The long awaited Direct Tax Code Bill 2009 (‘Code’) was finally unveiled by the Finance Minister on August 12, 2009. The Code seeks to bring all direct taxes under one code and pave way for a single unified tax reporting system. The Finance Minister has indicated that the Code has been drafted on a clean slate after studying and adopting internationally accepted principles and best practices in the world and is not an attempt to ‘amend’ or ‘improve’ upon the present Income-tax Act, 1961 (‘Act’).
A snapshot of key provisions proposed under the Code vis-à-vis the Act is given below:
Tax Rate card:
- Tax rates for individuals are proposed to be revised as follows :-
|Old Income Slab (INR)
||New Income Slab (INR)
Tax Rate *
|1,60,001 – 3,00,000
||1,60,001 – 10,00,000
|3,00,001 – 5,00,000
||10,00,001 – 25,00,000
[*Basic exemption for resident women would be INR 190,000 and for resident senior citizens would be INR 240,000]
- Tax rate for companies (both domestic and foreign) is proposed to be reduced to 25%.
- Domestic companies are proposed to be liable to Dividend Distribution Tax at 15%.
- Foreign companies having branch in India are proposed to be levied with branch profits tax of 15%.
- Minimum Alternative Tax (‘MAT’) to be computed on the basis of gross assets and not book profits. The MAT rate to be 2% for all companies and 0.25% for banking companies.
Partnership firms, associations of persons and bodies of individuals will be taxed as an “unincorporated body” at 30% without any threshold exemption limit.
Companies to be exempted from Wealth tax. Threshold exemption limit for Individuals and HUF increased to INR 50,00,00,000 and rate reduced to 0.25%.
Surcharge and cess
Surcharge and cess may be chargeable in the future in accordance with provisions of relevant Finance Act.
Individual Tax Proposals
- Separate category of ‘Resident but not ordinary resident’ under the Act to be done away with.
- All allowances (including house rent allowance) except for transport allowance and special allowance for performance of duties of an office/employment of profit to be fully taxed.
- Method of taxing personal savings such as Provident Fund, etc to be changed from ‘Exempt-Exempt-Exempt’ to ‘Exempt-Exempt-Tax’ regime.
- Deduction limit for payments to Permitted Savings Intermediaries to be increased from INR 1,00,000 to INR 3,00,000. However, number of Permitted Savings Intermediaries to be reduced to four.
- The current deduction available for housing loan interest up to INR150,000 for self occupied property to be done away with.
Corporate Tax Proposals
- A new “Income-Expense Model” envisaged for computation of ‘Business Income’ as prevalent in certain developed and ASEAN countries. Further, Income from each business to be computed separately. The Code also provides detailed computational machinery for specified businesses in the schedules to the Code.
- Loss on sale of ‘business capital assets’ (where no assets remain in a particular block of asset) will continue to be eligible for depreciation and will not be allowable as a business loss.
- Profit linked incentives under the Act to be substituted by ‘new scheme’ whereby all the capital and revenue expenditure (except expenditure on land, goodwill and financial instrument) would be allowed to be recovered and the period consumed in recovery will be the period of tax holiday. The benefit of ‘new scheme’ is restricted only to selected business. The profit linked incentives/other tax incentives contrary to the new scheme and area based exemptions available under the Act to be grandfathered.
- Transfer of ‘Investment asset’ to be taxed under ‘Capital Gains’ whereas transfer of ‘Business asset to be taxed under ‘Business Income’.
- No distinction to be made between short-term and long-term capital gains barring roll over and indexation benefits. The base date for indexation shifted from 1.04.81 to 1.04.2000.
- Securities Transaction Tax to be abolished.
- Where the cost of acquisition/improvement is indeterminable, the same to be considered as NIL.
- Foreign Companies to be considered ‘Residents’ even if the place of control or management is partly situated in India.
- Definition of ‘Fees for Technical Services (“FTS”) expanded to include ‘development and transfer of design, drawing, plan and software or similar services’.
- Definition of Royalty expanded to include ‘use / right to use of transmission by satellite, cable, optic fibre, ship or aircraft and live coverage of any event’.
- The rate of income-tax on Interest/Royalty/FTS to be enhanced from 10% to 20%.
- For a non-resident, even income from ‘indirect transfer’ of any capital asset situated in India to be ‘deemed to accrue’ in India.
- As against the beneficial provision of treaty override under the Act , the Code proposes that in case of conflict between tax treaty and Code, the one in later point of time would prevail.
- General Anti- Avoidance Rule (‘GAAR’) to be introduced empowering the tax authorities to declare an arrangement impermissible if entered/carried out with the objective of obtaining tax benefit and lacking commercial substance. The onus to lie on tax payers to prove otherwise.
- Concept of Advance Pricing Agreement (‘APA’) proposed to provide alternative to taxpayers for upfront determination of arm’s length pricing / pricing methodology for any international transaction. APA’s to have a shelf life of 5 years provided there is no change in the law during this period.
Other Key Proposals
- Separate concepts of ‘Previous Year’ and ‘Assessment Year’ to be replaced by a unified concept of ‘Financial Year’.
- Due Date for furnishing Returns to be June 30 for non business non-corporate taxpayers and August 31 for all other taxpayers.
- Income to be classified as Income from ‘Special Sources’ and ‘Ordinary Sources’. Losses (other than speculative business) allowed to be indefinitely carried forward for set off.
Whilst introduction of Code is a positive step towards ‘progressive and simplified tax regime’, provisions on treaty override, GAAR, etc. envisaged in the Code merit rethinking.
Written by:- Sandeep Ladda, Associate Director Milan Shah, Manager and– Nikhil Punamiya, Asst. Manager, PricewaterhouseCoopers