Background:-The Finance Minister tabled the Direct Taxes Code Bill, 2010 in Parliament on 30 August 2010 with a view to simplify the direct taxes legislation in India. The proposed Code, once enacted, would come into force from 1 April 2012.
Key changes proposed
Corporate Tax
- · The rate of tax for corporate taxpayers shall be 30 percent (inclusive of surcharge and cess)
- · Income from each business shall be computed separately
- · Expenditure from business shall be classified under three categories – 1) Operating expenditure 2) Finance charges and 3) Capital allowances
- · Assets shall be classified into – 1) business assets and 2) investment assets
- · Only income from “business assets” shall be taxable as income from business. Business assets shall be further classified into – 1) business trading assets and 2) business capital assets. Only business capital assets shall be eligible for depreciation
- · Certain specified expenditure such as non-compete fee, business reorganization expenses, etc. shall be allowed on a deferred basis over a period of 6 years. However, expenditure incurred by a resident on any operations relating to prospecting for any mineral or development of a mine or other natural deposit, etc. shall be deductible over a period of 10 years
- · In the case of finance lease, the lessee shall be deemed to be the owner of the business capital asset. Accordingly, depreciation shall be allowable to the lessee
- · Carry forward of losses shall be allowed without any time limit
- · Due date of filing the tax return shall be 31 August following the financial year, in place of 30 September
Dividend Distribution Tax (DDT)
• The rate of DDT shall be 15 per cent
• The dividend liable to DDT will be reduced by the dividend received from a subsidiary if the subsidiary has paid DDT on such dividend
Minimum Alternate Tax (MAT)
- · MAT shall be levied on book profits at the rate of 20 percent
- · Credit for taxes paid on book profit shall be allowable for a period of 15 years (as against the existing limit of 10 years)
- · DDT and MAT provisions shall apply to SEZ developers and SEZ units
Presumptive taxation
Income from the following business shall be calculated on presumptive basis, as under:
| Nature of business | Amount of income | Condition |
| Plying, hiring or leasing of heavy or light goods vehicle |
And
during which the vehicle is owned |
Total number of such vehicles owned should be less than or equal to 10 |
| Civil construction in connection with approved turnkey power project | 10 percent | Taxpayer is a foreign company |
| Erection, testing or commissioning of plant or machinery in connection with approved turnkey power project | 10 percent | Taxpayer is a foreign company |
| Providing services or facilities in connection with the prospecting for, or extraction or production of, mineral oil or natural gas | 14 percent | Taxpayer is a non-resident |
| Supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils or natural gas | 14 percent | Taxpayer is a non-resident |
| Operation of ships | 10 percent | Taxpayer is a non-resident |
| Operation of aircraft | 7 percent | Taxpayer is a non-resident |
| Any other business | 8 percent | Taxpayer is a resident individual, HUF or a firm and total turnover or gross receipts are less than or equal to ` 10 million |
The income determined as above shall be further increased by the excess of the income actually earned from the business over the amount specified above.
Business of operating a qualifying ship
- · Taxpayers engaged in the business of operating qualifying ships shall have the option of computing their profits under the Tonnage Income scheme
- · Negative income computed under the Tonnage Income scheme of the immediately preceding year shall be allowed to be set-off
- · Book profits or losses from core shipping activities of a qualifying ship shall be excluded for MAT purposes
Investment linked incentives
Investment based incentives shall be allowed to the following businesses wherein capital expenditure (excluding expenditure on acquisition of any land including long term lease, goodwill or financial instruments) shall be allowed as a deduction:
- Generation, transmission or distribution of power
- Developing or operating and maintaining any infrastructure facility
- Operating or maintaining a hospital in a specified area
- Processing, preservation and packaging of fruits and vegetables
- Laying and operating a cross country natural gas or crude or petroleum oil pipeline network
- Setting up and operating a cold chain facility
- Setting up and operating a warehousing facility for storage of agricultural produce
- Building and operating a new hotel of two star or above category commencing operation after 1 April 2010
- SEZ developers notified after 31 March 2012 (See Note 1 below)
- Units established in an SEZ and commencing operation after 31 March 2014 (See Note 2 below)
- Exploration and production of mineral oil or natural gas (See Note 3 below)
- Developing and building a housing project under a scheme of slum redevelopment
Mutual Funds
- · Income distributed by an equity oriented mutual fund liable to distribution tax at the rate of 5 percent. Such income received by the investor shall be exempt from tax
- · Income distributed by other than equity oriented mutual fund not subject to distribution tax. Such income received shall be taxable in the hands of the investor
Insurance Companies
- · Profits of life insurance business shall be the profit determined in shareholder?s account and subject to tax at the rate of 30 percent (as against 12.5 percent under the existing law)
- · Profit of other insurance business shall be profits disclosed in the annual accounts (subject to certain adjustments)
- · Income distributed to the policyholders of „approved equity oriented life insurance scheme? by life insurance company shall be liable to distribution tax at the rate of 5 percent
Financial institutions
- · Deduction for amounts credited to the provision for bad and doubtful debts account by the financial institutions shall be restricted to 1 percent of the aggregate average advances computed in the prescribed manner
Provisions related to Non-Profit Organisations (NPOs)
- · Income earned by NPOs, in excess of ` 100,000 shall be subject to tax at the rate of 15 percent
- · Total income of NPOs in relation to any charitable activity shall be gross receipts less prescribed outgoings
- · Prescribed outgoings inter alia shall include amount accumulated or set apart for charitable activity, and invested in specified modes for a period not exceeding three years, to the extent of –
– 15 percent of total income (before such accumulation) or
– 10 percent of gross receipts
whichever is higher
- · Notified public religious trusts and NPOs of public importance shall not be subject to income tax, subject to conditions
Wealth Tax
- · Every person, other than a non-profit organization, shall be liable to pay wealth tax
- · Wealth tax shall be payable at the rate of 1 percent on net wealth exceeding ` 10 million (as against the earlier limit of ` 3 million)
- · Definition of “specified assets” shall include (among other things) the following items:
– building or land appurtenant thereto farm house situated in the specified areas
– urban land
– motor car, boat, helicopter, etc., with certain exceptions
– jewellerary, bullion, etc.
– archaeological collections, drawings, paintings, sculptures,
– watch having value in excess of ` 50,000,
– cash in hand exceeding ` 200,000,
– equity or preference shares held in a Controlled Foreign Company, etc.
Certain exemptions have been provided, such as residential houses allotted to employees, houses occupied for business purposes, etc.
Assessments and appeals
- · Time limit of 6 months has been prescribed for passing a rectification order by the assessing officer
- · Powers of the tax authorities have been significantly increased with respect to reassessment and revision of orders
- · Delay in excess of one year in filing of appeal cannot be condoned by the Tribunal or by the Commissioner (Appeals)
- · Orders passed by the Commissioner (Appeals) can be appealed against before the Authority for Advance Rulings in case of Public Sector Companies
Note:-
1. Profit linked incentives under the Income-tax act, 1961 shall continue for SEZ developers notified on or before 31 March 2012
2. In case of SEZ units, the profit linked incentive under the Income-tax act, 1961 shall continue for units commencing operations on or before 31 March 2014;
3. Deduction allowed for expenditure on infructuous or abortive exploration; payment to Site Restoration Account maintained with State Bank of India in accordance with the scheme to be prescribed allowed as deduction
