Direct Tax Code and Common Taxpayers

The Direct Tax Code Bill, 2010, (DTC) was introduced in August 2009, to be effective from 1st April 2012, replacing existing Income tax and Wealth tax laws. A draft discussion paper was put in the month of August 2009 for public comments and witnessed tremendous debate and varied suggestions from all  corners. Some of the most critiqued proposals in the Code were levy of MAT on a gross assets base; unfettered sweeping powers for tax administration to invoke anti- avoidance rules; overhaul of capital gains taxation, and reshuffle of taxation of non-profit organisations (NPOs) and administrative rigours for NPOs. Pursuant to which, incorporating suggestions which came from various quarters, the government introduced the revised DTC in the month of June 2010.Our finance minister, Shri Pranab Mukerjee, while introducing DTC, had uttered following words, “The thrust of the code is to improve efficiency and equity of our tax system by eliminating distortions in the tax structure and introducing moderate levels of taxation and expanding tax base. The attempt is to simplify the language to enable better comprehension and remove ambiguity to foster voluntary compliance. The new code is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best international practices. It will eventually pave the way for a single unified taxpayer reporting system. It will specially meet the aspirations of our young and professionally mobile population.”We would debate it later on a different forum and time, whether; the revised DTC has lived upto to the promise of efficient and simple taxation regime as promised by our FM. Dear reader, as this note is intended for people from all walks of life, I would refrain from using technical terms and phrase as far as possible. Enough of gyan lets come to the topic.Frankly, a common taxpayer is not at all concerned with the intricacy of DTC and is concerned with only two questions:First and foremost question – Will I save tax with new income tax (DTC)?; andSecond but important question – Will compliance obligations be simple and lesser in the new taxation regime? Now, let’s answer these questions by understanding some of the paramount changes proposed to be introduced, which would have great impact on individual taxpayer. 1. Tax Rates vis-à-vis DTC regime and current regime – The proposed tax slabs under the DTC regime and tax slab under current regime are  as below:

DTC Regime Current Tax regime
Income slabs Tax rates Income slabs Tax rates
0  – 200,000 Nil 0- 160,000 Nil
200,001  -500,000 10% 160,000 – 500,000 10%
500,001  – 1,000,000 20% 500,000 – 800,000 20%
1,000,000 and above 30% 800,000 and above 30%

Impact: There is minimal reduction in the tax slab for individuals when compared with current tax slab. Thus, on the gross basis, taking other things static, taxpayers having income of ` 1000,000 would save tax of ` 24,000 annually. Further, it has been the habitual thing of our tax regime to give some tax concessions in terms of tax slabs to women and senior citizens. The proposed DTC extends that favour only in case of senior citizens and men and women are proposed to be treated at par with a view to promote gender equality. This is good for tax consultant and especially for students as moving forward, they don’t have to keep in mind separate tax slabs for men and women. I would not like to comment on how the ladies would react to this. Obviously, they would not like this to be parlance for gender equality atleast. 2. Simply means that in the present tax regime, long term savings scheme such as provident fund, approved superannuation fund, and life insurance, at the time of contribution, accretion and withdrawal are all exempt from tax (exemption is at all the three stages), will be taxable at the time of withdrawal in the DTC regime. However, the original DTC proposal was partially retracted on popular public demand, absence of universal social security system and administrative hassles in taxing the withdrawals.  The revised DTC has retraced its steps back to the (EEE regime) current taxation regime for only following saving schemes:

  • Provident Fund under Provident Funds Act, 1925;
  • Life insurance policy (other than unit linked fund) ;
  • Any other provident fund set up by the Central Government and notified in this behalf; and
  • Approved Superannuation Fund.

Impact: Investment in PPF (approved and Govt both) and approved superannuation fund would continue with  system, that is, the investment, income and withdrawal from these schemes will continue to be exempted in DTC regime.  But here is the catcher, other than these investment schemes would now fall in system under DTC regime.  So in future the taxpayer should be sure of what they are investing into and what would be the taxability of the same. Further, now let’s talk about the most common and known investment plan, that is (1 Lac walla exemption limit) emption under section 80C of present taxation law. Earlier, there was no boundary barrier within that 1 Lac investment option, but come DTC regime, payment of life insurance premium, health insurance premium, tuition fees would qualify for deduction to the extent of Rs. 50,000 only irrespective of quantum of total investment. However, additional benefit is proposed for contribution to approve funds for which deduction would be to an extent of Rs 100,000. With respect to the exemption on medical reimbursement, the exemption limit has been increased from Rs 15,000 to Rs 50,000. This means that individuals would enjoy the enhanced limit to claim the actual medical expenses. Impact: The taxpayers have to plan their investment in a methodical manner in the DTC regime, rather than adhoc investment for 1 lac, as is prevalent in the current tax regime. 3. Income from House PropertyThe income from “House property” in simple terms, rental income has always been associated with some amount litigations. The revised DTC has tried to solve some of the grey areas.For example, self-occupied properties may be taxed under the current regime in certain specific situations. This is because self-occupied properties are treated as deemed to be let out property in case an individual owns more than one house property. To remove the hardships, the revised DTC proposes to tax income from house property only if the property is let out. Another point of contention was, with respect to the treatment of those properties which are let out and letting out is in the nature of trade, commerce or business. There is always been an ambiguity on whether such income should be treated as income from house property or business income. The DTC has resolved this long pending issue as it proposes to tax such income as income from house property. This will clearly reduce the complexities but will reduce the benefits to the tax payers as the tax payers will be able to claim deductions to a ceiling limit. The revised DTC proposes to retain deduction to the extent of Rs. 150,000 on interest paid on loan against self occupied house property but does not extend the benefit of deduction on the principal amount. Impact: The changes proposed to be made in the revised DTC as far as with regard to taxing income from rental only when it is let out holds good for individual tax payers. To wrap up- The tax structure proposed in new DTC regime would help the tax payer in reducing their tax liability to some extent. The taxpayers should not expect riding reforms in the procedural requirements in the tax regime. As FM Says, “Tax reforms is a process and not an event”

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