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DIRECT TAX CODE a.

DTC has been planned to replace archaic (many of them obsolete) laws related to direct taxes, such as income tax, dividend distribution tax and wealth tax. b. DTC will bring end of most of the exempted incomes, rationalisation of savings, few modifications in tax slab (same already proposed in Budget 2012-12) and end of surcharge on income tax. c. EEE benefit only to provident fund, retirement fund, NPS, pure life insurance and annuity scheme. d. Proposed to be introduced in the coming fiscal year itself

Direct Taxes Code seeks to consolidate and amend the laws relating to all direct taxes, i.e., income-tax, dividend distribution tax and wealth tax so as to establish an economically efficient, effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP ratio.

The New Direct Tax Code (DTC) will to replace the existing Income Tax Act of 1961 in India. In his budget speech for 2012-13, finance minister has announced It was our earnest desire to give effect to DTC from April 1, 2012. However, we received the Report of the Parliamentary Standing Committee on March 9, 2012. We will examine the report expeditiously and take steps for the enactment of DTC at the earliest.

Here are some of the salient features and highlights of the DTC: 1. DTC removes most of the categories of exempted income such as Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property. 2. Rationalization of Tax Incentives for Savings, Tax saving based investment limit remains Rs 100,000, another Rs 50,000 has been added for pure life insurance (Sum insured is at least 20 times the premium paid) , health insurance, mediclaim policies and tuition fees of children. But the Rs 1.00 lac investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension fund.

3. The tax rates and slabs have been modified. The proposed rates and slabs are as follows (incidentally, in his budget speech for 2012-13, finance minister has proposed the same slabs, therefore IT slabs for the 2012-13 will be the same as proposed in DTC)

Annual Income Up-to INR 200,000 (for senior citizens upto INR 250,000) Between INR 200,000 to 500,000 Between INR 500,000 to 1,000,000

Tax Slab Nil 10% 20% Nil 30%

Above INR 1,000,000 ( Men and women are treated same now )

4. Exemption will remain the same for interest on housing loan for self- occupied property i.e. Rs 1.50 lac per year. 5. Only half of Short-term capital gains will be taxed. e.g. if you gain Rs 50,000, Rs 25,000 will be added to your taxable income. Long term capital gains (from equities and equity mutual funds, on which STT has been paid) will continue to be exempted from income tax. 6. As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) savings, accretions and withdrawalsto be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to tax these withdrawals. 7. Surcharge and education cess to be abolished. 8. For income from House Property : Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also, entire interest paid on home loan for a rented house is deductible from rent. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not given on rent. But, under the Direct Tax Code 2010, such a concept has been abolished. 9. Tax exemption on LTA (leave travel allowance) is abolished. 10. Tax exemption on Education loan to continue. 11. Taxation of Capital gains from property sale: For sale within one year, gain is to be

added to taxable salary. For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed as per the tax slab. Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981. 12. Medical reimbursement: Max limit for medical reimbursements has been increased to Rs 50,000 per year from current Rs 15,000. 13. Tax on dividends: Dividends will attract 5% tax. 14. As per the current laws, a NRI is liable to pay tax on global income if he is in India for a period more than 182 days in a financial year. But in new bill, this duration has been changed to 60 days. To avoid any income tax, an Indian sailor employed with a foreign ship will have to stay maximum for 60 days in India. 15. Corporate tax reduced from 34% to 30% including education cess and surcharge. Other salient features of the DTC 1. Stability in direct tax rates - Currently, the rates of tax for a particular year are stipulated in the Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is proposed. 2. Advance Pricing Agreements for International Transactions -This will

bring in certainty in transfer-pricing issues as any taxpayer can enter into an agreement with the tax administration, which will be valid for a period up to five years. 3. Controlled Foreign Company Regulations -This is a provision which will assist in taxation of profits of a foreign company in the hands of resident share- holders who may have incorporated such a company in low tax jurisdictions and are accumulating passive income (i.e. interest, dividends, capital gains, etc.) in the company without repatriating the income to India. 4. Currently, foreign companies are taxed at the rate of 42.2% (inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2% (inclusive of surcharge and cess) plus a dividend distribution tax at the rate of 16.6% when they distribute dividend from accumulated profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the rate at 30% and levying a branch profit tax (in lieu of dividend distribution tax) at

the rate of 15%. This will provide tax neutrality between a branch and a subsidiary of a foreign company in India. 5. Taxation of assets held abroad under wealth tax It is proposed to include certain

assets of residents which are held abroad, such as deposits in bank accounts in the case of individuals and interest in a foreign trust or in a controlled foreign corporation. This will create a reporting requirement mechanism for assets held abroad. 6. Phasing out Profit-linked Tax Incentives and Replacing them by Investment-linked

Incentives - It has been observed that profit-linked deductions are prone to misuse by shifting of profits from non-exempt to exempt entity or by reporting higher profits in exempt income entity. Such profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC. 7. Taxation of Non-profit Organizations: It is proposed to tax non-profit

organizations set up for charitable purposes on their surplus. Donations to these non-profit organizations will be eligible for tax deduction in the hands of the donor.