NEW DIRECT TAXES CODE BILL 2009
Its Impact on Salaried Class and Individuals
The proposed
DTC is a single code for all direct taxes, like, Income Tax, Corporation Tax, MAT,
DDT, wealth tax, etc. Written in simple language and direct voice, the DTC is
more transparent compared to the existing direct tax laws. It seeks to
encourage simplification and aims for stable taxes, better tax compliance,
expanding the tax base, improving efficiency & equity, eliminating
confusion and improving the Tax-GDP ratio.
SALIENT FEATURES
OF THE PROPOSED DTC ARE:
- Personal
Taxation: For individuals, salaried class, etc:
1. Limit for deductions of savings for individuals and salaried class
will go up to Rs three lakh from Rs one lakh (under Sec. 80C of the existing IT
Act)
2. Income slabs have been widened for the benefit of individuals, HUF
and salaried class
3. The DTC proposes to introduce EET method of taxation of savings
compared to existing EEE system
4. However, only new contributions on or after the commencement of the
new Code will be subjected to EET. Withdrawal of accumulated balances as on
March 30, 2011 in GPF, PPF, RPF and EPF
will not be subject to tax (grandfathering
clause)
5. Surcharge and cess on education will be removed and the peak income
tax rate will be kept at 30 per cent
6. Several tax exemptions under Section 80 C of existing IT Act –
like, instalments paid on Housing Loans, contributions to ULIPs and ELSS of mutual funds, Bank notified fixed
deposits of 5-years or more, interest accrued on NSC – will be removed
7. Interest on Housing Loan will not be allowed as deduction
8. An individual’s gross salary would include all perquisites such as
rent-free accommodation, medical reimbursements, leave travel concession, etc.
And all these will be taxed according to their respective tax slabs.
9. Shifting investment by withdrawing money from one eligible saving
scheme to another will not be treated as withdrawal and will not be included
under taxable income
10. Changes are proposed to be made in calculation of income from house
property
11. Withdrawals from Capital Gains Account Scheme will be included in
the taxable income and will be taxed as per individual’s marginal tax rate
12. Agricultural income continues to attract tax exemptions
- Taxation
of Companies:
1. Peak Corporation tax will be reduced from 34 per cent to 25 per
cent while removing surcharge and cess on education
2. DDT remains unchanged at 15 per cent
3. Radical changes will be made in MAT whereby MAT will be imposed at
two per cent (0.25 per cent for banking companies) of gross fixed assets
replacing the existing system of 15 per cent MAT on book profits
4. MAT will be final tax and it will not be allowed to be carried
forward for claiming tax credit in subsequent years
5. All tax exemptions will be phased out over a specified timescale
6. All area-based exemptions will be removed for corporates
7. Foreign companies will also have to pay a branch profit of 15 per
cent
8. DTC provisions will override the provisions of tax treaties, for
example, Double Taxation Avoidance Agreement with Mauritius
- General
and others:
- Concept
of ‘Financial Year’ will be introduced replacing the existing concept of
‘previous year’ and ‘assessment year’
- Radical
changes will be made in Capital Gains Tax – eliminating distinction
between long-term and short-term capital gains
- Capital
gains will be included under taxable income and tax will have to be paid
according to the respective tax slabs
- Indexation
benefits on Capital Gains will continue with the base date being shifted
to 1.4.2000 from 1.4.1981
- STT
will be abolished
- Dividends
(after the payment of DDT) will
continue to be tax-free in the hands of investors
- General
Anti-Avoidance Rule will be introduced to combat tax avoidance
(distinction between tax evasion and tax avoidance will be removed)
- All
trusts and institutions carrying on charitable activities will be brought
under a new tax regime
- Wealth
tax is being overhauled completely
NEW (PROPOSED) TAX SLABS WEF APRIL 1,
2011
Note: There
will be no surcharge and cess on education as per DTC
ISSUES THAT REQUIRE MORE CLARIFICATIONS:
- Any
withdrawal after 1.4.2011 from PPF account on investments made up
31.03.2011 will enjoy tax benefits. But, what about interest that is
accrued on balances as on 31.3.2011 and becomes payable after 1.4.2011?
- Whether
or not sums received after 31.3.2011 in the form of a bonus or maturity
proceeds from life insurance policies (that were subscribed prior to
1.4.2011) will enjoy tax benefits even after 1.4.2011? (Provisions under
sub-section 2(f) and (g) of section 56 and sub-section 3(a) of section 57
of DTCB seem to have created some confusion as to the taxability of life
insurance policies, particularly, ULIPs, money-back and endowment
policies)
- The
perquisites, like, LTC, medical reimbursements and rent-free accommodation
are proposed to be included under taxable income of salaried class. But,
the mode of taxation on perks is not defined in the DTC.
- Under
Section 80C of the existing IT Act, two mutual fund pension schemes,
namely Franklin Templeton’s Templeton India Pension Plan and UTI
Retirement Benefit Pension Fund, enjoy tax benefits. It is not clear
whether these two schemes will enjoy tax benefits once the DTC comes into
effect.
TAX CONCESSIONS/INCENTIVES
The following tax concessions will continue to be
allowed under DTC:
A. DEDUCTIONS ALLOWED FOR SALARIED CLASS ON THEIR
GROSS SALARY:
1. Professional tax paid
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2. Transport allowance as per limits
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3. Allowances incurred for official purposes
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4. Compensation received under VRS *
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5. Gratuity received on retirement or upon death *
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6. Amount received on commutation of pension *
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* subject to depositing
these amounts in a Retirement Benefits Account (RBA) as per Government norms
(see page 7 below for details on RBA)
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B. DEDUCTIONS ALLOWED WHILE COMPUTING TOTAL
INCOME:
As per the proposed Sections 65 to 67 of DTC, the
following deductions will be allowed for individuals/salaried class and HUFs:
a) Section 66: A maximum amount of Rs
three lakh in a financial year is allowed as deduction under this section. The
sums should be deposited in any account maintained with any ‘permitted savings
intermediary’ as per Central Government norms. (see page 7 below for definition
of permitted savings intermediary)
b) Section 67: Tuition fee paid to a college/school in India
c) Section 65: It states that the
aggregate amount of deductions under section 66 and section 67 shall not exceed
Rs 3 lakh in any financial year
Limit for deductions of savings for individuals
and salaried class will go
up to Rs
three lakh (under DTC) from Rs one lakh (under Sec. 80C of the
existing IT Act)
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C. OTHER TAX INCENTIVES AS PER SECTIONS 68 TO 72
OF DTC:
Ø Section 68: An individual shall be
allowed a deduction in respect of any amount actually paid by him in the
financial year by way of interest on loan taken by him from any financial institution
for the purpose of:
(a) pursuing his/her higher education; or
(b)
higher education of his/her relatives.
Ø Section 69: Health
insurance premium of up to Rs 15,000 (Rs 20,000 for senior citizens) will be
allowed as deduction for an individual/HUF. For health insurance on the health
of his/her parents, an additional deduction of Rs 15,000 (Rs 20,000 if the
parents are senior citizens) will be allowed .
Ø Section 70: An
individual will be allowed a deduction of up to Rs 40,000 (Rs 60,000 for senior
citizens) for medical treatment of self or dependents
Ø Section 71: An
individual/HUF will be allowed a deduction of up to Rs 50,000 (Rs 1 lakh for
severe disability) for medical treatment of a disabled dependant
Ø Section 72: A person shall be allowed
a deduction of up to 125% of donations made to laboratories and colleges
engaged in scientific/statistical/social sciences research. A person shall be
allowed a deduction of up to 100% of the donations made to PM National Relief
Fund, CM Relief Fund, etc. And in other cases, 50% deduction is allowed for
donations made to certain organisations.
TAX DEDUCTIONS/INCENTIVES TO BE WITHDRAWN:
Some important deductions that will not be
allowed in future under DTC are:
o
Interest of Rs 1.50 lakh paid on Housing Loan and allowed as
deduction, under existing laws, will not be allowed under DTC
o
Housing Loan instalments of up to Rs 1.00 lakh in a financial year
and allowed as deduction under Section 80C of existing IT Act, will not be allowed
as deduction under DTC
o
Contributions made to Equity Linked Savings Schemes of Mutual Funds
o
Notified Bank Time Deposits for a term of 5-years or more
o
Accrued Interest on NSCs
o
Contributions made under Unit Linked Insurance Policies
o
Perquisites (like, rent-free accommodation, medical reimbursements,
LTC and encashment of earned leave) provided by Central Government or other
employers will be monetised and included under taxable income and tax will have
to paid accordingly
o
Under DTC, bonuses or sums received from life insurance policies
will not be allowed for deduction in case: (1). Annual premium paid is more
than five per cent of the sum assured; and (2). If the policy is surrendered
before the maturity date (as per clause (a) of sub-section 3 of section 57 of
DTC)
SOME NOT-SO-FAIR & UNSAVOURY ASPECTS OF DTC:
The most glaring unfair provision seems to be
that the peak rate of income tax will be kept at 30 per cent for individuals;
whereas the maximum rate to be charged on companies will be reduced to 25 per
cent from 34 per cent! It is not clear why such a distortion occurs in tax
rates between individuals and corporates. Does it mean that individuals have to
suffer higher tax rates as compared to companies?
Even though the tax slabs have been widened, it
may not be fair to include perks, like, LTC, medical reimbursements by
employer, etc, under taxable income. Even the EET regime may have to be tweaked
a bit so that the burden on retired people is not very high. In India
What is amazing is that the government expects
the taxpayers to shift to EET method without giving any cushion. Individuals
need some comfort period to make a changeover to the new EET regime. Let us
examine a typical case: Till now, we have been advised, time and again, to
invest a substantial portion of our savings in life insurance policies
(especially, money-back/endowment policies and ULIPs), NSCs, PPF, pension
policies, VPF, EPF, ELSS, etc, to exhaust the limit set for tax deductions
under the existing Section 80C of IT Act, 1961. In line with their investment
objectives, many individuals have invested a major portion of their savings in
instruments, like, life insurance policies (especially LIC), PPF, NSC, ULIPs,
ELSS, etc. Now, the government expects us to shift our focus overnight to a new
system whereby all withdrawals will be included in the taxable income (despite
the grandfathering clause) and embrace risky investments in the guise of ‘best
international practices.’
TDS PROVISIONS FOR LOW-INCOME EARNERS & SENIOR
CITIZENS:
Annual interest of a sum above Rs 10,000 from
bank time deposits (in other cases, interest above Rs 5,000) received by
individuals attracts TDS. To avoid such TDS, individuals submit Form 15-G (Form
15-H for senior citizens) to banks so that banks will not deduct any Tax
Deduction at Source on interest received by the depositors. Under the DTC, this
facility will be withdrawn. Instead, depositors will have to approach the Income-Tax
Department and seek its approval and submit the same to banks. This will prove
to be a nightmare for small depositors and senior citizens.
WHAT IS EET REGIME?
As of now, individuals enjoy several tax benefits
– of course, subject to certain quantitative limits – on their investments in a
multitude of savings instruments; namely, EPF, VPF, PPF, GPF, NSC, insurance
policies, ULIPs, ELSS, bank fixed deposits, post office deposits, housing loan
instalments, interest paid on housing loan, etc. The present system is called
‘EEE’ meaning investments enjoy benefits in three stages: 1). Exemption allowed
at the time initial contribution, 2). Exemption through out the accumulation
period, and 3). Exemption at the time of withdrawal.
The EET method will apply for new contributions
made after the commencement of the DTC. The DTC proposes to shift to a new
system called ‘EET’ whereby exemption will be allowed at the time of initial
investment and accumulation period only; but the withdrawals will be included
in the taxable income and taxed according to one’s tax slabs (the spin doctors
in the Government want us to believe that moving to an ‘EET’ regime is as per
the ‘best international practices!’ Wow, what a discovery? Till the other day,
the gullible Indian public have been repeatedly (in fact, ad nauseam) informed by the Government authorities that India
Simply put, under the proposed EET regime, tax
savers will be postponing their tax liability for future or till the date of
retirement. Is retirement the best time to pay our taxes by avoiding payment of
taxes during our earning years?
RETIRMENT BENEFITS ACCOUNT (RBA):
The proposals contained in DTC state that the
following sums have to be invested in a Retirement Benefits Account in order to
have tax benefits: 1. Compensation received under VRS, 2. Gratuity received on
retirement or upon death and, 3. Amount received on commutation of pension. As
per sub-section (2) of section 22 of the DTCB, deductions shall be allowed if
the amounts referred to therein are deposited in an RBA maintained with any
permitted savings intermediary as per Central Government norms.
In this connection, a permitted savings intermediary is defined as a/an:
(a) Approved provident fund – as approved by PFRDA;
(b) Approved superannuation fund – as approved by PFRDA;
(c) Life insurer – life insurance companies under the ambit of IRDA;
and
(d) New Pension System Trust – administered by PFRDA.
The ‘catch’ here is that withdrawals from this
RBA will be finally subjected to tax at the time of withdrawal. It is really a
startling situation! The proposal of depositing
withdrawals into an RBA may not go down very well with retiring people and
senior citizens as they may not be able to meet their post-retirement
obligations.
NEED TO HAVE A LOOK AT EVERYTHING WITH FRESH PAIR
OF EYES:
We need to look at the new Code with fresh eyes
without any old baggage. Theoretically, the concept of EET, removal of all
kinds of tax incentives/concessions, and clubbing all sums under taxable income,
are sound and beneficial in the long-term. However, India
MY TAKE ON THE DTC RELATING TO INDIVIDUALS AND
SALARIED CLASS:
- Basically,
the new DTC offers a ‘bait’ to individuals and salaried class so that they
can enjoy the gains of low taxes and higher deductions while accepting
pains from the EET regime; removal of various of tax exemptions and
incentives; and inclusion of all types of sums under taxable income
- Perhaps,
the reduced tax slabs are prima facie deceptive
- I am
not too sure whether taxpayers, especially those in the Government sector
& low/middle income groups, will accept the bait offered by Central
Government
- It
seems to be a kind of a mixed bag for these class of taxpayers
- It
affects different people in different income slabs with diverse types of
investment choices in a different manner – some may be benefited while
other may suffer due to their differing mix of savings and investments
- Widening
income slabs will help the taxpayers with reduction in income tax
- The
proposal to increase the limit for deductions from Rs one lakh to Rs three
lakh is a welcome step
- The
new DTC will have no impact on NPS-New Pension System (of the PFRDA) as it
is already under the EET system
- Retirees
and Senior citizens will suffer heavily and withdrawal of several
concessions and incentives will cause a lot of heartburn to them
- Withdrawal
of deductions of LTC, medical reimbursement and rent-free accommodation
will be particularly harsh on salaried class with low/middle incomes
(However, one saving grace could be that Central Government employees will
be treated on a par with private sector employees. As of now, perks
enjoyed by Central Government employees are out of the tax purview)
- The
new tax regime will be very beneficial to taxpayers with annual incomes of
Rs 10 lakh and above
- One
silver lining is that only new contributions on or after the commencement
of the new Code will be subjected to EET. Withdrawal of accumulated balances
as on March 30, 2011 in GPF, PPF, RPF and EPF will not be subject to tax
(grandfathering clause).
- Another
small concession provided to individuals/salaried class is that the
rollover of any amount received or withdrawn from one account of the
permitted savings to any other account with the same or any other
permitted savings scheme will not be treated as withdrawal and thereby
will not suffer income tax
HOW TO TWEAK OUR INVESTMENTS FOR A SMOOTH
TRANSITION TO DTC:
As the old cliché goes, we need to live with
taxes till our death and there is no escape from either of them. As
individuals, there is not much we can do about the tax policies. But,
collectively, we can impress upon the Government to make suitable changes in
the new tax proposals without jeopardising the overall objectives of the DTC.
In the light of the new code, individuals and
salaried class shall desist from making too many investments in schemes just
for the sake of tax incentives – which may prove counterproductive to them in
the long-term. A small dose of moderation is imperative and it is important to
keep post-tax returns and one’s cash flows in mind while making new
investments. Every investment has to be evaluated thoroughly (before investing)
so that it can be beneficial even if tax incentives do not exist or are
withdrawn at a later date. A little bit of portfolio rebalancing toward the DTC
may help the investors in the run-up to the DTC to be implemented from 1.4.2011.
Asset allocation and periodical rebalancing will attain more importance from
now onwards.
The time has come for us to move away from
complex and non-investor friendly ULIPs and money-back life insurance policies.
We have to shift to pure term insurance policies. At the same time, we shall
ensure that the annual premium paid by us on any life insurance policy is less
than 5% of the sum assured (in the light of sub-section 3 (a) of section 57 of
the proposed DTCB). It is also necessary to remember that if we surrender our policy
before the normal expiry date, we have to include the proceeds in our taxable
income and pay tax according to our marginal tax rate.
Under the new DTC regime, small savings
instruments will be losing some of their sheen; but, common investors with
little knowledge of complex/structured financial products have no choice but to
depend on these savings instruments. However, it would be better for
sophisticated investors, with sound knowledge of financial markets and
products, to explore the possibility of higher optimal returns through
investments that entail no tax benefits. It is, indeed, a big opportunity for several
institutions – like, mutual funds, insurance companies and others to promote
their investment avenues – and attract individuals to their products. But, it
is going to be a big challenge for them to wean away investors from traditional
savings schemes and bank deposits.
Agriculture will continue to enjoy its primacy in
India
SUMMARY:
Writing an elaborate analysis is the easy part.
The most strenuous thing in writing a detailed analysis is summing up the
contents. As the impact of DTC is all-encompassing and affects different
sections of society in different ways, it’s difficult to condense things in a
lucid and understandable way. However, let me make an attempt:
The euphoria generated on the first few days
after the release of DTC has died down and now the true intentions behind the
new Code are being assimilated slowly by all the stakeholders in the country.
Perhaps, it is not a good idea to go for drastic
changes in our savings and investment process even though the government seems
to be keen to push its savers towards a consumption-driven society. It is quite
likely that the Government is ready to sacrifice a slice of the high savings
rate India US
Overall, I am of the opinion that the new DTC (if
implemented in the current form without any future amendments) is not
favourable to the salaried class and individuals with low/middle incomes. It's
particularly harsh on senior citizens. It's very detrimental to taxpayers who
have heavily invested in life insurance policies, PPF, EPF, VPF, NSCs, two or
more houses and other savings instruments. It's very favourable to those people
with high incomes. At this point of time, it’s difficult to gauge whether the
positives outweigh the negatives under DTC under all circumstances.
DTC is also a big negative for the so-called
long-term investors in equity shares and equity mutual funds. The amendments to
capital gains tax seem to be encouraging PURE GAMBLING and faster churning
rather than steady, long-term investments. What a tectonic shift? (It's like asking
a mendicant to move away from his frugal lifestyle to a life of a dream boy surrounded
by bikini-clad girls a la Richard
Branson or Vijay Mallya!).
May be, we need to think afresh and view our
future investments from a different angle. The time has come for us to evaluate
each investment depending on its own merit rather than blindly investing based
on just tax considerations. My feeling is that the new DTC regime will be good
for youngsters and freshers who are just converting their savings into investments.
These newbies can start with a clean slate and appreciate the nuances of DTC in
a better manner.
The three most contentious and infuriating issues
for individuals and salaried class will be: 1). Moving to an EET regime, 2).
Reintroduction of long-term capital gains tax while abolishing STT, and 3).
Doing away with tax concessions accorded to housing loan instalments and
interest paid on Housing Loan. The Government may have to martial all its
energies in order to convince the general public about these aspects. Can the
Government muster its political wisdom and implement the DTC in its true
fashion? With so many socio-economic issues involved; only time will provide
the right answers.
The debate has just started and I appeal to all
the stakeholders to make their own contribution to the debate in right earnest.
MY FAVOURITE QUOTES |
"The hardest thing
in the world to understand is income tax." Albert Einstein
|
"The avoidance of
taxes is the only pursuit that still carries any reward." John
Maynard Keynes
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"Death and taxes
and childbirth! There's never any convenient time for any of them." Margaret Mitchell
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Abbreviations
Used:
DDT
|
Dividend
Distribution Tax
|
LTC
|
Leave
Travel Concession
|
DTC
|
Direct
Taxes Code
|
NPS
|
New
Pension System of the PFRDA
|
DTCB
|
Direct
Taxes Code Bill 2009
|
MAT
|
Minimum
Alternative Tax
|
DTCDP
|
Direct
Taxes Code – Discussion Paper
|
NSC
|
National
Savings Certificates VIII issue
|
EEE
|
Exempt-exempt-exempt
|
PFRDA
|
Pension
Fund Regulatory and Development Authority
|
EET
|
Exempt-exempt-taxation
|
PPF
|
Public
Provident Fund
|
ELSS
|
Equity
Linked Savings Scheme
|
RBA
|
Retirement
Benefits Account
|
EPF
|
Employees
Provident Fund
|
RPF
|
Recognised
Provident Fund
|
GPF
|
Government
Provident Fund
|
STT
|
Securities
Transaction Tax
|
HUF
|
Hindu
Undivided Family
|
VPF
|
Voluntary
Provident Fund
|
IRDA
|
Insurance
Regulatory and Development Authority
|
VRS
|
Voluntary
Retirement Scheme
|
IT
Act
|
Income
Tax Act, 1961
|
References:
Ministry of Finance, Direct Taxes Code, etc.
Author’s Disclaimer: The author’s views are personal. The
above article is written for information purpose only. Every care has been
taken to provide authentic information as far as possible; however, the author
is not responsible for any inadvertent discrepancies that may have crept in.
Readers should consult their own certified tax consultants or experts to
correctly interpret the provisions of tax laws or other matters.
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