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DIRECT TAX REFORMS IN INDIA. AN OVERVIEW. Contents of Presentation -. Taxation system in India Background of Income Tax Act, 1961 Proposed Direct Tax Code 2010 Overview with Special reference to Personal Taxation. Taxation System in India.
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DIRECT TAX REFORMSIN INDIA AN OVERVIEW
Contents of Presentation - • Taxation system in India • Background of Income Tax Act, 1961 • Proposed Direct Tax Code 2010 • Overview with Special reference to Personal Taxation
Historically, income tax in India has always existed as elsewhere. The old Income Tax Act of 1922 was replaced by the present Income Tax Act, 1961. It was introduced after considering expert opinions of N.A.Palkhivala, P. Satyanarayan Rao , G.N.Joshi & many more.
Taxation System in India • The present Income Tax Act, 1961 levies tax on income earned by an assessee in India from different sources during financial year. • However, continuous evolution to keep pace with changes in business, to bring to the book the tax offenders and at the same time provide relief to innocent taxpayers required changes in tax laws.
Taxation System in India • This necessitated amendments to Finance legislation during the year as well as at the year end. • This resulted in complexities in operation as well as implementation of various provisions. • Diverse interpretations also added fuel to fire.
Taxation Systems in India • Various committees including Tax Reform Committee (Dr. Raja Chellia) in 1992 and Dr. Kelkar Committee in 2001 impressed upon need to reform and streamlining of Taxation Laws in India. • The objective was to simplify and rationalize the Income Tax Provisions as they stood. • The concept paper of Direct Tax Code was introduced.
Taxation System of India • The original DTC had undergone various changes with latest amendment to Direct Tax Code being proposed in August 2010. • The reforms to Direct Tax are being viewed with reference to DTC, 2010.
Direct Tax Code, 2010 • The present Direct Tax Code is being made effective April 01, 2012. • Hence, the provisions shall be applicable for all the transactions carried during the Financial Year 2011-12 [April 01, 2011 to March 331,2012].
Direct Tax Code, 2010 • Proposed DTC is bulkier than the existing one. • It has 20 Chapters divided into nine parts. • It has 319 sections and 22 schedules as against 298 sections and 14 schedules in the existing act. • Proposed DTC will replace existing Wealth Tax Act, 1957.
Direct Tax Code, 2010 • It deals with – • Income Tax • Dividend Distribution Tax • Tax on Distributed Income • Branch Profit Tax • Wealth Tax • Prevention of Abuse of the Code • Tax Management • General Provisions; AND • Interpretation of the Code.
Direct Tax Code, 2010 • The rates of tax have been included in the act itself. Hence, these are expected to be of longer duration rather than frequent changes as of now. • Same Tax slabs will apply to both men and women. • The deduction of Rs. 1 Lakh under section 80C for investments in specified savings schemes has been raised to Rs. 1.5 Lakhs.
Direct Tax Code, 2010 Personal Tax Slabs
Direct Tax Code, 2010 • The concepts of “previous year” and “assessment year” are proposed to be done away with. • For companies, individuals etc the maximum rate of tax is proposed at 30%. • Additionally a domestic company would be required to pay a dividend distribution tax (DDT) of 15% on dividends declared, distributed or paid. • Minimum Alternate tax (MAT) of 20% would be applicable on a company in case the tax based on the book profits is higher than the tax based on the profits as per the normal tax computation. • A foreign company is required to pay an additional branch profits tax of 15% in respect of the branch profits. • Levy of surcharge and education cess is proposed to be done away with.
Residence - Company • In the case of a company, it is proposed that the company shall be resident in India if it is an Indian company or if the place of effective management (POEM) is in India. • POEM has been defined to mean the place where the board of directors or executive directors make their decisions or the place where such executive directors or officers of the company perform their functions and the board of directors routinely approves the commercial and strategic decisions taken by such executive directors or officers.
Residence - Individual • In all cases, other than an individual, the persons would be a resident in India, if the place of control and management of the affairs, at any time of the year is situated wholly, or partly, in India.
Personal Taxes • Changes in income slabs which will result in incremental savings in tax. • The concept of Not ordinarily resident is removed. The condition of 729 days has been retained to determine the taxability of overseas income of an individual • A person not entitled to HRA is allowed a deduction of rent paid up to 10% of GTI or INR 2,000 per month & other conditions as may be prescribed • Exemption for medical expenses has been increased to INR 50,000. • Contribution to approved funds is deductible to the extent of INR 1 lakh. • Deduction for insurance premium (not exceed five percent. of the capital sum assured), Health Insurance covered & Tuition fees to the extent of INR 50,000. • Wealth tax to be levied at 1% for wealth in excess of INR 10 million
Capital Gains • Income from all investment assets to be computed under the head „Capital gains. Investment asset to include any capital asset which is not a business capital asset, any security held by a Foreign Institutional Investor and any undertaking or division of a business. • Distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset to be eliminated. • No tax on gains on transfer of shares of a company or unit of equity oriented fund that are held for more than one year and such transfer is chargeable to Securities Transaction Tax (“STT”). STT would be chargeable on transfer of equity shares of a company or a unit of an equity oriented fund.
Capital Gains • Fifty percent of the capital gains are allowed as deduction on transfer of shares of a company or unit of equity oriented fund that are held for a period of one year or less and such transfer is chargeable to STT. • The base date for determining the cost of acquisition to be shifted from 1 April 1981 to 1 April 2000. Consequently, all unrealized capital gains on assets between 1 April 1981 and 31 March 2000 not to be liable to tax. • Cost of acquisition to be Nil, if cannot be determined or ascertained for any reason.
Anti- abuse provisions –General Anti Avoidance Rules • The characteristics of the originally proposed rules have been retained. • Additionally it is proposed that an arrangement would be presumed for obtaining a tax benefit would include reduction in tax base including increase in losses. The provisions would be applicable as per the guidelines to be framed by the Central Government. • Further the definition of lacking commercial substance has been amended to clarify that obtaining tax benefit cannot be the only criteria for applicability of GAAR.
Income from house property • Income from house property on the basis of gross rent i.e. the amount of rent received or receivable contractually for the financial year • Deduction on account of interest on housing loan in case of a self occupied property (subject to an upper limit of `150,000) as well as pre- construction/ acquisition period interest in five equal installments • no relief has been provided for the principal amount of repayment of loan as is prevailing in Section 80C of the present Income-tax Act • standard deduction on account of repairs and maintenance has been reduced from the existing 30% of (gross rent less municipal taxes) to 20% of gross rent
Wealth Tax • All assessees are covered other than a nonprofit organization. • At present only few assets are covered. However, the proposed code proposes to add tax also on following specified assets – • Archaeological collections, Drawings, sculptures or any other work of Art. • Watch having value in excess of Rs 50000/-. • Interest in foreign trust or any other body located outside India (Whether incorporated or not) other than a foreign company. • Equity or preference shares held by a resident in a CFC. • Cash in hand in excess of ` 2,00,000/- in case of an individual. • Bank deposits outside India, in case of individuals and HUFs, and in the case of other persons, any such deposit not recorded in the books of account.
Criticism – • Many experts are seeking an answer to the question, ‘Do we need the new code in the present form?’ • The new DTC may not reduce litigation but might as well provide new controversies and more room for litigations and disputes. • A company may be treated as ‘resident’ in India even if its effective management is partly situated in India. This being subjective, may lead to controversies. • In cases of prosecution, the minimum fine has been prescribed at Rs. 50,000/- as against ‘NIL’ in the present act.
Criticism contd. . . • Commissioner (Appeals) has been restricted to consider matters considered by AO as against the wide power in the existing act. • General Anti Avoidance Rules have been prescribed in such a manner to cast duty on assessee to prove that his affairs were not entered into for avoidance of tax. • Other administrative provisions also are under criticism.
Sum up – • DTC has proposed simplifications which are not so simple. • The changes in the DTC Draft within 1 year leaves one wondering as to the fate of future contents or changes till DTC replaces present Income Tax Act, 1961. • Personal Taxation has brought relief to individuals. • Rules as to withholding tax have been more or less retained same.
