Revised DTC draft unveiled for public scrutiny

The Finance Ministry unveiled the second draft of the proposed Direct Taxes Code (DTC). The first draft tax code was released in August 2009 and received 1,600 comments. The first draft had proposed a uniform corporate tax rate of 25%. The revised discussion paper addresses 11 issues which includes the issue of wealth tax and general anti-avoidance rule (GAAR). The final draft is set to take into account issues such as minimum alternate tax (MAT), special economic zones (SEZ), transfer pricing, GAAR, IT exemption on savings and taxation of charitable organisations. Under the Direct Tax Code, the current distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset will be eliminated.



The seemingly diluted DTC says that FIIs can offset prior capital losses against capital gains but will have to pay advance tax as is applicable to domestic institutions. All gains made will be treated as capital gains and not as business income. All capital gains, whether short-term or long-term will get included in total income and taxed at normal rates. Currently, short-term gains are taxed at 15% and long-term at NIL. However for long-term, a standard deduction at specified rates will be allowed, reducing the effective rate of taxation. STT will remain, though rates could go down.

A big relief for India Inc. is that MAT will now be levied on book profits and not on gross assets as proposed earlier. Housing Finance Companies and real estate companies will benefit as the presumptive rent at 6% on house property has been removed. For self-occupied property, a deduction of Rs150,000 on interest paid is being re-instated. The DTC proposes to abolish the Securities Transaction Tax (STT). Therefore, all capital gains (loss) arising from the transfer of equity shares in a company or units of an equity oriented fund will form part of the computation process.

The Direct Tax Code Draft Bill is set to be presented in the monsoon session of Parliament. The earlier proposal to tax the Government provident fund and Public Provident Fund withdrawals, is set to be dropped.