DTC Direct Tax Code

1. DTC Direct Tax Code A Bird’s Eye View CA Santhosh.N Santhosh.iyer@gmail.com Only for information purpose

2. DTC- What is it? • DTC or the Direct Tax Code has been created to replace the archaic income and wealth tax laws in the country, a key reform initiative that is aimed at widening the tax net and increasing federal revenues. • What is the Direct Tax Code all about? • India wants to modernize its direct tax laws, mainly its income tax act which is now nearly 50 years old. The government, wants a modern tax code in step with the needs of an economy which is now the third largest in Asia. • The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government's coffers. • Why is it important for Indian firms and foreign investors? • One of the key aims of the new tax code is to provide a system which takes into account increased cross border mergers and acquisitions by Indian Corporates over the last few years. • The new code is also expected to streamline tax rates and administration for foreign institutional investors, for whom India is a top destination. • Will it provide greater stability to investors? • The code aims to provide greater tax clarity and stability to investors who want to invest in Indian projects and companies. he officials have said the government would not like to tinker with tax rates every year to provide a greater degree of tax certainty to Corporates, investors and individuals.

3. DTC- What is it? • What will be the impact on Indian and foreign Corporates? • On the face of it, the corporate tax rate has been reduced from a little over 33% to 30%. But tax experts say whether a company pays more tax or less will also depend on a key provision called the minimum alternate tax (MAT). • MAT is applicable to those companies who do not show book profits liable to tax, as they claim a plethora of exemptions on account of being in capital intensive industries. The MAT rate has now been increased from 18% to 20% in the new code. • Foreign Corporates today pay a higher rate of tax. However, the new rate of taxation for foreign Corporates is not yet known. • Will it be revenue positive for the federal government? • The government has marginally lowered the tax burden for individuals and has effectively left Corporates with largely similar tax rates as before, hoping that these changes will make the new code revenue positive. • Though the exact impact is not yet known, finance ministry officials have said the new code will help shore up the tax GDP ratio significantly from around the current 11 percent level. In the following slides an attempt is made to provide a bird’s eye view of the key highlights of the DTC which would be of an individual tax payer’s interest Those who are interested in receiving the full text of the Direct Tax Code ( almost 500 pages) may please send me an email at santhosh.iyer@gmail.com

4. Proposed Personal Income Tax Slabs and Rate Basic Exemption limit Total Tax Savings of Rs.24000 on a Rs.10 Lac Salary Income Tax Slabs

5. Deductions Existing provisions Additional savings of Rs.9000 Provisions in DTC

6. Deductions- the implications Superannuation Fund Provision of DTC Bill: Employer’s contribution to approved superannuation funds exempt; Employee’s contribution eligible for overall investment deduction limit of Rs 100,000; Maturity payments on retirement/ achieving certain age/incapacitation not taxable Existing tax provision: Employer’s contribution up to Rs 100,000 per annum is exempt; Withdrawal is exempt based on prescribed guidelines Implications: (Beneficial) Continuance of EEE( Exempt Exempt Exempt-contribution, accumulation and withdrawals ) would mean no tax liability on end-payments; Removal of present anomaly of part double taxation of employer’s contribution will help Premium paid for self/spouse/children/dependent parents eligible for overall additional deduction limit of Rs 50,000, against the existing provision of deduction of Rs 15,000, and additional deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) for parents Implications: (Mixed impact) Overall additional deduction limit although increased, is merged with life insurance and tuition fees; Parents need to be dependent, if premium is to qualify as a deduction No deductions for avenues such as mutual fund investments (ELSS), housing loan repayment (principal), etc, wherein at present such payments were eligible within the overall 100000 limit Implications: (Adverse) These avenues will no longer be eligible for deduction

7. Deductions- the implications Life Insurance Policies Provision of DTC Bill: Premium eligible for overall additional deduction limit of Rs 50,000 (with mediclaim & tuition fees); Premium paid on policies with premium > 5% of sum assured not deductible; Maturity proceeds exempt, if the premium paid in any year < 5% of sum assured & received on completion of original insurance period. Proceeds received on death are completely exempt; Equity linked life insurance schemes subject to 5% tax on distribution Existing tax provision: Premium deductible up to Rs 100,000; Sum received on life insurance policy (including bonus) exempt if premium in any year is < 20% of sum assured Implications: (Adverse) Overall additional deduction limit not only lowered to Rs 50,000, but is also merged with mediclaim insurance and tuition fees; Amounts received during the term of the insurance contract under cash back insurance policies would become taxable; Threshold of 5% of sum assured seems to be too low — may affect even genuine policies; No grandfathering provisions for presently issued policies; 5% distribution tax on equity linked insurance schemes would lower the effective yield of such instruments

8. Components of Salary • HRA( House Rent Allowance) & Leave Encashment • Provisions would continue in DTC also and hence employees would continue to avail the exemption • Medical Facilities and Medical Expense Reimbursement • Medical facilities continue to be exempt. • Reimbursement of medical bills exemption limits increased to Rs.50000/- from the existing Rs.15000/- • Implications (Favorable) -Continuation of exclusion of medical facilities out of perquisite net is a very welcome move; Increase of medical expenses reimbursement limit to Rs 50,000 is also commensurate to the increased medical costs • LTC ( Leave Travel Concession) • LTC exemption has been removed • Implications (Adverse)-No benefit of LTC travel cost exemption • Gratuity, VRS, commutation of pension • Terminal benefit such as gratuity, VRS, commuted pension are exempt, subject to conditions, against the current exemption limits of gratuity up to Rs 10 lakh, VRS up to Rs 5 lakh etc) in specified cases subject to conditions • Implications: (Favorable) Continuance of exemption will mitigate hardship of tax burden on such payments Additional benefit of Rs.10500

9. Income from House Property • Concept of Notional income stopped • House property income taxable only where rent is actually received/receivable, as against the current provision of taxing the house property(other than self occupied) based on deemed rent, even if the property is not actually occupied • Implications: (Favorable) Removes anomaly of tax levied on non-existing income • Deduction for Repairs • 20% on gross rent allowable towards repairs, etc, against the current 30% • Implications: (Adverse) Given increasing costs of maintenance of properties • Interest on housing loan for self-occupied property • Deduction of Rs 1.5 lakh (including pre-construction interest installment) allowed • Implications: (Favorable) The move to allow deduction of interest on housing loan is a reason to cheer for the tax payer

10. Capital Gains • Equity shares/equity oriented mutual fund units (STT paid) • If held > 12 months, 100% gains are allowed as deduction, ie entire gains not taxed; If held < 12 months, deduction of 50% of gains will be allowed, as against the current provision of no tax for securities held >12 months, and 15% tax on securities held <12 months. • Securities Transaction Tax (STT) • Same provisions to continue • Implications: (Favorable) Continuance of NIL tax on gains from sale of shares/equity oriented units held for more than a year is a welcome move; 50% deduction mechanism would result in lower tax impact (5%, 10% or 15%) • All other investment assets • Holding period for indexation/ exemption benefit is one year from end of financial year post acquisition; Indexation and rollover benefit (subject to conditions) available with reference to purchase price, or optionally, fair value as on 1 April 2000, if asset acquired before that date, as against the current provision of Holding period for classification as long term/indexation/exemption benefits is 36 months; If long term, gains taxable @ 20%, subject to indexation benefit (inflation indices starting 1981); If short term, gains taxable at applicable slab rates • Implications: (Favorable) Holding period for indexation/exemption benefit is reduced to 12-24 months maximum; Unrealized gains up to 1 April 2000 would go untaxed completely

11. DTC-Some Philosophies from an Aam Admi Perspective! The door on the tax breaks front has been shut for the principal amount paid on home loans, bank deposits, equity linked savings schemes of mutual funds, national savings certificate, infra bonds and unit linked pension plans. The government has, however, opened a new window, empowering itself to notify schemes for tax breaks and exempting such schemes from tax at all three stages — contribution, accumulation and withdrawals. Only long term savings schemes such as the public provident fund, new pension scheme, recognized provident funds will qualify for the tax deduction of Rs 1 lakh under what is now called Section 80 C of the Income Tax Act and be exempt from tax at all stages . The move to allow an Exempt Exempt Exempt (EEE) method of tax treatment will help individuals build a retirement nest as the country does not have a social security net, which is existing in some of the Western countries

12. DTC-Residential Status The requirement of being present in India for 730 days in the preceding seven years, essential for qualifying as an ordinary resident, is being dropped. However, with regard to taxation on worldwide income for a person resident in India, the condition will still be valid. So, while the status of not ordinarily resident (NOR) as defined in the Act will no longer exist, the concept will remain as first-time expatriates working in India will become taxable on their worldwide income only after they have been in India for 730 days or more in the preceding seven years.

13. DTC- General Provisions Summary The DTC 2010 would come into force on 1 April 2012, if enacted The concept of previous year replaced with a new concept of financial year which inter alia means a period of 12 months commencing from the 1st day of April Every person is liable to pay income-tax in respect of his total income for the financial year at the rates/conditions specified in the Schedules to the DTC after allowing credit for pre-paid taxes (including foreign tax credits) Income has been proposed to be classified into two broad groups: Income from Ordinary Sources and Income from Special Sources Income from Ordinary Sources refers to: - Income from employment - Income from house property - Income from business - Capital gains - Income from residuary sources. Income from Special Sources to include specified income of non-residents, winning from lotteries, horse races, etc. However, if such income is attributable to the PE of the non-resident it would not be considered as Special Source income. Accordingly, such income would be liable to tax on net income basis Losses arising from Ordinary Sources to be eligible for set off or carry forward and set-off against income only from ordinary sources without any time limit. Similar treatment would apply for set off and carry forward of losses from Special Sources. Loss arising from speculative business, losses under the head capital gains, and losses from the activity of owning and maintaining horse race to be set off only against such income in the same or succeeding financial years In case of delayed filing of return of income for any particular year, only losses pertaining to that year would now not be allowed to be carried forward for set off in future years.

14. Santhosh.N Head of Finance Operations Vodafone Essar South Ltd Hyderabad