Code served cold
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APART FROM SOME INSIGNIFICANT PROPOSALS THAT SIMPLIFY THECOMPLEX TAX REGIM, THE DTC OFFERS LITTLE ELSE
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The Direct Taxes Code was touted as the most revolutionary tax reform in the history of independent India. But, in its current form, the DTC bill only appears to be a reflection of the current legislation on direct tax, detailed under the Income Tax Act (ITA), 1961.
Aimed at bringing a new paradigm in direct taxation, the DTC was proposed to replace the archaic ITA last year, and weed out the structural complexities and countless provisions brought in by the 84 amendments to ITA in the past 50 years. But the revised draft of the bill only disappoints as it does not propose anything drastically different from the existing law, and the changes that it seeks hardly justifies the hype that was built around it. In fact, most experts say that these could have been incorporated into the present act in normal course through amendments and the Finance Bill which follows the Union Budget every year.
While the DTC is seen as a good move to simplify the convoluted direct tax structure in India, it does not offer anything new which justifies a new code. It puts the innumerable provisions, clauses and sub clauses in the current act into a clear and simple format without any significant departure from the existing provisions.
It was the first DTC draft, released in August last year, which offered to roll out path-breaking changes for both individual and corporate taxpayers, promising a new code in the true sense. It proposed to do away with most of the irrelevant exemptions and deductions available to taxpayers under multiple heads, which gave way to complicated tax structure and consequent tax evasion.
On individual taxation front, it suggested a radical change in tax rates applicable to particular income slabs. Currently, income up to 10 lakh is divided into four slabs—fl.6-5 lakh, 5-8 lakh, 8-10 lakh and 10 lakh and above, with the base rate of 10 per cent for the lowest slab and the maximum rate of 30 per cent for the highest bracket. The first draft of the DTC proposed to merge three income slabs into one charging a unified rate of 10 per cent, with income falling between no lakh and 25 lakh being charged at 20 per cent and anything above ?25 lakh at 30 per cent, the highest rate.
The revised (second) version of the draft is a pale shadow of the first draft. Barring a slight increase in income exempt from tax—from the current base of no lakh to 2 lakh and merging the t8-10 lakh income bracket into the t5-10 lakh bracket, the revised draft has reverted to the current rates.
That there is no surcharge and education cess is some relief to an otherwise similar individual tax structure. Also, the tax rates would become part of the DTC legislation unlike in the current law, where income tax rates are not part of the ITA. The present system is to announce the tax rates every year through the Finance Bill brought out after the annual budget.
In addition to this, while the first draft offered an investment limit of ?3 lakh, eliminating deduction for interest up to lakh on housing loans, the revised draft has reinstated this deduction. It has also brought in a new deduction of up to 50,00O for any amount paid towards life and health insurance or tuition fee. So, except this additional 50,00O, the revised draft offers the same deduction (of 1 lakh available under section 80C and 1.5 lakh as interest on housing loan) as under the ITA. In effect, it has reversed the cancellation of deduction for interest on housing loans and brought in yet another new deduction of 50,000.
This is not all. In what has been another policy reversal, is the method of taxing retirement benefits. The original draft recommended an Exempt Exempt Tax (EET) method of taxing contributions made towards certain retirement savings. Under EET, contributions and annual accumulations into specified funds are not taxed, but withdrawal from them are taxed. The revised draft has gone back to the current Exempt method of taxation for Government Provident Fund, Public Provident Fund and Recognized Provident Fund and the pension schemes administered by Pension Fund Regulatory and Development Authority, reinstating certain allowances that were available in the ITA.
For senior citizens, the exemption limit has been enhanced to 2,50,000 from the current 2,40,000. The exemption limit for women, which is 1.9 lakh at present, is proposed to be withdrawn.
Barring these changes, there are no significant proposals on the individual taxation front. The bill is expected to come up for voting during the monsoon session of Parliament next year. Originally slated to be effective from April 2011, the bill has already been deferred by a year, and is now expected to be in force from April 2012.
At the moment, it has been referred to the Parliamentary Committee which, in turn, is in the process of receiving and evaluating feedback from stakeholders. In the current form, the bill can, at best, be described as old wine in new bottle, according to tax practitioners. Says Vikas Vasal, executive director, KPMG: “Bringing in a new code which is largely similar to the current legislation raises an obvious question: could we have achieved the same with a few amendments to the current act?”
All the same, it has cut out ambiguity and jargons in the current law, which, experts say, could come in handy in the formation of a more robust direct tax regime in the country but the absence of radical
Changes proposed in the original draft brings the new code close to the current law.
Like personal taxation, provisions governing corporate taxes also disappoint. Unlike the first draft, which suggested a uniform rate of 25 per cent for both domestic and foreign companies against the current rates of 30-40 per cent, the revised draft reinstates 30 per cent rate for domestic companies with some relief to foreign entities whose income would be taxed at 30 per cent as against 40 per cent currently. Butas it is still higher than the rate suggested in the original draft, it is perceived as bit of a dampener for the overseas community doing business in India. However, while domestic companies would continue to cough up an additional 15 per cent by way of Dividend Distribution Tax on dividends declared, foreign corporations would be subject to a new tax. They will be levied a Branch Profit Tax of 15 per cent. This, as the name suggests, would be levied on the revenue earned by their branches in India. This was not part of the original draft.
The revised draft also raises the Minimum Alternate Tax (MAT) from current 18 per cent to 20 per cent. The only thing that has changed in the second draft in respect of MAT is that it would be continued to be levied on book profits and not gross assets, as was the original proposal, which saw vehement opposition and representation by the business community.
Securities Transaction Tax (STT) was withdrawn in the first draft, but it has been brought back. Under this, income from sale of shares in a company or equity-linked funds for over a year would attract STT and, would, therefore, be exempt from tax. Anything other than shares would be eligible for 50 per cent standard deduction. Therefore, tax rates applicable in the case of resident individuals would be 5,10 and 15 per cent, depending on the slab rate, and for companies, the rate could be 15 per cent.
What has been a welcome change for industries enjoying tax holiday under the current law is the restatement of profit-linked incentives. Under the updated bill, the deduction in respect of units established in a special economic zone under the ITA, will continue to be allowed a profit-linked deduction, if the taxpayer begins to manufacture or provide services in the SEZ unit on or before March 2014. In respect of an SEZ developer, the deduction under the ITA notified on or before March 2012 will continue to be allowed a profit-linked incentive. However, an SEZ developer notified after March 2012 will be eligible to claim investment-linked deduction, as proposed under the original DTC proposal.
In addition, some new provisions which have found place in the DTC Bill include General Anti Avoidance Rules (GAAR), Controlled Foreign Company (CFC), Advance Pricing Agreement and restatement of treaty override. These have been labeled as a “path-breaking” approach to deal with tax avoidance. GAAR is a broad set of provisions that invalidates an arrangement that has been entered into by a taxpayer with the main objective of obtaining a tax benefit. The tax authority in such cases is granted the power to adjust the assessment of the taxpayer so as to counteract the attendant tax advantage. The CFC proposal was not part of the original draft. This is for the first time the government has sought to introduce a CFC regime. It is an anti-avoidance measure aimed to provide for taxation of passive income earned by a foreign company that is directly or indirectly controlled by a resident in India.
The revised draft of the DTC Bill has reverted to the existing provision available to a tax payer to choose between a tax treaty and the ITA, whichever is more beneficial to him, The first draft, however, sought to redefine this relationship by providing that neither a tax treaty nor the DTC shall have a preferential status by reason of it being a tax treaty or domestic tax law, and that the provision that is later in point of time shall prevail. The revised draft has turned to the current legislation. While these provisions have been widely hailed by industry.
