DTC Direct Tax Code

CA Santhosh.NSanthosh.iyer@gmail.comOnly for information purpose

A Bird’s Eye View

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.

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

Proposed Personal Income Tax Slabs and Rate

Basic Exemption limit

Beneficial AdverseWomen 190,000 NASenior Citizen 250,000 250,000 All Others 180,000 200,000

Increase in bas icexempti on l imit is awelcome move, givenhigh infl ati on.

Preferenti al exempti on for womenremoved.

Category Existing DTC ProvisionImplications

Income Tax Slabs

Slabs Existing DTC Provision ImplicationsUpto 500000 10% 10%500000 to 800000 20%Over 800000 30%500000 to 1000000 20%Over 1000000 30%

Increase in slabs willdirectly results in savings.Also removal of eduationcess is positive for the taxpayers

Total Tax Savings of Rs.24000 on a Rs.10 Lac Salary

Deductions

Particulars Existing Limit

Deductions (Sec 80) PF/PPF/NSC/ELSS/Life Ins

premium/Housing loan principal etc 100,000

Additional deduction Investment in Infrastructure bonds 20,000 Total 120,000

Existing provisions

Provisions in DTC

Particulars DTC Provisions Limit

Deductions

Govt PF , Recognized PF, PPF and New PensionScheme of Govt and other approved funds.Amountreceived on maturity not taxable, subject toconditions

100,000

Additional deduction

Life Insurance Premium, Medical Insurance premiumand children tuition fees 50,000

Total 150,000

Additional savings of

Rs.9000

Deductions- the implications

Superannuation FundProvision 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 helpPremium 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 deductionNo 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

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

Components of Salary

HRA( House Rent Allowance) & Leave EncashmentProvisions would continue in DTC also and hence employees would continue to avail the exemption

Medical Facilities and Medical Expense ReimbursementMedical 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 removedImplications (Adverse)-No benefit of LTC travel cost exemption

Gratuity, VRS, commutation of pensionTerminal 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 conditionsImplications: (Favorable) Continuance of exemption will mitigate hardship of tax burden on such payments

Additional benefit of Rs.10500

Income from House Property

Concept of Notional income stoppedHouse 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 occupiedImplications: (Favorable) Removes anomaly of tax levied on non-existing income

Deduction for Repairs20% 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 propertyDeduction of Rs 1.5 lakh (including pre-construction interest installment) allowedImplications: (Favorable) The move to allow deduction of interest on housing loan is a reason to cheer for the tax payer

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 continueImplications: (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 assetsHolding 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 ratesImplications: (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

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

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.

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 AprilEvery 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 SourcesIncome 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 basisLosses 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.

Santhosh.N

Head of Finance OperationsVodafone Essar South LtdHyderabad