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GES Tax Alert


20 August 2009
Volume : GES/04/2009

The Direct Taxes Code (DTC) Bill 2009 - Focus on


Mumbai
Personal Tax implications
264-265, Vaswani Chambers,
Dr. Annie Besant Road,
Worli,Mumbai 400 030. Background

Tel: + 91 (0) 22 6619 8400 As a first step towards simplifying and bringing about structural changes in
Fax: + 91 (0) 22 6619 8401
direct taxes, the new Direct Taxes Code (DTC) Bill 2009 has been released for
Delhi public debate. This is expected to be presented in the winter session 2009 of
MCT House, One Okhla
Centre, Block A, Okhla the Parliament. The Code, once enacted, is proposed to be effective from 1st
Institutional Area,
of April 2011.
New Delhi, 110 025.

Tel : +91 (0) 11 6627 6000 The Code attempts to simplify the language to enable better comprehension
Fax : + 91 (0) 11 6627 6011 and remove ambiguity. It is expected that this would specially meet the
Bangalore aspirations of the young and professionally mobile population. The Code has
Deloitte Centre, Anchorage II,
been drafted considering the “principles that have gained international
100/2, Richmond Road,
Bangalore 560 025. acceptance”.

Tel: +91 (0) 80 6627 6000 Key Highlights of the DTC


Fax: +91 (0) 80 6627 6409

Chennai
 The due date of filing tax return has been advanced to 30 June from 31
No.52, Venkatanarayana July for individuals who do not have business income.
Road,
7th Floor, ASV N Ramana  While the tax rates remain the same, major changes are proposed in the
Tower,
T-Nagar, income slabs. Surcharge and Education Cess have been removed.
Chennai 600 017.
Tel: +91 (0) 44 6688 5000  The concept of “Resident but not ordinarily Resident” has been omitted.
Fax: +91 (0) 44 6688 5019
 Introduction of Exempt Exempt Tax (EET) method for taxation of savings
introduced as against the current Exempt-Exempt -Exempt (EEE) method.
Kolkata
Bengal Intelligent Park  A certificate of Residency to be produced for claiming treaty benefits.
Building, Alpha, 1st floor,
Plot No –A2, M2 & N2,
Block – EP & GP Sector – V,  India not to provide credit for taxes paid overseas in respect of India
Salt Lake Electronics sourced income, where there is no treaty in place.
Complex,
Kolkata - 700 091.
 Automatic treaty override, where the treaty provisions are more beneficial,
Tel : + 91 (0) 33 6612 1000 done away with. The DTC provides that the later of the Code or the treaty
Fax : + 91 (0) 33 6612 1001
would prevail.

 Concept of previous year and assessment year done away with.


Ahmedabad
“Heritage” 3rd Floor, Snap shot of the current and proposed income slabs
Near Gujarat Vidyapith,
Off Ashram Road, Amounts in INR
Ahmedabad – 380 014.
Tax Rate As proposed by Proposed as per
Tel: + 91 (0) 79 2758 2542 Finance Bill, 2009 DTC
Fax: + 91 (0) 79 2758 2551 Basic 160,000 *** 160,000***
Exemption
Hyderabad 10% 160,001 – 300,000 160,001 –
7th Floor, Lingapur House, 1,000,000
Amrutha Estates, 20% 300,001 – 500,000 1,000,001 –
Himayathnagar 2,500,000
Hyderabad – 500 029
30% > 500,000 > 2,500,000
Tel: + 91 (0) 40 2322 2098
Fax: + 91 (0) 40 2322 2098 *** INR 190,000 for Resident Female individuals, and INR 240,000 for senior

Vadodara citizens.
Chandralok,
31, Nutan Bharat Society, Currently, an education cess of 3% is applicable on the taxes, and hence the
Alkapuri, Vadodara – 390 007
maximum marginal rate is 30.90%. The proposed maximum marginal rate is
Tel: + 91 (0265) 2233 3776 30%.
Fax: +91 (0265) 2233 9729
Residential Status and Scope of Income

Individuals are categorized into Residents and Non-Residents. The definitions


for Residents and Non-Residents as per existing tax laws are retained.,

The current provisions categorise residents into Residents and Ordinarily


Residents (ROR) and Residents but not ordinarily residents (RBNOR). This
bifurcation has been omitted in the DTC.

Residence-based taxation is applicable to “Residents” and accordingly


worldwide income is liable to be taxed. Source-based taxation to be applied for
Non-Residents.

However, Residents would not be taxed on income accrued / received outside


India if the income relates to:

 the financial year in which the individual ceases to be a non-resident, or

 the financial year immediately succeeding such financial year, provided the
individual was a non-resident for nine years immediately preceding the
financial year in which he ceased to be a non-resident.

Rules for computation of total income

The incomes have broadly been categorized into “Income from ordinary
sources” and “Income from special sources”.

Ordinary Sources Special Sources


includes
Coverage Employment income Interest, dividends, capital
Income from house property gains etc received by a non
Income from business resident on investment
Capital gains income,
Income from residuary sources Winnings from lottery,
crossword puzzle,
gambling received by any
assessee etc.
Incentives Deduction of incentives Deduction of incentives not
permissible permissible

Set off & Possible within the head Set off of loss from one
Carry Ordinary Sources. However, source with profits from
forward of losses under the head Capital another source not
losses Gains and from speculative permissible.
business are ring fenced and
cannot be set off from income
under any other head
Tax Rates At normal rates after basic At rates specified, basic
exemption, as per slab rates exemption not available.
provided for

Return filing Mandatory where the taxable Mandatory


obligation income exceeds the maximum
amount not chargeable to tax
The various heads of income under Ordinary Sources have been elaborated
below

Income from employment, which includes Gross salary as reduced by the


sum of permissible deductions and the value of perquisites and profits in lieu of
salary.

The permissible deductions are

 Professional tax paid


 Transport allowance to the extent prescribed
 Special allowance or benefit to meet expenses incurred wholly and
exclusively in the performance of duties to the extent actually incurred.
 Compensation under Voluntary retirement / Gratuity received on retirement
or death / amounts received on commutation of pension - as prescribed
 Pension received by gallantry awardees.

Permitted deductions with respect to gratuity / voluntary retirement /


commutation of pension etc would be available to the extent the same is
deposited in a prescribed account. On withdrawal from such accounts, these
would be subject to taxes.

Salary would inter-alia include perquisites in nature of:

 Rent free or concessional accommodation provided by the employer.


 Value of any sweat equity share, including employee stock options allotted
or transferred, on the date of exercise.
 Value of any amenity, facility, privilege or service, computed as prescribed.

It would also include the following for which currently exemptions are available:

 Leave Travel concessions - for travel within India.


 Leave salary
 Medical reimbursements
 House Rent Allowance.
Income from house property

There are no benefits available for self occupied house property (currently,
interest costs not exceeding INR 150,000 is allowed as a deduction). Where
the property is deemed to be let out, or actually let out, the income shall be the
gross rent less specified deductions.

Gross rent would be the higher of the contractual rent or presumptive rent
calculated at 6% of

 The value fixed by the local authority or in its absence,


 Cost of construction/acquisition.
 Gross rent for one self occupied property would be considered Nil.
Advance rent to be taxed in the financial year to which it actually relates.

The deductions available in the case of a rented property / deemed to be let out
property would include

 taxes levied by the local authority as well as taxes on services paid to


Central Government,
 20% of gross rent towards repairs and maintenance (currently this is at
30%)
 Interest payable on borrowed capital.

Income from business needs to be computed as per the provisions of the


DTC. From the perspective of an employer on withholding tax compliances,
where there has been no compliance with respect to tax withholding, (including
on salary payments) by the employer, the related expenditure would not be
allowed as a deduction. However, such expenses could be claimed in the year
the actual deduction and deposit takes place, provided such payment is within 2
years from the end of the financial year in which the taxes were deductible.

Capital Gains

Income from transactions in investment assets (capital assets other than


business capital assets) would be taxed under the head “Capital Gains”.

Distinction between short-term investment asset and long-term investment


asset has been eliminated. Assets held for more than one year are entitled to
indexation benefit (currently for shares /security the period of holding is one
year, and for other assets the period is three years).

Capital gains arising from transfer of personal effects and agricultural land to be
excluded from the ambit of taxation. Base date for determining cost of
acquisition for the purpose of computing capital gains shifted from 1 April 1981
to 1 April 2000.

Securities Transaction Tax to be abolished.

In case cost of acquisition and cost of improvement of an investment asset


cannot be determined, the same shall be deemed to be Nil for the purposes of
computing capital gains.
Current exemption provisions based on investments of sale proceeds have
been significantly revised.

Capital gains income derived by non-residents brought within the purview of


Special Sources resulting in differential and possibly higher taxes as compared
to resident individuals. While resident individuals would be taxed at their
personal marginal rate, the non-residents are liable to be taxed at 30% on the
capital gains. More clarity is required with respect to the computation of capital
gains in the case of non-residents.

Losses under the head capital gains would be ring fenced and such loss shall
not be allowed to be set off against income under other heads. Further, such
loss (as is the case with loss under other heads) is allowed to be carried
forward indefinitely. Currently, the period for which losses can be carried
forward, is limited to 8 years.

Income from Residuary sources

Residuary income would comprise any income which does not form part of any
other head of income under ordinary sources / special sources.

Withdrawal under the savings scheme / retirement benefit account maintained


by the employees (both the investment amounts, as well as the interest
accrued) would be taxable under this head. However, the amount of
accumulated balance as on the 31st day of March, 2011, in the account of an
employee participating in an approved provident fund and any accretion thereto
shall be excluded from taxation. Any sum received under a pure life insurance
policy including bonus shall be exempt from tax.

Tax Incentives

Income from Special Sources is not entitled to incentives. However, income


from Ordinary Sources is entitled to a deduction of incentives which includes
the following:

 Contribution to Permitted Savings Intermediaries (including contributions to


approved provident fund, approved superannuation fund, new pension
fund, life insurer etc).
 Payment of tuition fees towards children education (for two children)

(Tax incentives relating to the above shall be subject to a maximum of INR


300,000 per annum).

Other incentives (subject to conditions and limits as prescribed) include interest


on higher education loan, payment of health insurance premium for self and
dependents, deduction for expenses incurred on maintenance of disabled
dependent, medical treatment of prescribed diseases, deduction for persons
with specified disability, donations etc.
Wealth Tax

 Individuals, Hindu Undivided Families and private discretionary trusts liable


to wealth tax on specified assets.
 Net wealth in excess of INR 500 Million to be chargeable to wealth-tax at
the rate of 0.25%.
 Value of assets located outside India in the case of an individual who is not
a citizen of India / or not a resident of India is not chargeable to wealth tax.
 The definition of wealth has been extended to include all assets other than
specific exclusions such as one house, or part of the house or plot
belonging to the individual which is acquired or constructed before 1st day
of April 2000.
 The value of the assets shall be as per prescribed rules (except for cash).

Comments

The Code will need to be read with the related rules / notifications which are
expected to be notified at a later point. The full impact will be known once these
are available. Nevertheless, the Code broadly indicates the intent of the
Government to move towards a simpler tax structure with lower tax rates,
higher compliance through stringent penalties, resulting in a wider tax base.
While most of the tax deductions and exemptions have been done away with,
the government has been fairly generous in increasing the slabs of income
resulting in lowering tax liabilities for all.

Source: (1)Direct Code – August 2009

(2)Discussion paper on Direct Tax Code – August, 2009

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