SHAPING UP OF FUTURE TAX REGIME – DIRECT TAX CODE

[Dr. Sanjiv Agarwal]

It's now almost final. The new revised direct tax code (DTC) has been approved by the Union Cabinet and is being placed as a Bill in ongoing monsoon session of Parliament. It is expected that the new tax regime shall usher into a regime of less exemptions and lower tax rates yielding higher disposable income in the hands of the citizens. DTC is aimed at replacing the current 50 year old Income Tax Act with a simple tax regime.   The DTC aims at limiting the plethora of tax exemptions to few.  It is expected that the DTC will provide greater stability and clarity to investors investing in Indian projects and companies. There will also be certainty about taxation.

WHAT THE REFINED DTC OFFERS -                      To be applicable from April 1,2011 ( AY 2012-13) -                      Basic exemption limit.. Rs 2 lakh for individuals -                      Women & senior citizens to enjoy higher threshold -                      Tax slabs to be decided by Parliament -                      Incentives on housing loans to continue -                      EEE status for provident & Pension funds -                      Surcharge / cess may go -                      Corporate taxes @ 30 percent -                      Corporate MAT @ 20 percent of book profits

 

On long term savings front, there is a good news that saving scheme such as Government provident fund, public provident fund, popular as PPF and recognized provident funds will continue to enjoy exempt exempt exempt (EEE) status, ie, investments, income or accumulation and withdrawal or redemption - all will be tax exempt. Earlier there was a proposal to tax the withdrawals. Not only such saving but pension funds administered by pension fund regulator including pension of Government employees will enjoy the EEE status. The exemption will be available for both, earlier as well as new investments as status quo has been maintained. This will also help the issue of taxing surplus funds of charitable institutions.

 

On tax slabs and tax rates, it has been proposed to raise the basic income tax exemption threshold from the present level of Rs 1.60 lakh to Rs 2 lakh for individuals which will leave more money in the hands of taxpayers. Women and senior citizens are likely to enjoy a higher exemption limit of Rs 2.5 lakh. The final rates a slabs will however, be announced later only by the Parliament. Indications suggest that the education cess and surcharge may be removed. Tax slabs could at best be three and tax rates will be taken in a schedule so that they may not require frequent amendment in law. The new tax slabs and rates shall come into effect from financial year 2011-12 (1 April 2011) relevant to the assessment year 2011-12.

 

While the earlier draft was silent on housing loans, the approved DTC suggest that tax incentives on housing loans will continue including payment on account of interest up to Rs 1.50 lakh p.a. on housing loans.

 

Corporate taxation for domestic companies shall be retained at existing level of 30 percent, down from 33.3 percent excluding cess but, however, without any cess or surcharge. Taking exemptions and deprecation etc into consideration, the effective rate of tax could be around 18-20 percent as is the present case. Infrastructure companies may take a slightly higher hit as certain exemptions will go. For oil and gas sector, Government has already announced to retain the capital   subsidy scheme. Information technology companies may be brought at par with other companies in view of the tax holiday being foregone for export incomes. Incentive to special economic zones (SEZs) has also not been granted except relief given in terms of grand fathering of income linked incentive to existing SEZ units which will be made effective when DTC is implemented. SEZs may continue tax sops till 204 but will be subject to levy of MAT @ 20 percent. Developers of SEZs are confused as to whether investments made in SEZs under construction will attract new clients in view of this proposed change. Presently, SEZ units get 100 percent tax exemption on profits earned for first five years, 50 percent for next five years, besides 50 percent exemption on re-investment. Also, SEZ developers get 100 percent tax exemption on profits for 10 years in a block of 15 years.

 

On minimum alternate tax (MAT), it has now been proposed that tax shall be levied on the book profits as per current position and not on the gross assets of the company, as was proposed earlier. Thus, MAT will continue to be levied on book profits and not on gross assets. DTC seeks to impose MAT @ 20 percent of the book profits as against the current 18 percent on book profits. This should be encouraging for the corporate world as the base of assets has been done away with.

 

While the tax burden has been lowered by enhancing the limits and broadening  the slabs, it seems that DTC may be revenue positive for the Government as tax collections may grow owing to lesser exemptions and improved compliance.  The DTC is expected to be introduced is Lok sabha this week  and then referred to select committee of both the houses for approval and enactment in winter session. Since direct taxes are in the sole domain of Union Government, it could see the light of the day, unlike GST where the light still appear to be at the end of the tunnel. DTC is well worth the effort, if enacted and implemented properly.

 

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