ST.

XAVIERS COLLEGE PRESENTING:

DIRECT TAX CODE AND EXISTING DIRECT TAX SYSTEM IN INDIA: A COMPARATIVE ANALYSIS
Gaurav Jain Roll 240 9614693193

The major tax enactment in India is the Income Tax Act of 1961 passed by the Parliament, which imposes a tax on income of individuals and corporations. This Act imposes a tax on income under the following five heads: Income from house and property, Income from business and profession, Income from salaries, Income in the form of Capital gains, and Income from other sources Under the new code income will be computed under two heads namely special source or an ordinary source. This is known as presumptive taxation. The special sources (specified in a separate Schedule) generally reflect items like Royalty, Fees for Technical Services (FTS), investment income etc. All other sources of income will be ordinary sources. Special sources would be subject to tax on the gross amount. Further the income from ordinary sources will be divided into: a. Income from employment b. Income from House Property c. Income from business d. Income from Capital Gains e. Income from residuary sources. (Similar to other sources, with some minuses)

Impact of DTC is very important from all aspects on the Indian taxation system. DTC has come up with various changes to make the Indian tax system more simple. Income Tax Act and Wealth tax Act are abolished and single code of Tax, DTC in place. Concept of Assessment year and previous year is abolished. Only the Financial Year terminology exists. Status of resident but not ordinarily resident goes away. Earlier the terminology of assessee was meant for the person who is paying tax and/or, who is liable for proceeding under the Act. Now it has been added with 2 more definitions namely a person, whom the amount is refundable, and/or, who voluntarily files tax return irrespective of tax liability. No changes in the system of Advance Tax, Self Assessment Tax and also TDS. Government assessee is covered in Direct Tax Code. (Current act was not covered with Government Assesses) Impact of DTC has been generally dealt, now its impact on the various sources of income would be analyzed i.e. on
HOUSE PROPERTY SALARIES PGBP CAPITAL GAINS OTHER SOURCES DEDUCTIONS

Income shall be the gross rent less specified deductions. Furthermore, the gross rent was to be higher than (a) the amount of contractual rent for the financial year; and (b) the presumptive rent calculated @ 6% p.a. of the rateable value fixed by the local authority. However, in a case where no rateable value has been fixed, 6% was to be calculated with reference to the cost of construction or acquisition of the property. Present Income-tax Law provides a standard deduction of 30 percent to the tax payers for repair, maintenance etc but this deduction is proposed to be reduced to 20 per cent only under the DTC. DTC proposes to provide the deduction of 1.5 lakh in respect of only one self-occupied property. Standard deductions cant be claimed more than the taxable income under the DTC unlike the current system. In the case of a let-out house property, gross rent will be the amount of rent received or receivable for the financial year. Best part of the new proposal relates to non-taxing of deemed rental income for individual and Hindu Undivided Family owning more than one residential house for self use.

DTC has proposed to tax the HRA component. Currently medical treatment in specified hospitals is not taxable, nor is payment of medical insurance premium. The DTC seeks to tax all of the above. The apprehension of a very high tax burden has been put to rest as the perquisite value will not be based on market value of accommodation. Presently, this perquisite is valued at lower of a specified percentage of salary and actual rent paid. DTC has proposed to remove exemptions available in many of the allowances. DTC increased the eligible deduction limit for life insurance premium paid to Rs 3 lakhs (presently Rs 1 lakh). However, the maturity proceeds were taxed in case where the premium paid in any year is more than 5% of the sum assured (presently 20%) or the sum is received before the death/completion of insurance term. The exemption limit for retrenchment compensation is proposed to be increased from Rs. 50,000 to Rs.5,00,000. All employees will enjoy exemption upto one-third of commuted value of pension (if gratuity received) and exemption upto one-half commuted value of pension (if gratuity not received). The present exemption to commutation of pension received under pension scheme of insurers is proposed to be withdrawn, displaying unnecessary bias against the self-employed class. tax-free limit for the medical reimbursement is proposed to be raised from Rs. 15,000 to Rs. 50,000.

As per DTC under this head of income every business will constitute a separate source of income, necessitating separate computation of income for each business The limits of turnover/gross receipts for applicability of tax audit is proposed to be increased to Rs. 1 crore in case of business and Rs. 25 lakh in case of profession. Accordingly, such businesses can avail the scheme of presumptive taxation@ 8%, if their turnover is upto Rs. 1 crore, subject to fulfilment of other prescribed conditions. Place of effective management to determine the residential status of a company. In effect, if foreign companies are effectively managed from India, they would be treated as residents and their global income would become taxable. Education cess and Higher education cess are proposed to be removed. SEZ developers to be allowed profit-linked deduction for all SEZs notified by 31st March, 2012. Further, units set-up in SEZs on or before 31stMarch, 2014 to be eligible for benefit of profit-linked deduction. However, SEZs would not be eligible for exemption from MAT. Gross earnings will include all accruals and receipts derived from or connected with business assets, Business expenditure will be classified into(i) Operating expenditure (ii) Permitted financial charges (iii) Capital allowances. The weighted deduction has been enhanced to 200% for any expenditure (both revenue and capital except land and building) incurred on in house scientific research and development by a company is proposed for all industries (not restricted to manufacturing).

In case of transfer of any investment asset being land or building, the Code proposes to take the stamp duty value as the full consideration received or accruing on transfer. This is irrespective of whether the consideration shown in the agreement is higher or lower than the stamp duty value and irrespective of whether the stamp duty value exceeds the fair market value on the date of the transfer. Presently, under section 50C, the assessee is allowed to claim before the Assessing Officer that the valuation adopted by the stamp duty authorities exceeds the fair market value on the date of transfer. If the stamp duty value is disputed in appeal or reference or revision before any other authority/Court/High Court, the Assessing Officer may refer to Valuation Officer to determine the fair market value of the asset. This right of the assessee is sought to be taken away by the Code. Capital gains on listed equity shares or units of equity oriented fund held for more than one year, on which STT is paid, would continue to be exempt from tax. Capital gains on listed equity shares or units of equity oriented fund held for less than one year, on which STT is paid, would be taxable at 50% of the applicable rates i.e. the rate would be 5%, 10% and 15% for a person falling under the 10%, 20% and 30% slab brackets, respectively. In case of companies, the rates of Capital Gains would be 15%. In case of other assets held for more than one year from the end of the financial year of acquisition, benefit of indexation would be available. The base date for indexation would be 1.4.2000. Similar to the existing provisions of the ITA, conversion of private company/unlisted company into LLP is tax exempt, on satisfaction of prescribed conditions.

There is not much difference between DTC and the direct tax system of India with regards to computation of income from other sources. However there are few changes that should be taken into account. At present the dividend earned from the equity funds are tax free. Now you pay a 5% tax on dividend earned from all equity mutual funds. Do note that the same will be required to be paid by the fund house before actually distributing the dividends. In case of debt funds, the dividend received would be added to the income and taxed as per the income slab that individual falls under. In such case, individual himself pays the taxes, not the mutual funds. Under the Code, gifts received by an individual/HUF from any source except those mentioned in clause 56(3) are to be aggregated and a deduction of Rs.50000 is available over them, however these gifts had separate deduction limits under each category. So the code seems to inflate the burden over taxpayers. Any amount exceeding 20,000 taken / accepted / repaid as loan or deposit, otherwise by an account payee cheque/draft shall be added to the income.

Earlier terms Deductions under Chapter VI A will be treated as Tax incentives. 80C gets a major hit by introduction of EET methodology (Exempt - Exempt - Tax). The investment is Exempted when invested. The investment is Exempted till it is remained invested. The investment is Taxed when it is withdrawn. Also, investments are considered only of those invested through savings intermediaries approved by PFRDA (Pension Fund Regulatory and Development Authority)!! Such savings intermediaries may in turn invest in ELSS mutual funds, government securities, Public sector securities, etc. Such investments are also exempted to the maximum of Rs. 3 Lakh. All such savings will be governed directly by government by an appointed depository (an independent agency). Other than this, Tuition fees for children will be allowed as deductions. No maximum limit for this, as savings are charged once they are withdrawn. Medical treatment, higher education loan interest, donation and rent paid by selfemployed individual are deductible. New provision comes for Handicapped individuals to get deductions upto 75,000. Annual Income Tax Slab Up-to INR 200,000 (for senior citizens 250,000)Nil ; Between INR 200,000 to 500,000:10% ; Between INR 500,000 to 1,000,000:20% ; Above INR 1,000,000:30% ; Men and women are treated same now.

After keen analysis of the subject matter it is evident that the Code aims at reducing tax rates, but expanding the tax base by minimizing exemptions. It is also very hard to say whether the code is beneficial or not. The code doesnt discriminate me and women and at the same time has a different tax slab defined for the senior citizen. The code has proposed to make the system simple hence all the basic exemptions have been withdrawn. From the first instance it seems that DTC might be a little worse for poor class of people and might be favourable for the rich class. However there are many vital areas which has not been clearly understood and require clarification.