(Neha Pathakji, Lecturer in Taxation Laws at NALSAR, writes on the proposed Direct Tax Code, and its impact on the society.)
The nation is witnessing winds of change these days, especially in the age old Tax system. Just when a new indirect tax regime is round the corner in the form of GST(Goods and service tax), likely to be implemented in April 2010; the release of brand new Direct Tax Code has leased a fresh life in the Direct Tax system. The government seems to be determined to overhaul the existing tax fabric, both direct and indirect and make it simple, transparent and broad based. This is a strong message from the government of its commitment to realign the domestic taxing architect with internationally accepted taxing principles and practises.
The new Direct Tax Code, if passed in the Parliament, will bid adieu to more than four decade old Income Tax Act, 1961. It will become a law only in 2011, so that as a nation we still have sufficient time to deliberate upon the new Code. The Income Tax Act, 1961; often considered to be one of the most complicated piece of legislature, has given rise to lots of confusion and complexities. Thankfully the new Code has aimed to remove the ambiguity by giving a go bye to redundant provisions, organising and grouping the provisions, ensures easy language for better understanding and transparency in the administration; thereby trying to promote better compliance and understanding of the statute. It has proposed to slash down rates, both for individuals as well as India Inc., replaced the concepts of ‘assessment year’ and ‘previous year’ with a single term ‘financial year’, scrapped the exemptions and distinction between long term capital gains and short term capital gains, raise deductions levels from current 1 lac to 3 lac. For individual tax payers, the Code proposes Rs.1.6 lac tax free income, income up to Rs.10 lac taxable at the rate of 10%, up to Rs.25 lac at 20% and at 30% above Rs. 25 lac whereas corporate taxes are down from 30% to 25%.
Taking a bird’s eye view, the new Code seems to promise the aspiring individuals and middle class and at the same time woo the corporate world. While the raising of deductions from current Rs.1 lac to 3 lac will stimulate savings, interests on savings have been made taxable. However, the Code will prove to be a mix bag for salaried class. In a major departure from current position, the draft Direct Tax Code envisages EET regime i.e. exempt-exempt-tax from exempt-exempt-exempt. In simple words it means that the Code proposes to introduce exemption on investment, exemption on returns but tax on withdrawal. This has raised concerns of the salaried class and small investors. EET will have a favourable impact on the New Pension Scheme; it makes withdrawals from the PPF, GPF, RPF and EPF taxable, hitting the most where it hurts. The idea mooted is to save on tax when in employment and pay tax at retirement. But it is the retirement time when any taxpayer would least want to part with his lifelong earnings. The ones who have already opted for annuity plans and pension funds from insurance companies are sceptic. This may require amends in the investment portfolio of the small investors. Also in a major jerk to the borrowers of housing loans, the exemptions on housing loans find no mention. It is suggested that there should be some provision for standard deductions for the salaried class.
Agricultural income still remains out of the purview of tax. The business losses will be allowed to be carried forward indefinitely which is again good news for the business sector. The capital gains tax and wealth tax are also imbibed in the same statute, thereby integrating different direct taxes like income tax, corporate tax, fringe benefit tax, wealth tax and capital gains tax under one umbrella.
The new Code promises the taxpayers happy days ahead once the proposal becomes law. However, the government needs to invite suggestions and take opinions and feedback from the financial experts, chartered accountants, jurists, the academia, experts and all the stakeholders before giving a final shape to the new tax system.
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I’ve been involved in taxations for longer then I care to admit, both on the individual side (all my working lifetime!!) and from a legal stand since satisfying the bar and following up on tax law. I’ve provided a lot of advice and righted a lot of wrongs, and I must say that what you’ve put up makes complete sense. Please persist in the good work – the more individuals know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.
From an investor’s perspective, the proposals in the new direct tax code are some of the worst that I have seen in my life. The E-E-T provisions on long term savings will result in killing the savings habit amongst Indians. The imposition of capital gains tax on long term capital gains and the inclusion of capital gains in the gross annual income will make any Indian think twice before making any long term investments.
Some facts which seem to have eluded the finance ministry are:
A) A capital gains tax of even 15% every year results in total portfolio value declining by almost 50% in 25 years (assuming a 18% appreciation per annum on which a 15% tax is paid every year). Thus a 15% tax on capital gains is effectively a 50% tax, seen from the perspective of a long term investor. Capital gains has ideally to be exempt from tax, or taxed at a very nominal rate of around 5%. As far as capital gains tax on equity investments is concerned, the current STT system should have been retained, and capital gains tax maintained at zero per cent.
B) The new direct tax code does not extend section 80C benefits to investments in equity linked instruments like mutual funds, ELSS, ULIPS etc. Thus, to avail the tax benefit, investments must perforce be made in sub-standard instruments that yield approx 8% per annum instead of gaining upwards of 15% per annum from equity linked investments.
A simple calculation will show that even one lakh rupees invested every year in equity (earning 15% per annum) will be worth more than three lakh rupees invested every year in debt instruments like NSC, PPF (earning 8% pa), after 25 years.
The new direct tax code, unless suitably modified, will only make all Indians poorer in the long run.
Nice to see your post Ma’am.
I also notice that there is a huge issue as regards tax evasion in the Act. the earlier law was that if taxign statutes could be interpreted in such a manner as to save tax on the individual, then such evasion would be valid and not ilegal. This has been done away with with the introduction of sections 112/113 of the code with a reversal of the burden of proof.
Another issue that I noticed was that foreign entities have no locus standi to challenge a tax notice under the bill. This obviously has been made to do away with teh evils of the vodafone dispute and is a very horrid provision. One cannot invoke tax without giving a chance to be heard.