Comparison income Tax ACT 1961 and DTC...

S. No.

Subject

IT Act, 1961

DTC-II

Impact

(1)

(2)

(3)

(4)

(5)

(i)

Taxation of companies

(i) Under this Act, domestic companies are taxable @ 33.90% where income exceeds ` 1 crore. No surcharge @ 10% is leviable upto income of ` 1 crore

(ii) Foreign companies are taxable @ 42.33% where income exceeds ` 1 crore

Under DTC-II, the proposal is to tax all companies including the foreign companies @ 30% - No surcharge – no education cess

uMarginal relief for domestic companies

uWelcome proposition for foreign companies- relief of about 13% on tax rates

uHowever, profits of Indian branches of foreign companies will be subject to additional ‘Branch Profits Tax’ leviable @ 15%

(ii)

Minimum Alternate tax in the case of companies

MAT rate is @ 19.93% (inclusive of surcharge and education cess) where income exceeds ` 1 crore. Tax credit for MAT paid is available for 10 years

MAT is proposed to be taxed @ 20% without any surcharge and education cess.

Credit for MAT is proposed for 15 years

MAT rate of tax increases slightly.

Credit for MAT gets extended from 10 years to 15 years

The proposal to impose MAT on total value of gross assets @ 2% in DTC-I has been given up

(iii)

Wealth tax

1957 Wealth tax Act

No wealth tax on companies

Wealth tax is proposed on wealth exceeding ` 1 crore

Tax generally on non-productive assets. However value of equity in preference shares held by a resident in controlled foreign company will be liable to tax.

Companies hitherto non-taxable will be taxable.

Favourable aspect is that limit of ` 30 lakh gets extended to ` 100 lakh.

(iv)

Taxation of salaries - In regard to income from salaries the pattern of taxation remains the same as in the existing enactment. Changes however have been made in certain respects. These briefly are as under

(a)

House rent allowance

Exemption is available subject to satisfaction of prescribed conditions

Exemption is continued

Distinction between employees living in own houses and rented houses has been removed.

(b)

Leave encashment

Exemption is available upto ` 3 lakh in specified cases and fully exempt in case of Govt. employees

Exemption of leave encashment on retirement up to the limit to be specified allowed

Employees would continue to avail of exemption subject to limit prescribed.

(c)

Medical reimbursement

Medical treatment in specified hospitals not taxable, nor is payment of medical insurance premium. More so, reimbursement of medical bills is exempt up to `15,000.

Medical facilities not taxable (as present) and medical expense reimbursement up to` 50,000 exempt

There is continuation of exclusion of medical facilities out of perquisite net.

Increase of medical expenses reimbursement limit to ` 50,000 is commensurate to the increased medical costs.

(d)

Leave Travel Concession (LTC)

LTC is exempt in respect of travel expenses for self/family subject to certain conditions.

LTC exemption removed

LTC benefit (travel expenses) shall be taxable.

A report published in some newspapers shows that Government is reconsidering the proposal for exemption of LTC in a round about manner by including it in the total income of an employee and then giving deduction on prescribed basis. This would lead to complication in an already complicated legislation. This also shows the fickle mindedness of the policy makers! A proposal is to be changed only after 3 days of its announcement.

(e)

Retirement Benefits of employees

Exemption is available (gratuity up to ` 10 lakh, VRS up to ` 5 lakh etc. ) in specified cases subject to conditions

Terminal benefit such as gratuity, VRS, commuted pension are exempt, subject to conditions

Continuance of exemption will ease tax burden on such payments.

(v)

Taxation of House Property incomes

Here too, the pattern would continue to be the same i.e, taxation on A.L.V. basis. However some changes proposed are mentioned hereinafter

(a)

Newly introduced concept of taxation of house properties on notional ALV basis by DTC-I

House property (other than self-occupied) income is taxed on deemed rent basis, even if not actually let out.

House property income taxable only where rent is actually received/receivable

Vis-a-vis DTC-I, the hardship of taxation on notional basis gets removed and to this extent, the new proposal in DTC-II is welcome.

(b)

Deduction of expenses for repair and renewals in regard to property income

Deduction of 30% of gross rent is allowed

20% on gross rent allowable towards repairs, etc.

In view of the increased cost of construction the proposed reduction from 30% to 20% isprima facieunwarranted and of an arbitrary andad hoc nature.

(c)

Interest deduction for housing loan for self-occupied property

Interest deduction upto `1.5 lakh is allowed in case of one house property which is not let out by an individual

Deduction of ` 1.5 lakh (including pre-construction interest instalment) allowed.

Since the present practice of deduction upto` 1.50 lakh is to continue, no benefit on this count can be said to accrue or arise to taxpayers. An adverse impact would be that repayment of loan which could be deducted u/s 80C along with other items will be discontinued.

(vi)

Income from business or profession

The changes proposed in DTC-II are too many to be covered in a short article of this nature. These could be discussed in a separate write up on this subject only.

(vii)

Income from capital gains

Fundamental changes are proposed to be made in regard to taxation of capital gains to “attract” small investors to stock market. To what extent this objective would be fulfilled could be a matter of debate. In the meantime, comparative study of some of the aspects of taxation of this income under the 1961 Act and proposed DTC-II is briefly mentioned hereinafter.

Securities transactions Act (STT)

Applicable

To be continued

No change

Equity shares and units of equity oriented funds

If held for more than 12 months, entire gains are not taxable.

If held for more than 12 months, 100% gains are allowed as deduction, i.e. entire gains not taxed.

Continuance ofNIL tax on gains from sale of shares/equity oriented units held for more than a year continues and should be welcome.

If held for less than 12 months, tax payable on gains @ 15%

If held less than 12 months, deduction of 50% of gains will be allowed and the balance will be taxed at gradual rates of 5%, 10% & 15% depending on income of the assessees.

50% deduction mechanism would result in lower tax impact

Other investment assets

Holding period for classification as long term/indexation/exemption benefits is 36 months

Holding period for indexation/exemption benefit is one year from end of financial year post acquisition

Cut off date for working cost of acquisition shifts from 1-4-1980 to 1-4-2000. thus unrealized gains upto 31-3-2000 will get exempted.

Holding period for indexation/ exemption benefit is reduced to 12 – 24 months.

Long term, gains taxable @ 20%, subject to indexation benefit (inflation indices starting 1981)

Indexation and rollover benefit (subject to conditions) available with reference to purchase price, or optionally, fair market value as on 1 April, 2000, if asset acquired before that date

If short term, gains taxable at applicable slab rates.

(viii)

Some other aspects concerning common taxpayers

Govt. PF, PPF, recognized PFs etc.

Employer’s contribution to recognized provident fund exempt up to 12% of salary

Employee’s contribution eligible for deduction up to ` 100,000

Employer’s contributions to PF up to 12% of salary exempt.

Employee’s contribution eligible for overall investment deduction limit to `100,000

Accretions and amount received exempt.

Withdrawals exempt based on prescribed guidelines

EEE continued for these schemes.

Overall investment deduction limit of ` 100,000 applies for contributions to approved funds, viz., PF, superannuation fund, gratuity, pension and other notified funds.

On withdrawal and maturity not taxable, subject to conditions.

Superannuation funds

Employer’s contribution up to ` 100,000 per annum is exempt

Withdrawal is exempt based on prescribed guidelines

Employer’s contribution to approved superannuation funds exempt Employee’s contribution eligible for overall investment deduction limit of `100,000

Maturity payments on retirement/ achieving certain age/ incapacitation not taxable

Continuance of EEE would mean no tax liability on end-payments.

Removal of present anomaly of part double taxation of employer’s contribution will help.

Life Insurance Premium

Premia deductible upto `100,000

Sum received on life insurance policy (including bonus) exempt if premium in any year is <20% of sum assured.

Further maturity amount is exempt if premium paid is less than 2) 5 of the sum assured.

Premium paid on is exempt upto ` 1 lakh, along with other sums.

Premia eligible for overall additional deduction limit of `50,000 (with mediclaim & tuition fees)

Premia paid on policies with premium less than 5% of sum assured not deductible.

Maturity proceeds exempt, if the premium paid in any year <5% of sum assured and 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

Overall additional deduction limit not only lowered to `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.

Medical premium

Premia paid for self/ spouse/ children are entitled for deduction of `15,000 and additional deduction of ` 15,000 (`20,000 in case of senior citizens) for parents

Premia paid for self/ spouse/ children/ dependent parents eligible for overall additional deduction limit of ` 50,000

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.

80C investment avenues considerably reduced

Such payments were eligible for ` 100,000 deduction limit

No deductions for avenues such as mutual fund investments (ELSS), housing loan repayment (principal), fixed deposit etc.

These avenues will no longer be eligible for deduction

(ix)

Aspects concerning special situations/incomes

Special Economic Zone (SEZ) units

No sunset clause under existing laws

Unit set up in SEZ to get deduction from profits if set up before March 31, 2014

Adverse impact, i.e. no exemption from 1-4-2014.

SEZ developers

Profits are not subject to tax

Existing developers engaged in operations before April 1, 2012 shall be eligible to claim profit based tax holidays

Adverse after 31-3-2012. No profit tax holiday after this date.

Tax losses

To be carried forward for maximum 8 years

Unlimited carry forward of losses

New proposal would have adverse impact on working of undertakings affecting their efficiency.

Monetary limits regarding tax audit

Existing limits:

For income from profession, ` 15 lakh; and

For income from business,` 60 lakhs

Tax audits limits to be enhanced:

For income from profession, ` 25 lakh; and

For income from business, ` 1 cr.

It will give relief to small and middle income group taxpayers. The present limits prescribed in 1984 have become totally unrealistic

(x)

International taxation

General Anti Avoidance Rules (GAAR)

No such provisions

Empower tax authorities to declare an arrangement impermissible under certain conditions.

These can lead to harassment and hardship for taxpayers.

Treaty override proposal

Treaty or the Act, whichever is more beneficial, to prevail

Treaty or the Act, whichever is more beneficial, is to prevail subject to some caveats.

Can impact foreign business dealings adversely

Branch profit tax

No such provisions

Additional branch profit tax @ 15% on all foreign companies having any form of PE in India.

This can have dampening effect on foreign trade transactions and volumes

Residential status of foreign companies

Resident in India only if controlled and managed wholly in India

In DTC-I, rules were broadened. A company was deemed to be resident in India even if a part of management was in India. In DTC-II Rules relaxed –Focus shifted to place of effective management.

May create difficulties in implementation as their could be difference of opinion in regard to where is placed effective management

Indirect transfer of capital asset

No specific provisions

Under DTC-I, income from indirect transfer of capital asset (situated in India) specifically covered).

Provision retained with relaxation – transfer of shares of a foreign company taxable in India; if FMV of assets in India exceeds 50% of FMV of total assets

Being a new provision, its impact will have to be watched

Royalties and Fees for Technical services

Currently, royalty and FTS are taxable @ 10% on gross income for foreign companies

Royalty and FTS proposed to be taxed @ 20% on gross income for foreign companies

Rate of tax on these income is proposed to be doubled. Can adversely affect import of technology in the country.

Controlled foreign companies (CFC)

There are no rules concerning CFCs in the current legislation.

CFC provisions have been introduced to tax passive income earned by a foreign company (controlled directly or indirectly by a resident in India)

Under proposed CFC rules, even income of such foreign companies not distributed to shareholders would be deemed to be distributed and consequently taxable in India in the hands of resident shareholders as dividend received from the foreign company.

The proposal can affect outbound investments. There is no provision for getting credit for taxes paid abroad. This can result in double taxation.

Income from transfer outside India on shares of interest outside India.

No such provision in the existing law

There is considerable litigation at present regarding the taxability of such interest in foreign countries. It started with Bombay High Court’s decision in the case of Vodafone International Holding BV v.Union of India[2008] 175 Taxman 399. The practice is affecting Indian taxation through indirect transfer relating to Indian business. The amendment is intended to ensure clarity.

This will check cross-border transactions involving transfer of shares or interest in foreign company taxable in India if at any time preceding 12 months, fair value of assets in India owned directly or indirectly represent at least 50% of fair value of all assets owned by foreign company.