Direct Taxes Code - who does it affect you ?

Direct Taxes Code (DTC) is proposed to replace the Income-Tax Act from April 1, 2011, with the objective of simplification of tax structure and align it with the economic environment.

DTC was presented to the public for debate in August 2009. After due deliberations and suggestions from stakeholders, a Revised Discussion Paper (RDP) was presented recently by the Government for public comments. The RDP has reconsidered many proposals in the DTC in line with the expectations of the public.



Though most of the existing provisions of the income-tax law are finding place in the DTC, many provisions are new or modified that will affect the individuals significantly.

The prominent ones are discussed in brief.

DTC proposed significant reduction in individual income-tax by increasing tax slabs – 30 per cent tax rate at an income level of Rs 25 lakh (present – Rs 8 lakh).

If proposed tax slabs and rates are implemented, then taxpayer's take-home pay may see a substantial jump. However, in view of relaxation or rollbacks of other tax proposals, one has to wait and watch whether Government still intends to offer the proposed tax slabs and rates.

EEE preferred over EET

Exempt-Exempt-Exempt method of taxation provides exemption of investments at the time of contribution, accretion and withdrawal.

DTC proposed to change this system to Exempt-Exempt-Tax to make all investments taxable on withdrawal.

EET results in higher tax at retirement in contrast to ability to pay. Recognising the fact of absence of a well developed social security system and other challenges (technical / administrative) Government thought it fit to retain EEE and partial EET.

Selective roll back in case of products such as provident fund would certainly leave the tax payer richer at the time of retirement for enjoying the twilight days of his life. RDP still indicates taxing certain other investments like NSC, bank deposits on EET basis.

DTC initially sought to tax let out property on higher value (higher of 6 per cent of cost or actual rent) entailing higher tax outgo for the tax payer even if such income is not received.

Further, this would have created disparity of tax levy among tax payers due to different purchase costs as a result of timing difference.

In a welcome move, Government seeks to rollback this provision and also continue with existing incentive of deduction of interest on self occupied property.

Long-term capital gains and equity gains enjoy beneficial tax treatment. RDP prescribes new scheme of computation of capital gains (see table).

Resultant short-term as well as long-term gain does not enjoy any further tax concession such as favourable rate or exemptions.

Key advantage for individuals is shift in base date from 1981 to 2000 resulting in enhanced assumed cost of acquisition (if the asset is old enough) thereby reducing capital gains. This may help offset higher capital gains tax liability to some extent.

One of the strange provisions in DTC, which had not caught public attention but can affect a common man travelling abroad, is furnishing an undertaking to the tax officer to the effect that he has made “satisfactory arrangement” for discharging his tax liability in India before he leaves India.

Travel abroad

The tax officer has to issue a no-objection certificate for his travel. If travel is made without a no-objection certificate from the tax office, the owner or charterer of the aircraft will be held responsible to pay the taxes due, if any.

This process would have been more of a hurdle than a smooth ride.

Giving due consideration for the concerns expressed after the release of the DTC, the Government has reconsidered many of the important provisions that would have significantly affected tax payers.

This approach will undoubtedly benefit all the taxpayers and more so the retired citizens.

Still, there is a need for the Government to involve tax professionals and intellectuals from all walks of life to further update and modify DTC before the final code is enacted.

The aim of the law should be to create a win-win situation for the taxpayer and the Government. RDP is a big step in the right direction.

Prakash Hegde

Nachiket Barve

(The authors are with PricewaterhouseCoopers' Tax and Regulatory Services.)

via BL