Direct Taxes Code - Implications

The much awaited Direct Taxes Code Bill, introduced this week in Parliament, has set high expectations in the minds of taxpayers of the country — individuals and businesses alike.



In particular, the expectations of salaried taxpayers was something that the Government wanted to earnestly address in view of the unmatched diligence in tax payments through the unfailing tax deduction mechanism.

With the above perspective if one has to analyse the implications of the proposals in the Direct Taxes Code Bill, the outcome is a mixed feeling of delight and disappointment raising the expectation further when the Government is open and sincere in its intention to meet the genuine demands of this tax-paying fraternity.

The major disappointment is the postponement of the implementation by a year to April 2012, though the Government has its reasons — administrative and fiscal — that do not really matter to the taxpayers. The major delight is the Government's policy of consultation and collaboration.

Tax rates

Proposals: There will be no tax on income up to Rs 2 lakh (the current slab is Rs 1.6 lakh). Ten per cent tax will be charged on income between Rs 2 lakh and Rs 5 lakh, 20 per cent if the income is between Rs 5 lakh and Rs 10 lakh. Those falling in the bracket above Rs 10 lakh will attract 30 per cent tax.

For resident senior citizens, the slabs will be Rs 2.5 lakh; Rs 2.5 lakh to Rs 5 lakh; Rs 5 lakh to Rs 10 lakh and above Rs 10 lakh. The respective tax rates are nil, 10 per cent, 20 per cent and 30 per cent.

Upside: Those earning between Rs 2 lakh and Rs 8 lakh will be able to save Rs 4,120, while those in the bracket of Rs 10 lakh and above will he able to save Rs 24,720. In the resident senior citizen's category, the savings will be Rs 1,030 (Rs 2.5 lakh to Rs 8 lakh) and Rs 21,630 (Rs 10 lakh and above).

Downside: Separate concession for resident woman has not been proposed.

Income from Employment (Salary Income)

Proposals: Exemption for non-domiciliary medical reimbursements claim to be enhanced from Rs 15,000 to Rs 50,000 per annum.

Upside: Will offset increased medical costs.

Proposal: Exemption of tax borne by the employer on non-monetary perquisites not to be continued.

Downside: Displays lack of consistency in approach.

Proposal: Exempt-Exempt-Exempt method of taxation to be continued in respect of contributions to PPF, Government Provident Fund, Recognized Provident Fund, Approved Superannuation Fund and New Pension Scheme with contributions eligible for deduction up to Rs 1,00,000.

Upside: A reassuring measure in the absence of a comprehensive and cohesive social security system to take care of old age and health needs.

Downside: Investments in Equity-Linked Savings Scheme and Unit Linked Insurance Plan are left open.

Proposal: Additional deduction for tuition fees for two children, life insurance premium and health insurance premium up to Rs 50,000.

Upside: Relief to address increasing costs of education and health needs.

Proposal: Discontinuance of deduction for repayment of housing loan.

Downside: Would result in increase in effective cost of loan. The proposal needs reconsideration, especially as affordable housing is considered to be one of the critical infrastructure needs of India.

Income from House Property

Proposal: Income from house property is to be computed only if the property is let-out.

Upside: Income of unoccupied property not assessable to tax on deemed basis.

Capital Gains

Proposal: Long-Term Capital Gains on sale of Equity Shares and Equity Oriented Mutual Funds on which Securities Transaction Tax has been paid.

Upside: Continuance of exemption in the form of deduction up to 100 per cent, 50 per cent of the gains according to the period of holding as more than one year, one year and less respectively has ensured broadly the benefit available under the present Act is continued with no change.

Proposal: The date of adoption of Fair Market Value as cost of acquisition in respect of assets be shifted from April 1, 1981, to April 1, 2000, for capital gains computation.

Upside: Welcome relief to ensure tax on unrealised gain is not attracted.

Proposal: Exemption of capital gains on investment in residential property subject to placing an additional restriction in the roll over benefit that the assessee does not own more than one residential house on the date of sale of original asset.

Downside: Will stunt the growth in housing sector.

Proposal: Concessional rate of tax at 20 per cent on Long Term Capital Gains for assets other than the above to be removed.

Downside: Difference would make substantial inroads into gains.

Wealth Tax

Proposal: Increase in exemption limit from Rs 30 lakh to Rs 1 crore.

Upside: Real relief considering substantial increase in market valuation of assets today.

Compliance

Proposal: Tax return filing requirement to be simplified with a single return consolidating income and wealth.

Upside: Avoiding multiple filings leads to better compliance.

In substance, the new sets of proposals are, by and large, in line with the provisions of the current law. Given the above, one has to take a balanced approach and compromise on the gaps with the hope that curative days are not far off to have them addressed by the Government through consultative process, which has been rightly engaged for over a year ever since the first draft of Direct Tax Code was introduced in August 2009.

via BL