New Tax Laws To Watch Out For In 2013 -I Direct Tax Code

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Direct Tax Code

Let’s see what the year 2013 has in his kitty for levying of the new tax laws.

From the last two or three years we heard much about the DTC- Direct Tax Code and in this year’s budget statement of our beloved finance minister we heard the noise once again. But this time the finance minister has said that it is not possible for them to implement the DTC from April 1, 2013 as they need to have a look once again on it. Hence we can assume that DTC will be deferred once again for future date.

Now we  first see what the DTC was in beginning I mean what was the draft that proposed first time so this grabs the attentions of all the persons, financial professionals, Investors (FII ) and the MNC’s and the foreign govt. as well.

What is Direct Tax Code and what are the impacts of it?

Direct Tax code is replacement of existing tax direct tax laws i.e. Income Tax Act we can say like that DTC will replace the existing Income Tax Act and it has long lasting impact on the Income tax payers as it will take more time to understand the new law it rules and regulation. Because it took so long to understand the Income Tax Act and now we are standing at the era where once again lots of tax issues will come in front of tax authorities and law makers. In near future when the DTC will applicable because of less knowledge and lack of understanding of the point of view of lawmakers by the assessee and department as well hence we see pile of pending cases.

The intention of law makers is that to ease the process and compliances to minimize the litigation.

White Paper on DTC

Some part of that white paper will reproduce here.

MINIMUM ALTERNATE TAX

Proposed:

It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies. The MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.

TAX TREATMENT OF SAVINGS – EXEMPT- EXEMPT TAX (EET)

Proposed:

It proposes the „Exempt-Exempt-Taxation‟ (EET) method of taxation for savings. Under this method, the contributions towards certain savings are deductible from the accumulation/accretions are exempt (free from any tax incidence) till such time as they remain invested and all withdrawals at any time are subject to tax at the applicable marginal rate of tax.

INCOME FROM SALERY

Proposed:

It provides that “Income from employment” will be gross salary as reduced by the aggregate amount of permissible deductions.

Under the DTC, salary will include, inter-alia, the following:-

(a) The value of rent free or concessional, accommodation provided by the employer irrespective of whether the employer is a Government or any other person;

(b) The value of any leave travel concession;

(c) The amount received on encashment of unavailed earned leave on retirement or otherwise;

(d) Medical reimbursement; and

(e) The value of free or concessional medical treatment paid for, or provided by, the employer.

The Discussion Paper states that the value of rent-free accommodation will be determined for all employees including Government employees in the same manner as is presently determined in the case of employees in the private sector.

INCOME FROM HOUSE PROPERTY

Proposed:

The Discussion Paper proposes a new scheme for computation of income from house property in the draft DTC, the salient features of which are:

(a) Income from house property shall be the gross rent less specified deductions.

(b) Gross rent will be higher of (i) the amount of contractual rent for the financial year; and (ii) the presumptive rent calculated at six per cent per annum of the ratable value fixed by the local authority. However, in a case where no ratable value has been fixed, six per cent shall be calculated with reference to the cost of construction or acquisition of the property. If the property is acquired during the financial year, the presumptive rent shall be calculated for the proportionate period of that financial year

(c) The advance rent will be taxed only in the financial year to which it relates.

(d) The gross rent of one self-occupied property will be deemed to be nil, as at present. In addition, the gross rent of any one palace in the occupation of a ruler will also be deemed to be nil, as at present.

(e) The following deductions will be admissible against the gross rent:-

(i) Amount of taxes levied by a local authority and tax on services, if actually paid.

(ii) Twenty per cent of the gross rent towards repairs and maintenance as against thirty per cent at present

(iii) Amount of any interest payable on capital borrowed for the purposes of acquiring, constructing, repairing, renewing or re-constructing the property

(f) In the case of a self-occupied property where the gross rent is deemed to be nil, no deduction for taxes or interest will be allowed.

(g) The income from property shall include income from the letting of any buildings along with any machinery, plant, furniture or any other facility if the letting of such building is inseparable from the letting of the machinery, plant, furniture or facility.

CAPITAL GAIN TAX

Proposed:

It provides that income from transactions in all investment assets will be computed under the head "Capital gains”. The DTC provides that gains (losses) arising from the transfer of investment assets will be treated as capital gains (losses). These gains (losses) will be included in the total income of the financial year in which the investment asset is transferred. The capital gains will be subjected to tax at the rate of 30% in the case of non-residents and in the case of residents at the applicable marginal rate.

Under the Code, the current distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset will be eliminated.

In general, the capital gains will be equal to the full consideration from the transfer of the investment asset minus the cost of acquisition of the asset, cost of improvement thereof and transfer-related incidental expenses. However, in the case of a capital asset which is transferred anytime after one year from the end of the financial year in which it is acquired, the cost of acquisition and cost of improvement will be indexed to reduce the inflationary gains.

The capital gains from all investment assets will be aggregated to arrive at the total amount of current income from capital gains. This will, then, be aggregated with unabsorbed capital loss at the end of the immediate preceding financial year (unabsorbed preceding year capital loss) to arrive at the total amount of income under the head „Capital gains‟. If the result of the aggregation is a loss, the total amount of capital gains will be treated as 'nil' and the loss will be treated as unabsorbed current capital loss at the end of the financial year

These are only some parts which I reproduce here just for the reference as it’s not possible to reproduce the whole bill here.

What we read above is just the some parts of white paper on DTC which will later on amended on various recommendations received from various committees’ and chamber of commerce like FIICCI, CII, ASHOCAM etc.

Recommendations

The below recommendations are just the compilations of those which provided by the industry to fin men as mentioned above that I cannot reproduce the all recommendation as well that is because I want that my reader should read it instead of just having a look of it.

MAT

It has been proposed to calculate MAT still with reference to book profit.

EET to EEE

It has been proposed to the government that on the pension fund and other deductions will allow continuing under the EEE instead of EET.

INCOME FROM SALERY

It is proposed that perquisites in relation to medical facilities/reimbursement provided by an employer to its employees shall be valued as per the existing law with appropriate enhancement of monetary limits. It is clarified that the DTC does not propose to compute perquisite value of rent free accommodation based on market value.

INCOME FROM HOUSE PROPERTY

It is proposed:

(a) In case of let out house property, gross rent will be the amount of rent received or receivable for the financial year.

(b) Gross rent will not be computed at a presumptive rate of six per cent of the rateable value or cost of construction/acquisition.

(c) In case of house property which is not let out, the gross rent will be nil. As the gross rent will be taken as nil, no deduction for taxes or interest etc. will be allowed.

However, in case of any one house property,

which has not been let out, an individual or HUF will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.

CAPITAL GAIN TAX

It is proposed that:

(a) Income under the head “Capital Gains” will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer.

Capital Asset held for a period of more than one year from the end of financial year in which asset is acquired

(a)Listed equity shares or units of an equity oriented fund:

 Capital gain on the capital asset held for than a year shall be computed by allowing deduction of certain % of capital gain without allowing indexation on such assets. This adjusted capital gain will add in total income of tax payer and will be taxed at applicable rate.

The loss arising on transfer of such asset will be scaled down in a similar manner

 (b)Capital gains on other assets held for more than one year

For taxation of capital gains arising from transfer capital assets held for more than one year (other than listed equity shares or units of equity oriented funds), the base date for determining the cost of acquisition will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains on such assets between 1.4.1981 and 31.3.2000 will not be liable to tax. The capital gains will be computed after allowing indexation on this raised base. The capital gains on such assets will be included in the total income of the taxpayer and will be taxed at the applicable rate

( c ) Capital gains on the assets which held for less then a year will be added to the income of that year and taxed at the prevailing rate.

For FII’s it is proposed that the income arising on purchase and sale of securities by an FII shall be deemed to be income chargeable under the head „capital gains. This would simplify the system of taxation, bring certainty, eliminate litigation and is easy to administer. The FII’s are not subject TDS and existing practice will follow to tax them.

New Modified version

As the finance minister in its budget speech clearly of this year states that before implementing the DTC in full they need to review once again to it as proposed bill is termed old and need revision according to changing in domestic and international fronts as well. So we can hope that we will get the revised or modified DTC will be much better from the old one which was proposed in 2010.

This bill must contains stiff penalties and prosecution for non-compliance with the tax laws but also ensure that tax payers will not be harassed by the authority by using those laws and regulations other wise this become the pain in to the stomach of all the tax payers as well as tax professionals.

Now we only can hope that the proposed Direct Tax Code will be combination of major tax relief and should not be the removal of most tax-exempted benefits. It is expected to begin a new era of transparency and greater compliance in taxation field.  

Before summing up I will draw your attentions that about certain facts that what the DTC has in his basket for individuals and corporate

For Individual

We can only hope that tax slabs will see a change when DTC gets applicable and individuals will get more respite from taxes.

For Corporate

Carry forward of losses shall be allowed without any time limit.

 Probable retention of EET (Exempt- Exempt Tax)

Another important thing and bad news for individuals is the finance ministry is likely to retain the EET (exempt-exempt-tax) principle proposed in the Direct Tax Code on the lump sum amount a salaried taxpayer will receive from his investment in savings schemes such as the Public Provident Fund and other superannuation funds. This means while the contribution and accumulation are tax-free, withdrawal will be taxed at the marginal rate of income tax.
By the look of things and policy if implemented Depending on the quantum withdrawn, almost one third of the savings could be eaten away.
With structural changes to the Direct Tax Code, DTC bill in its final stages, it looks in all certainty that the DTC bill should get some concrete base and will implement soon with major changes.

Let’s Sum Up

By not implementing the DTC in F.Y. 2013-14 finance minister makes it official that now it’s their aim to simplifying the procedure and increasing the compliance.

Before closing down I just want to mention the recommendation of kelkar committee. These are

Online verification of PAN could be made mandatory for high value transactions to reduce use of black money

All pending refunds should be issued at the earliest. This will also improve liquidity of taxpayers and reduce their dependence on market borrowings at a relatively high interest rate

The Income Tax Department should create a national portal to enable taxpayers to file applications seeking rectifications and appeal effect.

The Direct Taxes Code Bill, 2010 should be comprehensively reviewed before it is enacted into law for implementation

It suggested to amend the provisions of all tax laws to charge interest at rates which reflects the market rate of interest to the defaulters and a penalty for such default

The panel is also for a 360 degree profile of all taxpaying individuals and institutions to help decrease tax evasion and tax fraud

Industry proposed various recommendations to the finance ministry but it’s on the ministry to accept these recommendations or not. As they may be accept these as it are or can modify or it may possible they would not change and will implement bill as it is.

So before planning to evade tax be careful as government is following you.

There is an old Irish proverb which more or less state the mentality of the government 

“Tax his tractor, tax his mule; tell him, taxing is the rule.
Tax his oil, tax his gas, tax his notes, tax his cash
Tax him good and let him know, that after taxes, he has no dough.
If he hollers, tax him more; tax him till he's good and sore.
Tax his coffin, tax his grave, tax his sod in which he's laid.
Put these words upon his tomb, "Taxes drove him to his doom."
Once he's gone, we won't relax. We'll still collect inheritance tax.