Direct Taxes Code | More questions, few answers for individuals

Direct Taxes Code | More questions, few answers for individuals

New Delhi: The direct taxes code (DTC) Bill introduced on Monday in the Lok Sabha brings down tax rates for companies, but does not clearly signal a similar move for individuals, with the scope of some tax exemptions for the latter yet to be decided.

Also See | The Direct Tax Menu: 1 April 2012

The Bill, to be made operational from 1 April 2012, largely sticks to the revised draft circulated in June, which diluted key provisions of the first draft introduced in August 2009.

The key features of Monday’s Bill are tighter norms for international taxation, eventual replacement of profit-linked incentives with investment-linked incentives and the introduction of tax rates in the legislation to provide the government with flexibility and taxpayers a sense of stability on rates.

“The attempt in the first draft of the code was to almost rewrite the entire Income-Tax Act of 1961," said Dinesh Kanabar, deputy chief executive officer and chairman (tax) at audit and consulting firm KPMG.

“The approach followed in the Bill today tabled before Parliament is to simplify the current law, rationalize it and deal with certain new concepts such as place of effective management, controlled foreign companies legislation, advance pricing agreements and the like."

DTC will come into effect in fiscal 2013.

Following the Bill’s introduction on Monday, the next step will be to place it before a parliamentary select committee to listen to the views of stakeholders and then recommend changes, a senior government official, who did not want to be identified, said.

The tax rate for companies, especially foreign ones, has been reduced and the current benefits related to special economic zones have been retained for four more years.

DTC’s significant departure over the current tax legislation has been in terms of plugging loopholes in cross-border transactions, and introducing explicit norms to neutralize disputes such as the tax department’s ongoing one with telecom firm Vodafone Plc.

It is in the case of individuals that DTC’s implications are mixed. The tax rates remain unchanged for individuals, but the slabs have been tweaked to give individuals some benefits. The grey area in DTC remains proposals related to tax exemptions, where it is unclear if the returns from popular unit linked insurance plans (Ulips, a hybrid insurance and mutual fund product) will continue to enjoy the current tax exemption.

Finance ministry officials, including revenue secretary Sunil Mitra, who addressed a press conference did not clarify on the tax treatment of Ulips.

Another finance ministry official, who did not want to be identified, said there would be an internal discussion in the finance ministry before a final decision on Ulips is taken.

DTC has also partially withdrawn concessions on home loans—the concession on repayment of principal has been eliminated.

For individuals, the significant changes are in the area of tax exemptions, where the code has been designed to boost “long-term savings" in areas such as provident fund and pension fund.

The insurance industry is likely to be adversely affected by the provisions of DTC.

The space for tax exemptions individuals have when they buy life or health insurance policies has been squeezed to Rs50,000 from the current level of up to Rs1.15 lakh.

According to the finance ministry official, insurance premiums are regarded as “expenses" by DTC. Therefore, the tax exemptions on them have been squeezed and benefits have been transferred to “long-term" savings.

For companies, DTC has proposed a reduction in effective tax rates. Companies, both Indian and foreign, will be taxed at a flat 30%. The big gainers here are foreign companies as their current effective tax rate is 42.23%. The current effective rate of taxation for Indian companies is 33.22%.

DTC has made life simpler for companies in two other areas. The minimum alternate tax (MAT) will continue to be calculated on book profits and not gross assets, as proposed in the August 2009 DTC draft. While this rate has been increased a bit to 20%, the blow has been softened by allowing companies to carry forward MAT credit to 15 years from the current 10 years.

Monday’s DTC Bill also stayed with the line taken in June’s revised draft of softening the blow on non-profit organizations, which will be taxed at 15% subject to a few deductions.

Liz Mathew contributed to this story.