Union Cabinet on Thursday cleared the new Direct Tax Code Bill that proposes to raise the basic exemption limit for individual tax payers from Rs 1. 6 lakh to Rs 2 lakh. So there will be no tax on incomes below Rs 2 lakh. The exemption for senior citizens has been raised to Rs 2. 5 lakh, up from 2. 25 lakh at present. The tax code will now be sent to a standing committee for clearance and is most likely to be presented in Parliament on Monday New Income tax slab 0 -2 lk – Nil 2 -5 – 10% 5- 10 – 20% >10 – 30%
The whole objective of the Direct Tax Code is to provide predictability because now the tax rates will not be part of the Finance Act. It will be a part of the schedule which will be approve by Parliament along with the Direct Tax Code. Direct Tax Code incorporates all three direct tax act; IT Act of 1961, Wealth Tax of 1957, Dividend Distribution Tax of 1997. All these are combined in Direct Tax Code,” said Mukherjee. Most probably on Monday it (Direct Tax Code) will be introduced in Parliament. It will be put on the website as soon as it’s introduced in Parliament,” said Revenue Secretary Sunil Mitra.
The Bill also seeks to remove surcharge and cess on corporate tax, providing relief to business houses. According to the new direct tax code corporate tax rate will be 30 per cent including all taxes, down from the existing 33 per cent. For senior citizens and females, the tax slabs are likely to be relaxed further, they added. “The whole objective is that a plethora of exemptions will be limited. (Income) tax slabs will be three. Rate of taxes will be taken in the schedule so that they need not be changed every year,” Mukherjee said.
On the corporate tax, the Finance Minister said it is sought to be retained at the present level of 30 per cent, but there will not be any surcharge or cess on it. Income between Rs 2-5 lakh is likely to attract a rate of 10 per cent, 20 per cent for Rs 5 -10 lakh bracket and 30 per cent above Rs 10 lakh. At present, income between Rs 1. 65 lakh and Rs 5 lakh attracts 10 per cent tax, while the rate is 20 per cent for the Rs 5-8 lakh bracket and 30 per cent for above Rs 8 lakh. The first draft of the bill had suggested 10 per cent tax on income between Rs 1. 0 lakh and Rs 10 lakh, 20 per cent on income between Rs 10 and Rs 25 lakh and 30 per cent beyond that. However, Finance Ministry officials had later said those slabs were just illustrative. The Bill, approved by Cabinet on Thursday, also seeks to impose minimum alternate tax (MAT) at 20 per cent of the book profit, compared to 18 per cent at present. The first draft had proposed to impose MAT on assets, which drew strong criticism from the industry. The MAT on book profit has been maintained in the revised draft as well. It had also proposed to tax long-term savings like PF at the time of withdrawal.
The revised draft exempted them. “Concerns were expressed for shifting from EEE (exempt, exempt, exempt) to EET (exempt, exempt, tax),” Mukherjee said. This would also address the issue of taxing surplus funds of charitable institutions, he said. The new Direct Tax Code will take effect from April 1, 2011. A new Direct Tax Code has been released, the stated objective of which is to improve efficiency and equity of the system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The three strategies adopted while drafting the code are: . Minimize exemptions. ii. Remove ambiguity in law. iii. Check erosion of tax. This direct tax code will replace existing Income Tax Act, 1961 & Wealth Tax Act, 1957. 1. The Goal 1. 1 Consolidate and amend all direct taxes – Income Tax, Dividend Distribution Tax, Wealth Tax. 1. 2 Simplify language to ensure that the law can be reflected in the return form. 1. 3 Reduce scope for litigation. 1. 4 Flexibility in accommodating changes without need for frequent amendments. 1. 5 Eliminate regulatory functions. 1. 6 Provide stability. 2. Key Gains of new Direct Tax Code . 1 Drastic deductions in the tax rate: THE EXISTING SLAB THE NEW PROPOSAL |Income Slab |Proposed Rate | |Upto Rs. 1. 6 lakhs* |NIL | |Rs. 1. 6 lakhs to Rs. 10 lakhs |10% | |Rs. 10 lakhs to Rs. 25 lakhs |20% | |Above Rs. 25 lakhs |30% | |Income Slab |Proposed Rate | |Upto Rs. 1. 6 lakhs |NIL | |Rs. 1. 6 lakhs to Rs. lakhs |10% | |Rs. 3 lakhs to Rs. 5 lakhs |20% | |Above Rs. 5 lakhs |30% | * For resident women, basic exemption limit would be Rs. 1. 9 lakhs & for senior citizens, Rs. 2. 4 lakhs. Thus a person with taxable income of Rs. 10 lakhs is likely to save approx Rs. 1. 2 lakhs annually. 2. 2 Deduction for Royalty income on patents for individual residents upto Rs. 3 lakhs. 2. 3 Cost inflation adjustment to be available. 2. 4 Other Tax & Exemption Gains Particulars |Existing Norms |Proposed changes as per Direct Tax Code| |Deduction under section 80C – |Rs. 1 lakh |Rs 3 lakh | |Corporate Tax rates (including for foreign |34% |25% | |companies) | | | |Net Wealth Tax Exemption Limit |Rs. 0 Lakhs |Rs 50 crores | |Wealth Tax Rate |1% |0. 25% | |Carry forward of losses |Loss in one year could be set off against |Indefinite carry forward of losses. | | |profits only in next eight years. | |Securities Transaction Tax (STT) |Applicable |Discontinued | |Base date for capital gains tax |April 1, 1981 |April 1 2000 | | | |Capital appreciation up to 2000 not | | | |taxable | |Maximum penalty |Three times tax amount |Two times tax amount | 3.
Key Pains of new Direct Tax Code 3. 1 Receipt on maturity of LIC policy taxable except for pure life insurance policy 3. 2 Cost of acquisition/improvement nil if not determinable 3. 3 Roll over benefits for capital gains tax exemptions trimmed to only one residential house 3. 4 Income from house property 3. 4. 1 Presumptive rent calculated at 6% p. a. of rateable value when higher than contractual rent. 3. 4. 2 Income from letting of machinery, plant, furniture included if letting of building is inseparable from the same. 3. 5 MAT linked to gross assets rather than book profit @ 25% for banking companies and 2% for others 3. 6 General Anti Avoidance provisions introduced 3. Capital Gains may get taxed 3. 7. 1 The Code has proposed to tax all capital gains at the rate of investors’ marginal tax rates (tax brackets they fall). It decided to do away with the distinction between long term and short term capital gains tax. 3. 7. 2 At present, all long term investments of over one year in equities attract zero tax. However, the short term capital gains become part of the income of the investor and are accordingly taxed @ 15%. However, as per the Code the capital gain will be part of the income and will be taxed accordingly. As tax slabs are proposed to be changed to a higher limit, the impact on small investors will be lesser.
But large investors will have to pay huge tax. 3. 8 Other Tax & Exemption Pains |Particulars |Existing Norms |Proposed changes as per Direct Tax Code | |Branch Profit tax |Not Applicable |Applicable @ 15% | |Tax breaks and exemptions to firms |Area-based exemptions, tax breaks given for|Phased out. | | |investing in backward areas or in the | | | |north-east, etc. | | | | | | |Profits of firms in many sectors like | | | |power, petroleum, and other infrastructure | | | |sectors are exempt from tax for a number of|Period of the tax holiday will not be | | |years, especially for the first 10 years |pre-fixed. Firms will not be taxed till | | | |they recover their investments, all capital| | | |and revenue expenditure barring on land, | | | |goodwill and financial instruments.
Once it| | | |has recovered these investments, profits | | | |will become taxable. | |Minimum Alternate Tax (MAT) |Calculated on the companies’ profits |Calculated on the change in valuation of | | | |companies’ assets. | |Listed shares & MF units |Exempt from capital gains tax |Capital Gains tax applicable | |Distinction in assets |Assets classified as short term and long |Distinction of short term and long term | | |term |assets to be discontinued. |Profit on sale of business capital |Treated as capital gains |Treated as Business income | |assets/undertaking | | | |Repairs and maintenance deduction under the|30% of rent |20% of rent | |head income from House Property | | | |For Self occupied property, deduction for |Deduction Available |Not Available | |interest and principal loan repayment | | | |Particulars |Existing Norms |Proposed changes as per Direct Tax Code | |Rent free accommodation to Government |Exempt from tax |Taxable | |employees | | | |Carry forward credit for MAT in later years|Allowed |Not Allowed | |Financial assets like shares held in |Not included in the definition of wealth |To be included in the definition of wealth. | |various companies and fixed deposits | | | |Short – term investment schemes like |Exempt from tax |Taxable | |insurance, MFs. | | |Investments in certain instruments like |Not taxable at all the three stages – at |This will now change to EET and that means | |Public Provident Fund, Employees Provident |the time of investments, the amount is |the last stage will be taxed. Any | |Fund and government provident fund |deducted from your taxable income, during |withdrawal of money from the account will | | |the period of investment when interest |be taxed since that amount withdrawn will | | |accrues it is not taxed and at the time of |form part of the income for that year. This| | |withdrawal too no tax is payable.
This is |will apply only to amounts that accrue from| | |what is called the exempt – exempt – exempt|April 2011 onwards. | | |(EEE) treatment. | | 4. New Concepts of new Direct Tax Code 4. 1 Test for residency changed 4. 1. 1 Foreign companies, even if partly held/managed from India will become “resident”. 4. 1. 2 Concept of “resident but not ordinarily resident” dropped. 4. 2 Income from business 4. 2. 1 Computed separately for each business 4. 2. 2 3 types of business expenses allowed: Operating expenditure, permitted financial charges and capital allowances. 4. 3 Scientific R & D allowance 4. 3. 1 Scope of weighted deduction of 150% to be extended to all industries 4. 3. Scientific research to be defined 4. 3. 3 Presumptive taxation for certain business to continue 4. 3. 4 Separate income determination regimes provided for hospitals, SEZ, infrastructure, etc. 4. 3. 5 MF, VCF, Pension Fund etc taxed as pass through entities 4. 3. 6 New tax regime for trusts, institutions carrying on charitable activities The current tax rate for domestic companies, including surcharge and cesses, comes to about 33. 22 per cent, while foreign companies pay over 40 per cent. The bill sought to levy the same corporate tax rate on domestic and foreign companies. So Corporate tax to remain at 30 per cent but without surcharge and cess.
This will provide much- needed relief to the industry and bring the levy on par with global standards. * MAT to be 20 per cent of book profit, up from 18 per cent * Proposal to levy dividend distribution tax at 15 per cent Proposal to raise tax exemption for senior citizens to Rs. 2. 5 lakh from Rs. 2. 4 lakh currently No mention about tax exemption to women in proposed bill, While senior citizens will continue to enjoy greater tax exemption, women tax payers will lose their special status under the proposed Direct Taxes Code. Exemption for investment in approved funds and insurance schemes proposed at Rs. 1. 5 lakh annually, against Rs. 1. 2 lakh currently