of
insurance products and mutual fund products, the Code proposes to levy
Income Distribution Tax on equity linked insurance products on the lines
of equity oriented mutual funds. For a life insurance company, only the
surplus determined in the shareholder account would be taxed. This will
benefit the policy holders as it would leave more money in the policy
holder’s account. Further, in respect of life insurance products, that is,
where the premium paid or payable for any of the years does not exceed 10%
of the capital sum assured, any amount including bonus will not be
subjected to tax. Besides, pure life insurance products are also outside
the tax ambit.
- Deduction for CSR expenditure
in backward regions and districts: The CSR expenditure cannot be
allowed as a business deduction as it is an application of income.
Allowing deduction for CSR expenditure would imply that the government
would be contributing one third of this expenditure as revenue foregone.
Other
significant changes in the Code
Taking into
account, the report of the SCF and the amendments carried out in the Income-tax
Act, 1961 and the Wealth-tax Act, 1957 which are consistent with the policy
laid down in the Bill, the revised Code has been drafted. While drafting the
revised Code, a comprehensive review of the provisions of DTC Bill, 2010 was
also carried out in the light of the observations made by the Kelkar Committee
in its report on ‘Road Map for fiscal consolidation’. Some of the other changes
in the revised Code, which are based on a comprehensive review of the DTC Bill,
2010 and reflect the broad policy of the Government, are as under:-
- Taxation of ‘Income from house
property’: The income from a house property, which is not
used for business or commercial purposes, will be taxed under the head
‘income from house property’. The income from house property shall be the
gross rent as reduced by the specified deductions. The gross rent shall be
higher of the contractual rent or the presumptive rent. The presumptive
rent shall be the annual value or rental value (without giving any
deduction) fixed by the local authority for the purposes of levy of
property tax. In a case where no such value is fixed by the local
authority, the presumptive rent shall be the amount for which the property
might reasonably be expected to be let from year to year.
- Change in base of Wealth-tax: The DTC
Bill, 2010 captured only unproductive assets for levy of wealth-tax. This
substantially reduced the base for wealth-tax. To keep the base wide, the
revised Code captures all assets for wealth-tax, whether physical or
financial, thereby removing the distinction between physical and financial
assets, which discriminated against those taxpayers who are conservative
and put their money in physical assets. Wealth-tax is proposed to be
levied on individuals, HUFs and private discretionary trusts at the rate
of 0.25%. The threshold for levy of wealth-tax in the case of individual
and HUF shall be Rs.50 crores.
- Additional tax @10 per cent on
recipient of dividend (liable to Dividend Distribution Tax) exceeding one
crore rupees: Under the Income-tax Act as well as in the DTC
Bill, 2010, the dividend distribution tax is to be levied at the rate of
15%. This favours high net worth taxpayers who pay only a fraction of
their earnings as tax on their investments in the capital market. The
draft DTC proposes to remove this anomaly by levy of 10% additional tax on
the resident recipient if the total dividend in his hand exceeds Rs.1
crore.
- Rationalisation of provisions
related to non-profit organisations: The provisions for taxation of
non-profit organisations (NPO) has been rationalised by taxing their
surplus at a concessional rate of 15%, allowing basic exemption limit of
Rs.1 lakh and permitting all capital expenditure as a revenue outgoing.
The draft Code does not provide for specific modes of investments. An NPO
would be free to make its investments, other than the limited prohibited
modes of investments. Consequently, specific deduction for accumulation
and the provision for carry forward of deficit are proposed to be removed.
- Settlement Commission: Settlement
Commission has not achieved the intended purpose of early settlement of
cases and additional revenue realisation. At the same time, the backlog of
cases has reduced the efficacy of search and survey actions. Accordingly,
the draft Code does not provide for the machinery of Settlement
Commission.
- Weighted deduction for
scientific research: DTC Bill, 2010 provides for weighted deduction of
175% to the donor on any donation made by it to the specified institutions
to be utilised by them in scientific research. Weighted deduction of 200%
is also provided for in-house scientific research. Since, the weighted
deduction reduces the actual expenditure on research and there is
significant potential for its misuse, the revised Code provides for
weighted deduction of 150% for in-house scientific research and 125% to
the donor on any donation made by it to the specified institutions.
- 35 per cent tax rate for
individual/ HUF having income exceeding Rs. 10 crore: With a
view to maintain overall progressivity in levy of income-tax, the revised
Code provides for a fourth slab for individuals, HUFs and artificial
juridical persons. In their case if the total income exceeds Rs.10 crore,
it is proposed to be taxed at the rate of 35%.
- Ring-fencing of losses from
business availing investment linked incentive: The
policy of the Government has been to broaden the tax base and the strategy
for broadening the base essentially comprises of three elements (i) to
minimize exemptions as they erode the tax base (ii) to reduce the number
of ambiguities in the law, and (iii) checking of erosion of tax base
through tax evasion. Accordingly, the profit linked and area based
deductions were replaced by investment linked deductions for businesses
specified in the Eleventh, Twelfth and Thirteenth Schedules of the DTC
Bill, 2010. The basic principle of investment linked incentive is that the
taxes are payable by a business after it recoups its capital investment.
However, to protect the tax base it is necessary to ring fence losses from
such businesses, otherwise profits of even the existing businesses can be
potentially wiped out. Accordingly, the revised Code provides for ring
fencing of losses from specified businesses. However, in the case of
business re-organisation, where there is unabsorbed loss in the years
preceeding the re-organisation, such loss will be allowed to the successor
in respect of such business.
- Taxation of indirect transfer
of assets: The DTC Bill, 2010 provides for a 50% threshold
of global assets to be located in India for taxation of income from
indirect transfer in India. This threshold is too high. There could be a
situation that a company has 33.33% assets in three countries but it will
not get taxed anywhere. Accordingly, the revised Code provides for a
threshold of 20% of global
assets to be located in India for taxation of income from indirect
transfer in India. Besides, exemption is provided for transfer of small
share holdings (upto 5%) outside India.
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