THE NEW TAX CODE

Thrust of the code, would be to improve efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base.

The Income-tax (I-T) Act, 1961, and the Wealth Tax Act, 1957 are the proposal goes to be replaced with a unified direct taxes code.

The new code is expected to clear the numerous complexities and interpretation issues that shroud the present I-T law. I

It is also believed that complex provisions and tedious explanations may be replaced with mathematical formulae as far as computational provisions are concerned for, say, tax holidays.

THE PROPOSAL
The draft Direct Taxes Code proposes raising tax exemption limit on savings to Rs three lakhs from the present Rs one lakh, while suggesting taxing money withdrawn from savings schemes like PPF, EPF and GPF. Withdrawals should be included in the income of the assessee during the relevant year and taxed accordingly. Retirement benefits would be exempt from tax if saved in the Retirement Benefits Account.

Contd
Corporate tax rate may be cut to 25% from 30%. Under the new proposal, the period of the tax holiday will not be pre-fixed. The firm will not be taxed till it recovers its investments. All capital and revenue expenditure barring on land, goodwill and financial instruments. Once it has recovered these investments, profits will become taxable.

Contd
The code also proposes to rationalize the manner in which amalgamations and demergers are dealt with. The idea is to ensure that these do not change the tax liability of the combined entity. Stringent penalty provisions are proposed in case of wilful attempt to evade tax, but maximum penalty mooted will not be more than two times the amount of tax payable in respect of the amount of tax base underreported. Imprisonment for a term which may extend to seven years and with fine has been proposed for a person who wilfully attempts in any manner to evade any liability in respect of tax, interest or penalty.

Contd
The code proposes to exempt the general tax payer from paying income tax if his income is Rs1,60,000 in a year. He would pay just 10% up to Rs10 lakh, 20% beyond that and Rs25 lakh and 30% beyond Rs25 lakh.

The code proposes abolition of the controversial STT. This will be a major setback for investors in the stock markets. At present, all the long-term investment of more than one year in equities attracts zero tax.

MAT
The MAT liability will now be calculated not on their profits but on change in the valuation of their assets. The idea clearly is to ensure that fudging of the books does not lead to avoidance of tax. The authors of the code justify the re-definition of MAT as an assets tax saying that this would allow companies to expect to earn a specified average rate of return on their assets which is an incentive for efficiency .

CAPITAL GAINS
The code proposes to treat capital gains as business income. Losses would be allowed to be carried forward indefinitely. It decided to do away with the distinction between long-term and short-term capital gains tax.

CAPITAL GAINS
However, the short term capital gains become part of the income of the investor and taxed accordingly. However, as tax slabs can go for a change, the impact on small investors will be lesser. But large investors will have to pay huge tax in case of a bullish market. The code, however, left the provision for taxing the dividend unchanged. While the dividend distribution tax, payable by the company, remained at 15%, it will remain non-taxable at the hand of recipients.

GOOD
For taxpayers earning Rs. 5 lakh 25 lakh, who will enjoy net tax saving of 10% to 20%. For agriculture income earners, who have been assured of continuous tax exemption.

GOOD
For all companies & individuals/HUFs having wealth of less than Rs. 50 crores proposed to be exempted from wealth tax. For investors, who will continue to enjoy exemption if capital gains are invested in new house.

BAD
For investors currently earning exempt long term & concessional short term market gains, now required to pay tax at regular rates. For taxpayers being required to pay wealth tax on all assets, including hitherto exempt financial assets.

BAD
For salaried taxpayers losing LTC, medical & leave encashment exemptions. For house rent earners currently enjoying standard deduction of 30%, now to get lower deduction of 20%.

UGLY
For small taxpayers earning up to Rs. 3 lakh, who will get no tax benefit, but will effectively bear higher load due to change in tax concessions. For private discretionary trusts, who will not enjoy the basic exemption limit of Rs. 50 crore.

UGLY
For salaried class, whose retirement benefits will be required to be separately deposited and will be taxed on any withdrawal. For self-occupied house owners paying interest on housing loan, losing benefit of current deduction of up to Rs. 1,50,000.

Illustration
Mr. Tripathi, a middle class employee earning monthly salary of Rs. 40,000 ( 4,80,000 p.a.), currently manages to maintain a zero-tax status by availing tax free LTC & medical perks of Rs. 70,000, deduction of interest on housing loan of Rs. 1,50,000 & repayment of such loan of Rs. 1,00,000 eligible for deduction u/s 80C.

SHOCKED..

Illustration
Mr. Kapoor, a top notch executive currently returning annual taxable income of Rs. 25 lakhs and paying income tax of Rs. 6,54,000 thereon, will party for sure when he learns that he will reap a whopping tax saving of Rs. 2,70,000, since he will pay only Rs. 3,84,000 on the proposed new tax rates coming into effect.

ELATED..

Conclusion
The new code would first be put in public domain for comments from stakeholders and then it would be placed before Parliament for approval. Since the new code is based on well accepted principles of taxation and best international practices, it will eventually pave the way for a single unified tax reporting system .

Conclusion
Meanwhile, on the structural changes in indirect taxes, the minister promised to speed up the process for implementing Goods and Services Tax (GST) by 1 April 1 2010. The GST, a new indirect tax regime, would do away with most of the indirect taxes and would have a dual structure. The two components would be Central GST and the states GST.

Conclusion
The net impact of these measures on India Inc would be substantial and mostly positive but might vary from company to company, say tax experts. There could be cases where the removal of incentives coupled with the new methods computation would expand the tax base by up to 40%, netting out the benefit of the low tax rate.

By the time the code becomes law, it may be 2011 -the golden jubilee of the old law.