The new code attempts to change the methodology of taxation of business profits from the existing model where the taxable income is equal to business profits with specified adjustments even though this model does not provide for items of receipts which form part of business profit and deduction to be made there from. The discussion paper claims that the existing model give rise to frequent disputes about taxability of receipts and allowable deductions for various expenses. In order to avoid these legal disputes the New Code takes the second model of income-expense model where in the taxable income will be equal to gross income minus allowable deductions. The code itself enumerates the items of receipts and deductions to reduce the scope of litigation.

Under the new code all assets will be classified into “business assets” and “investment assets”. The “business assets will be further classified into “business trading assets” and “business capital assets”. While income from transactions in all business assets will be treated as “income from business” the income from transactions from investment assets will be computed under “capital gains” some of the important changes will be (a)  profit on sale of business capital assets and (b) profit on sale of an undertaking as slump sale will no longer be treated as “capital gain” (c) The income by way of interest ( other than in case of financial institutions, banks) will be treated as income from residuary sources. (d) Income from letting out of the buildings other than hotel, convention centre or cold storage, will be considered under “income from house property and not as business income.

On the face of it appears that the new code is very favourable to companies as tax rates are reduced to 25% from the present level of 30%. And also eliminates wealth tax liability on corporate assesees. But when we take into account the provisions of MAT which is altogether on a new concept of being charged on the gross assets instead of book profit it become very harsh. While  the first schedule of the new code provides that corporate tax rate will be 25% of its total income [profits] sec 2(3) of the code also provides that corporate tax liability will be higher of the two namely 25%of profit or MAT calculated at 2% of gross assets. [0.25% of gross assets in case of banking companies]. The code itself clarifies the procedure to compute gross assets which includes gross block of fixed assets plus capital work in process plus book value of other assets excluding loss and miscellaneous or preliminary expenses not yet written off less accumulated depreciation.

The first blow to the companies will be where its profits are under strain or it is loss, still the companies have to pay tax of MAT which will be high. Secondly the MAT paid is not allowed to be carried forward and deducted from future tax liability as it is being allowed hitherto. Thus under new code MAT is not deferred tax liability but actual out flow of funds even if there is loss. Will it not affect the future growth of the companies when it has to shell out money for tax even when it is not making profit?  Thirdly will it not add as additional burden to interest paid already on borrowed funds for acquiring these assets? As we know very well most of the companies use borrowed funds for financing long term assets as well as working capital finance from banks for their current assets. What will be their final cost of borrowing if they have to pay additional 2%tax on these borrowing also? Unless the companies are able to earn minimum 8% on their gross assets, they will be paying more on MAT than paying tax on profits. Further Advance tax is also payable on MAT which will be additional cash flow burden on the companies. Investors can analyse their own present investment in companies by looking into their annual reports and how the new MAT will affect their investments.

From the above reading we need not go to an immediate conclusion that the NEW CODE has only adverse features or I was only looking at the dark side of the code. The new code is most beneficial when it comes to rates of taxation as it is long standing rates and not likely to be rigged every year.  Similarly the test for residency is also simplified. The new code also provides exemption for Venture Capital Funds from tax liability just like Mutual Funds. But there is a doubt lingering whether this reading is correct or not since the grouping of VCF with SEBI recognised Mutual Funds is not clear. At the same time the new code should also clarify the tax provisions relating to income from investments in VCF just like exemptions available to investors in Mutual Funds.

Authored by: CA. N. VENKATESWARAN,  B.Sc.,FCA.,ACS.,CAIIB.,AMIMA , Email:

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