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No big bang change in Direct Tax Code Bill: PwC

Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8311 Points)

01 September 2010

No big bang change in Direct Tax Code Bill: PwC

August, 31st 2010
After much delay, the Direct Tax Code Bill was finally tabled in the Parliament. Aimed at simplifying procedures for investors and bringing in more revenue by widening the tax net, DTC is a key reform for Indian economy. It would now be applicable from April 1, 2012, instead of March 1, 2011. Rahul Garg, Leader, Direct Tax Practice, PwC has welcomed the move. In an interview to Media, Garg said that the delay is welcomed as assessment process is changed in the new norms. However he also added that there is no big bang change in tax in DTC Bill. Mukesh Butani, Partner, BMR and Associates commented that the government will gather more money from taxpayers. Saying that tax on unit linked insurance policies (ULIPs) is not a significant change, Butani remarked that a tax on graded short-term capital gains is a positive move. According to DTC Bill, short-term capital gains will be taxed at income tax rates while short-term capital gains for companies is flat at 30%. Besides, the new DTC Bill will have dividend distribution tax (DDT) of 5% for both equity mutual funds (MFs) and unit linked insurance policies (ULIPs). Minimum alternate tax (MAT) on book profit will be at 20% while DDT will be levied at 15%. Also, income distributed by mutual funds to unit holders will be at 5%. Tax on branch profits is at 15%, on net wealth above1 crore is 1% while exemption limit hiked to2 Lakh. Q: What was the fuss all about? There was so much talk about DTC for the last many quarters, doesn’t look like it’s a bunch of whole lot of excitement, is there? Butani: People are reading the headline news only in so far as the tax rates and the slabs are concerned. If you look deeper into it, there are several changes in the procedural part of the law. There are some new concepts which have been introduced on general anti-avoidance, controlled foreign corporation (CFC) legislation and treaty overwrite. Yes, the big bang reforms that captured the headline, wherein the maximum marginal rate applicable for individuals would be25 lakh and the corporate tax rate would be brought down to 25%, all of those have not come true, I guess in the right direction that the government intended to. I think the simple math couldn’t add up. There is no change in as far as the basic philosophy for tax rates is concerned, whether it is for individuals or it is for corporates. Otherwise it is a brand new code, completely different philosophy in so far as the administration and the policy are concerned and the procedure for doing assessments is concerned. Some new concepts, which I guess is going to help government gather more money from the tax payers. Q: Why the delay? That is what everyone was scratching their heads about yesterday. This is not goods and services tax (GST). Why did DTC need to come only in 2012? Do you think it was a signal that both might come together in 2012? Garg: I would think that the delay is welcome here for two reasons, there is significant change in relation to the process of assessment, and there is a significant change in respect of how the computation is made. For that both the tax payers and the government needs to gear up both structurally from their organizational point of view as well as the systems need a lot of gearing up. I think there is a breathing space for both the government and the tax payers to gear up before we venture into the new code. To my mind it is meaningful and sensible. The big bang radical reforms of sweeping nature have not been there in this code and if you look at it briefly, it is the anti-avoidance provisions whether you call it general anti-avoidance, whether you call it CFC, whether you call it some other process which are more stringent than before or widening the powers of the tax officers to reopen the cases etc. I would think that pretty much this seems the concept and the rates are also not too drastically changed. Therefore in terms of the revenue gathering, it is not hurrying up any changes and that is why I suppose the delay is alright and is meaningful.Q: The tax on unit linked insurance policies (ULIP). How much of a deterrent or a step back do you see that as? Butani: I don’t know-there is a little bit of engineering that they have done on various aspects, including the ULIP aspect, but I don’t think it is material as such. I think the biggest cheer for the market was long-term capital gains exemptions on listed securities. Even from a short-term capital gains standpoint a 50% reduction goes back to an old law that we had – it used to be called ATT. I don’t think that it is going to make any material difference on the ULIP tax rate. Q: Have you looked at the special economic zone (SEZ) regulations or proposals? There seems to be some wrinkle on minimum alternate tax (MAT) on SEZs as well? Butani: I think the biggest aspect on SEZ on the unit’s front was, if the SEZ developers are going to complete building the infrastructure say by 2012, it is going to take time for units to be able to occupy. I think that date has been extended to 2014. The SEZ unit holders will enjoy profit link incentives if they start their operations by 2014 and the SEZ developers will have a deadline of 2012. If you look at the original code, it was not very clear as to what would be the date applicable for SEZ developers and the law was completely silent on SEZ unit holders. As far as the levy of dividend distribution tax and MAT is concerned, it goes against the grain of the SEZ law, not against the income tax law. When the SEZ law was legislated, they had prescribed for completely tax free status. That is a new avenue I guess that the government has figured out to be able to collect some amount of taxes on SEZ, entrepreneurs, developers and SEZ unit holders. But all in all you still have a saving of the corporate tax rate of 30%, which otherwise would have been paid by the developers and by the unit holders up to 2012 and 2014 respectively. Q: Do you agree that the government has found ingenious ways of getting more taxes out from many of those taxpayers? Garg: I think there is no ingenuity in the way. I would suspect that what is now sought to be done in the DTC is precisely in conformity with some principles of international tax. What needs to be seen is how is this administered and if it is administered in the true spirit and true letter of how it is done internationally, I think the aspects which are sought to be brought in whether it is CFC, whether it is General Anti Avoidance Rules (GAAR), whether it is limited override of treaty for GAAR reasons. I would say that the challenge now we would have is to see whether the system is mature enough to administer it the way it ought to be, not lopsided either way. Q: What do you think, on issues like CFC and GAAR, do you have perfect clarity? Butani: There is no clarity. That is also one reason why the law has been deferred till 2012. The GAAR and the CFC regulations had to have a set of subordinate legislations. These subordinate legislations could either come by way of rules or by way of guidelines by the Central Board of Direct Taxes. Both these subordinate legislations need not be an Act of Parliament. Just like the government debated, the direct tax code, I would anticipate that these subordinate legislations are debated threadbare. If they are not debated and views from various stakeholders are not taken into consideration, you are bound to have administrative challenges. To your point, is this the right time to introduce such legislation? Personally no, because India is a capital importing country and it will continue to be a capital importing country. The question is, jurisdictions all over the world are doing it and they are doing it with one sole reason, various governments are going through budget deficits and hence tax collection is the top priority of the governments. If you talk about tax collection, another guiding philosophy for tax administrators all over the world is make sure that bulk of the economic activity that you carry out is liable to tax in your jurisdiction. It is no longer true that in a globalized world, you are looking at economic activity that was spread across various jurisdictions. Now the aim and objective of various governments which is also very clear if you look at the various legislations that we are having, tax all economic activity in India to maximize your tax collection. That is the guiding philosophy. Source : https://www.moneycontrol.com/news/economy/no-big-bang-changedirect-tax-code-bill-pwc_481905.html

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Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8311 Points)
Replied 01 September 2010

Benefit account system from DTC was unfortunate

August, 30th 2010
The new Direct Tax Code is now well on its way to becoming the law of the land. From April 1, 2011, many things will change, but compared to the original draft of the code, the changes are not nearly enough. Now that the dust has settled and we know exactly what has made it into the final bill, it’s instructive to discuss the ideas that were dropped. Of all the opportunities missed, the one that’s the most unfortunate is the dropping of the proposed Retirement Benefit Account system. It’s interesting that of all the changes that have been made since the original August 2009 draft of the code, this was the only one that was universally recognised as desirable, and yet was dropped because it was said to be impractical. As envisaged in the August 2009 draft, this would have been an account into which all retirement benefits would have been kept by individuals. The deposits could have come from VRS, gratuities and other post-retirement payouts. Within the account, these could have been kept in a savings instruments like the NPS and others which would be approved for the purpose. As long as the money stayed in the account, it was not taxable. It could also have been moved around within the approved instruments without attracting tax. This account would have meant that not only would post-requirement payouts received at age 60 would not have been taxed at the time, but they could have been earning compounding returns for years or decades without being taxed. The extra returns could easily have compensated for the (deferred) taxation.But that was not to be. The June 2010 revision of the DTC said that “maintaining individual Retirement Benefits Account by permitted savings intermediaries on behalf of all employees would require a centralised, nation-wide authority to regulate and manage crores of retirement benefits accounts of employees and to deduct tax on withdrawal which entails creation of a separate institutional mechanism, complex logistics and substantial costs.” So this is not a flaw in the concept itself, but an implementation problem. Actually, the concept of an account like this should actually be extended in other ways, as in the US, the 401(k) account has been extended to the so-called Roth 401(k). While the 401(k) is much like the retirement benefit account of the original DTC, the Roth 401(k) is a sort of a T-E-E account. In an account like this, if deposits are made with tax-paid funds and then held till retirement, then the there’s no further taxation at any stage. Such unified accounts would doubtless be beneficial in every way to the retiree as well as to the tax authorities. Even if they are too complex to implement now, that could change within a few years. There’s no reason that such a system should now be forgotten till 2061, when (extrapolating from the track-record), the Direct Tax Code is due for the next overhaul. If the government thinks the UID feasible, then at some point in the next decade or so, a unified retirement account should be possible. I mean how complex can it be? It’s not as if it’s something truly difficult like, for example, organising an international sports event. Source : https://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/Dropping-retirement-benefit-account-system-from-DTC-was-unfortunate/articleshow/6458530.cms

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Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8311 Points)
Replied 01 September 2010

All show and no play in Direct Tax Code Bill

August, 31st 2010
The Direct Tax Code (DTC) bill was tabled in Parliament on August 30, 2010. Made up of more than 400 pages, what are its key highlights? The corporate tax rate has been proposed at 30%, profit linked exemptions for special economic zones (SEZs) and the long-term capital gains exemption on listed equities stays along with Securities transaction tax (STT), short-term capital gains will be taxed at half your slab rate that is 5-10-15%, depending on which slab you fall under. As far as individual taxation goes, the exemption limit has been hiked to2 lakh and a wealth tax of 1% on assets more than1 crore will be levied. Now the new DTC is expected to be applicable from April 1, 2012. So at the end of what seems to be a three-year very long exercise, what kind of new law are we faced with? Media had an in-depth conversation with Deputy CEO & Chairman-Tax at KPMG, Dinesh Kanabar, who sees the new bill as a simplistic version of the existing income tax act which should not have been the case. Here is the verbatim transcripttt of his interview. Q: A quick impact analysis. Any materially different impact on both companies as well as individuals, as compared to where we are today, under the existing income tax act, it doesn’t seem to me like life will change much, will it? A: I don’t think there is a dramatic change in the corporate sector. We have certain things like foreign companies being regarded as resident in India, if their place of effective management is in India. We have this whole change on overseas transfers with an underlying value in India, which again is a sea change. There is an introduction of controlled foreign company regulations and finally we have the general anti-avoidance regulations (GAAR) which I would say are the four-five big changes in the way we are approached taxes hitherto for. But certainly a sea change from where the position was in terms of the first draft. What was there in the second discussion draft and what has finally emerged as the position with the government is taking in terms of presenting the bill. A very shifting of stance. At one level you could come back and say have the lobbying groups got their pound of flesh? The other way you can come back and say is the government listening to people and doing things? I will again give you a perspective. Probably about four-five years back, the government embarked on a mission to say can we rewrite and simplify the law. A committee was set up to review the tax laws. That was given a go and then a whole new law was sought to be enacted with minimum alternate tax (MAT) on gross assets etc and we now seem to have come back at the original position. Just simplify the law, keep it as it is, don’t change the overall framework, do away with all the exemptions, do away with all the explanations etc and have a law which people can simply understand. google_protectAndRun("ads_core.google_render_ad", google_handleError, google_render_ad); Q: We have just ended up with a simpler version of the existing income tax act after two years of heated debate on a new direct tax code? A: I would agree with that but simplification itself is not a very good objective to have. Q: But it didn’t require two years of debate then. A: I agree with you, but the two years of debate, came from a position, where the government moved from just one objective of simplification to a lowering of a tax base. The position was can we get a tax rate lower to 25%. If you wanted to get the tax rate lowered down to 25%, then you have to do something else to balance and raise resources and you wanted to then have assets based MAT taxation etc. When you removed that objective, everything changed. It was shifting of the government’s objective and focus in the interregnum which led to these whole changes. Q: You pointed out all the efforts made by the tax department and the finance ministry to usher in a whole new regime of taxation where you have lowered the tax ability on individuals and then brought 3.5 lakh companies into the tax net by imposing a MAT on assets, doing away with the capital gains exemptions so as to be revenue neutral. You have not been able to do that, because various interest groups have lobbied away various aspects? India Inc lobbied very hard against MAT on assets, the market sector lobbied against any change on capital gains and so at the end of the day we were not be able to accomplish much, we should have been able to accomplish more? A: I don’t know whether you need a new tax code for a new economy. It was a question whether the government wanted to make a statement that we are competitive in the market place and we are getting the tax rate down from 35% almost to 25%. We have now come back to lowering the rate of tax to 30%, is good enough so long as we have simplified. I would like to believe that you did not have to go through this entire circus for the last two years, but effectively what we have been able to achieve is this one goal of saying, can we have a tax rate which is simple. The issue about wanting to tax companies which are not hitherto under the tax net. Either your compliance mechanism is not right in which case if these companies are making profits, you have not been able to catch them or if these companies are not making profits because they have got exempt income, then do you want to tax assets, is that what you want to do on the income tax act? That is something which the government needs to answer Source : https://www.moneycontrol.com/news/management/dtc-bill-tabled_481845.html

Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8311 Points)
Replied 02 September 2010

Decoding the tax code

September, 01st 2010
There are many good reasons for the cautious and conservative approach the Union finance ministry has adopted towards direct tax reform. Expectations of a radical reform of tax policy have understandably been belied because of the government’s cautious approach. The most important reason for such cautious conservatism would be the likely revenue implications of the changes being proposed. The Union revenue secretary has let it be known that the government would be giving away as much as '53,000 crore in the first year of implementation of the new direct taxes code (DTC). Clearly, this fact may have also shaped the government’s decision to delay the implementation of the new tax code by an year. No finance minister can afford to take chances with revenues and reform when the fiscal deficit and the budgetary deficits of the government are so high. Fiscal policy and public finance purists may like neat and decisive reform, while taxpayers would like simplicity of procedure and clarity in language, but fiscal authorities worry more about the revenue implications of tax reform. The government cannot afford to risk reduced revenues at a time when there is such uncertainty about growth and deficit management. Further, given the recent decline in the savings rate, the government may have also been wary of reducing the incentives for saving. As a consequence of such concerns, the final DTC has proved to be less radical in scope and intent than was widely expected. Critics would say the government has missed an opportunity to undertake more wide-ranging reform. But the fact is that tax reform is always a continuing process and no government can afford to put a full stop to policy change unmindful of the revenue and deficit management implications of such change. Even so, it is necessary to ensure reasonable stability, predictability and transparency in policy. Hence, whatever the change the government now intends to bring should remain in place for a reasonable period of time to enable individuals and firms to plan and manage their incomes, savings and investment decisions. The government’s decision to offer some comfort to lower middle-class families is well taken, especially when inflation continues to hurt them, and so also its decision to end gender preferences, considering that in India the phenomenon of single mother households is still not significant and most women taxpayers belong to double-income families. However, it is not clear why the government wishes to keep in place so many exemptions. The scope of exempt-exempt-exempt ought to have been reduced and that of exempt-exempt-tax widened. Health and education expenditure and retirement benefits are about the only items that ought to benefit from tax exemptions. There is no reason why any other sort of income or expenditure should attract tax exemption. It is the margin for discretion and the lack of clarity that complicate tax systems and their administration. These considerations must inform policy on general anti-avoidance rules (GAAR) so that the taxpayer is not at the mercy of tax administration and tax consultants. GAAR principles must be clearly defined by the government and not left to tax authorities to decide. At the end of the day, even the simplest of policies can become a nightmare for the honest taxpayer if authorities have the leeway to harass

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