DIRECT TAXES CODE WATERED DOWN TO KEEP ALL HAPPY
The government has retained the form, but abandoned the spirit of the Direct Taxes Code (DTC) to have a simple, clean tax system without exemptions.
A revised discussion paper on the Direct Taxes Code, released by the Central Board of Direct Taxes (CBDT) on Tuesday, dropped many controversial proposals of the original draft code to help individuals and companies save on their tax outgo.
These include levying minimum alternate tax (MAT) on gross assets and taxing savings schemes such as the public provident fund at the time of maturity. Companies will pay MAT on book profits.
A dilution of the proposals in the draft code would mean a huge revenue loss for the government, which, in turn, will impact fiscal deficit. The trade-off could be to scale down the liberal tax slabs for individuals proposed in the original code. And that is bad news for taxpayers.
"The proposed revisions are like old wine in a new bottle," said Deloitte partner Homi Mistry.
But revenue secretary Sunil Mitra said the slabs proposed in the draft code were only illustrative. The code has addressed 11 issues, including MAT, tax treatment of savings, taxation of house property, tax treatment of capital gains, status of double taxation agreements and general anti-avoidance rules.
CBDT chairman SSN Murthy said the decision on tax rates will be taken later.
The draft code had proposed a 10% tax rate for taxable income between Rs 1,60,000 and Rs 10 lakh, 20% for income above Rs 10 lakh but below Rs 25 lakh, and 30% for income above Rs 25 lakh.
This could be tweaked and the prerogative to fix the rate will be with the legislature, said a senior CBDT official.
Domestic investors in equities will, however, pay capital gains tax on listed shares, with CBDT retaining the overhaul of the tax treatment proposed in the draft code to scrap this exemption. Capital gains will be added to income and taxed according to an individual’s slab. The tax treatment will be similar for non-residents. The securities transaction tax (STT) will, however, stay and rates will be calibrated.
CBDT has also sought to end the uncertainty over tax treatment of FIIs. The income of FIIs that buy and sell shares will be treated as capital gains and not business income, which could increase their tax liability.
Going by the revised code, individuals will enjoy tax exemptions in select, but fewer, savings schemes. These include the public provident fund, pension schemes, including the government’s new pension scheme, general provident funds, recognised provident funds, pure life insurance and annuity schemes. These schemes will not be taxed at any stage. The move will give a boost to the new pension scheme, which has not found many takers so far.
Other savings schemes such as the national savings certificate, bank deposits, unit-linked insurance plans and equity-linked mutual funds will continue to enjoy tax breaks for their full duration. There is, however, no clarity on their tax treatment when the code comes into force.
CBDT has also softened the blow on the tax treatment of house property by scrapping the proposal to compute gross rent on 6% of the cost of construction or acquisition. The salaried class too has been spared of a higher tax burden on perks.
"The exempt exempt exempt tax (EEE) system on retirement benefits will help senior citizens who do not have social security benefits. Similarly, the valuation of perquisites as per prescribed rules rather than linked to market rates will help lower the tax-burdened salaried class. Exempting single house owners from house property income would contribute to investment in the housing sector," said Kaushik Mukerjee, executive director, PwC.
Companies will pay tax on their book profits. Loss-making companies will not come into the net. "Capital-intensive infrastructure companies and FIIs will get some relief," said Sunil Gidwani, executive director, PwC.
But the revenue loss could be offset with a hike in MAT rate, said an official who did not wish to be named.
Existing companies in special economic zones (SEZs) will enjoy tax exemptions or profit-linked deductions for a limited period till the new code comes into force. Only unproductive assets will attract wealth tax, with CBDT dropping the proposal to levy tax on the net wealth on the valuation date.
The party for FIIs investing through Mauritius could end, with the code proposing general anti-avoidance rules. Tax authorities will have the powers to lift the corporate veil and examine the substance of a transaction. There, however, will be safeguards. "Treaty override has been a serious concern for international investors. In the revised discussion paper, it is now clarified that DTC will not conflict with the other benefits available under tax treaties. However, where anti-avoidance provisions such as GAAR or CFC are invoked, treaty will not apply", said Shefaili Goradia, partner, BMR Advisors.
However, it has introduced Controlled Foreign Corporation rules wherein it can levy a tax on a foreign subsidiary of an Indian company that does not distribute dividends.
Finance minister Pranab Mukherjee on Tuesday expressed confidence that the government will be able to introduce the Direct Taxes Code in the next financial year. "I feel that we have addressed all the major concerns of the stakeholders. If there are any more suggestions, we shall look into it," he had said earlier in the day at the annual conference of chief commissioners of indirect taxes.
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