proposed draft income tax code

The draft proposes to bring all direct tax laws under one umbrella, the finance minister said, adding that it would eliminate the scope of litigation. “The new draft code has simplified capital tax gains and laws on for non-profit organisations, savings instrument,” he said. The new code was aimed at removing distortions in the tax structure, he added.

The code proposes to exempt the general tax payer from paying income tax if his income is Rs 1,60,000 in a year.

He would pay just zero tax till an income of Rs 1,60,000 per year. From income above Rs 1,60,000 till Rs 10 lakh (Rs 1 million), he will pay a tax of 10 per cent.

For income above Rs 10,00,000, but less than Rs 25,00,000 (Rs 2.5 million), he will pay tax of Rs 84,000 plus 20 per cent of the amount over Rs 10,00,000.

For income above Rs 25,00,000, he will pay Rs 3,84,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00,000.

Currently, the general income tax payer does not pay tax till Rs 1,60,000 of income in a year. However, he pays 10 per cent tax on income between Rs 1,60,000 and Rs 3 lakh, 20 per cent between Rs 3 lakh and Rs 5 lakh (Rs 500,000) and 30 per cent beyond Rs 5 lakh.

While the code proposes abolition of the controversial STT, it also suggests reintroduction of tax on long term capital gains on securities trading.

Major Highlights of Direct Tax Code 2009:

Key proposals for investors:

- Rates of tax to be uniform

- Security transaction tax to be abolished

- Business losses can be carried forward indefinitely

- Effective corporate tax rate at 25%

- To scrap long, short-term capital gains distinction

- To abolish Securities Transaction Tax

- No tax deduction on interest payable on any government security

- Base year for calculation of capital gains tax moved to April ‘00

- Tax deduction limit on savings to be hiked to Rs 3 lakh

- Wealth tax liability to be discharged by payment of pre-paid taxes

- Income from certain transfers not be treated as capital gains

- Income tax slabs proposed to be changed; highest tax rate of 30% for individuals to be applicable for income over Rs 25 lakh

Key proposals for businesses:

- Taxation of all non profit organisations rationalised

- Profits of non-life insurance business to be disclosed annually

- Government may enter overseas agreements for double taxation avoidance

- No tax deduction on interest payable to banking companies, insurers

Market Impact

- FMCG, metals to benefit from 25% corporate tax rate

- No distinction between long- and short-term capital gains welcome

- No incentive for long-term investor anymore

- No DDT on payment of divided to pass-through entities

- Tax on interest on overseas borrowing a negative

- May discourage leveraging and reduce investment

- Significant increase on slab rates for individual taxation welcome

- Will lead to disposable income and more investment

- STT to be abolished

- May have sentimental impact

The new code seeks 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-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation.

Briefly, the salient features of the code are as under: (a) Single Code for direct taxes:All the direct taxes have been brought under a single code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system.

(b) Use of simple language: With the expansion of the economy, the number of taxpayers can be expected to increase significantly. The bulk of these taxpayers will be small paying moderate amounts of tax. Therefore, it is necessary to keep the cost of compliance low by facilitating voluntary compliance by them.

This is sought to be achieved, inter alia, by using simple language in drafting so as to convey, with clarity, the intent, scope and amplitude of the provision of law. Each sub-section is a short sentence intended to convey only one point. All directions and mandates, to the extent possible, have been conveyed in active voice.

Similarly, the provisos and explanations have been eliminated since they are incomprehensible to non-experts. The various conditions embedded in a provision have also been nested. More importantly, keeping in view the fact that a tax law is essentially a commercial law, extensive use of formulae and tables has been made.

(c) Reducing the scope for litigation: Wherever possible, an attempt has been made to avoid ambiguity in the provisions that invariably give rise to rival interpretations. The objective is that the tax administrator and the tax payer are ad idem on the provisions of the law and the assessment results in a finality to the tax liability of the tax payer. To further this objective, power has also been delegated to the Central Government/Board to avoid protracted litigation on procedural issues.

(d) Flexibility: The structure of the statute has been developed in a manner which is capable of accommodating the changes in the structure of a growing economy without resorting to frequent amendments. Therefore, to the extent possible, the essential and general principles have been reflected in the statute and the matters of detail are contained in the rules/Schedules.

(e) To ensure that the law can be reflected in a Form: For most taxpayers, particularly the small and marginal category, the tax law is what is reflected in the Form. Therefore, the A-10 structure of the tax law has been designed so that it is capable of being logically reproduced in a Form.

(f) Consolidation of provisions: In order to enable a better understanding of tax legislation, provisions relating to definitions, incentives, procedure and rates of taxes have been consolidated. Further, the various provisions have also been rearranged to make it consistent with the general scheme of the Act.

(g) Elimination of regulatory functions: Traditionally, the taxing statute has also been used as a regulatory tool. However, with regulatory authorities being established in various sectors of the economy, the regulatory function of the taxing statute has been withdrawn. This has significantly contributed to the simplification exercise.

(h) Providing stability: At present, the rates of taxes are stipulated in the Finance Act of the relevant year. Therefore, there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the code, all rates of taxes are proposed to be prescribed in the First to the Fourth Schedule to the code itself thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through appropriate amendments to the Schedule brought before Parliament in the form of an Amendment Bill.