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Dr. Sanjiv Agarwal

The Cabinet approved Direct Tax Code (DTC) as tabled in Parliament on last day of August 2010 has many surprises and hidden shocks for individuals as well as corporate India.  The key objective of DTC is to benefit small taxpayers as a result of rationalization of tax rates, slabs and exemptions. The country also gets one more year to understand the new tax regime and adopt the same.

WHAT THE REVISED DTC OFFERS

–                      To be applicable from April 1,2012 ( AY 2013-14)

–                      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 to go

–                      Corporate taxes @ 30 percent

–                      Corporate MAT @ 20 percent of book profits

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. SEZs coming into operation after 31st March 2012 will also suffer dividend distribution tax, besides MAT. 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. It is now considered by the Finance Ministry under DTC regime that tax exemption to SEZs are discretionary and that SEZ units don’t have intention to the invest the profits in the infrastructure growth of the country, given the continued tax exemptions. It is worth mentioning that there are 111 SEZs in operation in India which houses  over 1800 SEZ units employing over five lakh people.

So far as tax rates are concerned, even corporates will benefit as surcharge and education cess will no longer be applicable. In case of companies, while minimum alternate tax (MAT) will be @ 20 percent levied on book profits, MAT credit could be  carried forward for fifteen years. However, information technology companies and SEZ units will suffer additional tax in the form of MAT. SEZ units will also have to pay dividend distribution tax @ 15 percent. Foreign companies will pay branch profit tax @ 15percent in India, besides 30 percent income tax. For SEZs  notified prior to 31 March 2010, current tax sops would continue. In case of SEZ units, current benefits will be available if such units commence operations before 31st March, 2014.

For businessmen and professionals, the monetary limit for compulsory tax audit will be hiked. In case of business, the limit will now be Rs one core of turnover or gross receipts and for professionals, Rs 25 lakhs of gross receipts as against Rs 40 lakh and Rs 10 lakh respectively, at present.

There is some good news for individuals and investors. Long term capital gains (gains arising out of investments held for more than a year) from the sale of shares on stock exchanges will be exempt from income tax, unlike what was feared earlier, thus retaining zero tax status. However, securities transaction tax (STT) @ 0.25 percent would continue. For short term capital gains, the effective  tax rate would be lower than the normal rate of tax now. The tax on short terms gains would be just @ 5,10 and 15 percent of the gains in three income slabs after taking account the deduction of 50 percent.  Not only this, the existing limit of rupees one lakh investment (as per section 80 C) has been retained and a new limit of Rs 50000 has been introduced for taxpayers who spend such sum on life insurance premiums, education (tuition fee) for children and taking health insurance . However, to discourage insurance as a tool for investment, it has been proposed that only those insurance schemes will quality for investment in which premium is 5 percent of the sum assured. Another Rs 1.5 lakh benefit can be availed in the form of interest paid on home loans as deduction. As already clarified, the exempt-exempt-exempt system of taxing long term savings will continue and therefore, there will be no tax on withdrawals of saving from provident fund, pension fund and post retirement schemes.

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 2012-13 (1 April 2012) relevant to the assessment year 2013-14.

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 the timing of the new tax code, the implementation has been deferred by one year, ie, it will now be introduced from April 1, 2012 instead of April 2011.  Thus, effectively , new tax code will be made applicable from financial year 2012-13. relevant for the assessment year 2013-14.  The deferment by a year will allow the tax practitioners, tax payers and tax administration enough time to become sufficiently familiar with new law.

While the reasons for this deferment have been stated as time allowed for understanding the new law, transition issues and smooth migration, it appears that with goods and service tax (GST) also likely to be delayed from April 2011 and that the Government willing to bring about both tax reforms together, April 2012 might have been chosen hoping that GST would also be ready by then. Let’s hope that 2012 would see both these tax reforms.

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