A COMPREHENSIVE PROJECT ON COMPARATIVE ANALYSIS OF DIRECT TAX CODE AND INCOME TAX ACT Submitted to C K SHAH VIJAPURWALA INSTITUTE

OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION Under Gujarat Technological University UNDER THE GUIDENCE OF Faculty Guide Ms. Ishita Ashara (Asst. Professor) Submitted by Sushank Kadam Enrolment No. (097050592040) Chirag Rupani Enrolment No. (097050592012)

M.B.A. SEMESTER IV C K Shah Vijapurwala Institute of Management M.B.A. PROGRAMME Affiliated to Gujarat Technological University Ahmedabad

April 2011

Comparative Analysis of Direct Tax Code & Income Tax Act

Submitted by:

Submitted to:
C.K.Shah Vijapurwala Institute of Management
In partial fulfilment of the requirement of the award for MBA under Gujarat

Sushank Kadam
Enrolment No:097050592040

Chirag Rupani
Enrolment No:097050592012

Technological University

PREFACE
MBA is a stepping-stone to the management carrier and to develop good manager it is necessary that the theoretical must be supplemented with exposure to the real environment. Theoretical knowledge just provides the base and its not sufficient to produce a good manager thats why practical knowledge is needed.

Therefore the research product is an essential requirement for the student of MBA. This research project not only helps the student to utilize his skills properly learn field realities but also provides a chance to the organization to find out talent among the budding managers in the very beginning.

As a student of professional course, it is quite necessary for us to have knowledge about the practical aspect of Taxation within India and the Direct tax code which will be levied from 2012. The project work is to develop our ability and knowledge about the new tax code i.e. Direct Tax Code & develop ideas in that context.

The theoretical knowledge & conceptual ideas are the background for the career development but project work has also equal contribution for occur. The sentence experience is the best teacher is very true in every field & so project work during the course is arranged to develop the skill & attitude.

It is rightly said that practice makes a man perfect. In order to achieve excellence and success, theoretical knowledge must be supplemented with practical knowledge and practical work i.e. is Project work. Among the numerous interesting things concerned with changing the understanding of management students, this project work plays an important role in development of us.

ACKNOWLEDGEMENT
Completion of project has been possible only because of the constant encouragement, goodwill, support and guidance of our peers. The cooperation by them acted as a driving force at each stage during the project.

We express our gratitude to MS. Ishita Ashara our project guide for directing our project in right direction and for creating opportunistic situation to gain knowledge. Also we thank her for helping us to guide in making our project memorable. We are also very thankful to all faculties for providing useful information about Project preparation, various aspects regarding project.

We also thank to Dr. Rajesh Khajuria (Director) for giving us a great opportunity to learn Direct Tax Code. We also thank them for tremendous support they have provided by taking time out of their busy schedules.

We also give a special thanks to all staff of C.K.Shah Vijapurwala Institute of Management for keeping us on our toes throughout the program and also helping us through their work schedule.

We thank all our colleagues & friends for providing a good working atmosphere in the organization.

DECLARATION
We, Sushank Shantaram Kadam and Chiragkumar Bipinchandra Rupani, hereby declare that the report for Comprehensive Project entitled Comparative Analysis of Direct Tax Code & Income Tax Act is a result of our own work and our indebtedness to other work publications, references, if any, have been duly acknowledged.

DATE: 28/04/2011

Sushank S. Kadam
PLACE: Vadodara

...............................

Chirag B. Rupani

................................

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY
Direct tax code, it is said to replace the existing Income Tax Act, 1961. The Government had announced its intention to introduce a revised and simplified Income tax Bill. If approved, the DTC shall come into force from April 1, 2012, and shall be applicable for the financial year 2012-13. The new tax code would be a vast improvement over Income Tax Act 1961. To moderate tax rate and simplify tax laws, all direct taxes including FBT and income tax would be brought under one code. The new code is aimed at eliminating the scope of litigation as far as possible. Direct Tax code (DTC) 2012 proposes substantial changes to the current direct tax legislation and is likely to have significant impact on the business community. The business community do well to assess the impact on their current structure and business models. Direct Tax Code seeks to increase tax exemption on income from Rs. 1.8 lakh to Rs. 2 lakh and fix the corporate tax at a flat 30 per cent. As per the Bill, income from Rs. 2-5 lakh will be taxed at 10 per cent; Rs. 5-10 lakh at 20 per cent and 30 per cent thereafter.

The Direct Tax Code significantly highlighted on following points.

Income tax exemption limit proposed at Rs. 2 lakh per annum, up from

Rs. 1.8 lakh.

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on

between Rs. 5-10 lakh, and 30 per cent for above Rs. 10 lakh.
Tax burden at highest level will come down by Rs. 41,040 annually.

Corporate tax to remain at 30 per cent but without surcharge and cess.

 The Minimum Alternate Tax (MAT) rate has been increased from 18 to

20 percent.

Dividend distribution tax, tax on distributed profits of a domestic co will

be 15 percent.
Exemption for investment in approved funds and insurance schemes

proposed at Rs. 1.5 lakh annually, against Rs.1.2 lakh currently.

DTC removes most of the categories of exempted income. Equity

Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits.
Only half of Short-term capital gains will be taxed.

For incomes arising of House Property: Deductions for Rent and

Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.
Tax exemption on Education loan to continue.

Tax exemption on LTA (leave travel allowance) is abolished.

Taxation of Capital gains from property sale: For sale within one year,

gain is to be added to taxable salary.

Tax on dividends: Dividends will attract 5% tax.

Medical reimbursement maximum limit for medical reimbursements has

been increased to 50,000 per year from current 15,000 limits.

TABLE OF CONTENT
PAGE NO
13 32 33 35 37 39 41 43 44 46

SR NO

PARTICULARS
PART I GENERAL INFORMATION

1 2

INTRODUCTION NEED,FEATURES & OTHER ASPECT a) Need for DTC b) Salient Features Of DTC c) Development Of DTC

TAX SLAB RATE OF DTC a) Tax Deductions b) Post DTC Tax Liabilities & Savings

4 5

SCHEDULES TO DTC EXPERTS VIEWS ON DTC

PART II PRIMARY STUDY

6 RESEARCH METHODOLOGY a) Research Methodology b) Objective Of Study 7 8 9 10 11 12 13 14 15 MECHANISM OF TAXATION COMPARATIVE STUDY INDUSTRYWISE IMPACT ANALYSIS EXAMPLE RESULTS & FINDINGS PROPOSED CHANGE IN DTC IN 2011 PROS AND CONS CONCLUSION BIBLIOGRAPHY 52 53 53 54 59 65 80 89 93 96 99 102

LIST OF TABLES/GRAPHS/DIAGRAMS

10

LIST OF TABLES/GRAPHS/DIAGRAMS SR NO. 1 2 3 4 5 6 7 8 PARTICULARS FEATURES OF DTC TAX SALBS OF INDIVIDUALS TAX SALBS OF SENIOR CITIZEN COMPARISION OF TAX SLAB COMPARISION OF TAX LIABILITY MECHANISM OF TAXATION COMPARISION OF TAX RATES TAX LIABILITY AT DIFFERENT INCOMES TABLE 1 2 3 4 5 6 7 8 PAGE 32 39 40 41 42 54 63 82

11

PART I GENERAL INFORMATION

12

INTRODUCTION

13

INTRODUCTION
The draft Direct Taxes Code (DTC) along with a Discussion Paper was released in August, 2009 for public comments which will going to enacted w.e.f.1 st day of April 2012. Since then, a number of valuable inputs on the proposals outlined in these documents have been received from a large number of organisations and individuals. These inputs have been examined and the major issues on which various stakeholders have given their views have been identified. The existing Income Tax Act of India was enacted in 1961. It replaced the first Income Tax Act of 1922. Thus, historically, the first Income Tax Act was operational for almost 40 years and the existing one has been in place for almost 48 years. Little change has been made during this time up until the current proposals. Over the years, Indias tax laws have become more complicated and difficult to administer or even understand. Litigation is at an all time high in the country with tribunals and courts swamped with tax disputes being challenged by the taxpayers and the tax department. The present Income Tax Act contains more than 400 sections and even more subsections, provisos and explanations. For the general tax payer, it is virtually impossible to decipher the act. The Indian government is seeking to initiate radical tax reforms by proposing to enact a new Direct Tax Code which will replace the existing Income Tax Act and come into effect on April 1, 2012 (for the fiscal year 201213). The Direct Taxes Code Bill was placed by the Finance Minister for public debate and discussion on August 12, 2009. The code seeks to combine the law relating to all direct taxes (income tax and wealth tax) less than one roof. The proposed DTC has been designed with the objective of simplification of the provisions of tax laws by having a fresh look at the provisions of the act. After taking into consideration the representations received on the proposed provisions of the DTC, the government has now proposed

14

to modify the DTC and issued a revised discussion paper to this effect on June 15. This Revised b i l l addresses these major issues. The issues which this Revised Discussion Paper addresses are: i. Minimum Alternate Tax (MAT) - Gross assets vis-a-vis book profit. ii. Tax treatment of savings - Exempt Exempt Tax (EET) vis-a-vis Exempt Exempt Exempt (EEE) basis. iii. Taxation o f i n c o m e f r o m e m p l o y m e n t - R e t i r e me n t b e n e f i t s and perquisites. iv. Taxation of income from house property.

v.

Taxation of capital gains

vi. vii. viii.

Taxation of non-profit organisations Special Economic Zones Taxation of existing units Concept of Residence in the case of a company incorporated outside India.

ix.

Double Taxation Avoidance Agreement (DTAA) vis-a-vis domestic law. x. Wealth Tax.

X.

General Anti Avoidance Rule (GAAR).

The proposals in this revised bill would lead to a reduction in the tax base proposed in the DTC. The indicative tax slabs and tax rates and monetary limits for exemptions and deductions proposed in the DTC will, therefore, be calibrated accordingly while finalising the legislation.

15

 MINIMUM ALTERNATE TAX-GROSS ASSET VIS--VIS BOOK PROFIT The bill includes discussion on the DTC deals with Minimum Alternate Tax (MAT). As stated in the /nm Discussion, a company would ordinarily be liable to tax in respect of its total income. However, owing to tax incentives, the liability on total income, in many cases, has been found to be extremely low or even zero. Internationally, a variety of economic bases and methods are used to calculate presumptive income so as to overcome the problem of excessive tax incentives. These

presumptions could be based on net wealth, value of assets used in business or gross receipts of the enterprise. 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. TAX TREATMENT OF SAVINGS EXEMPT EXEMPT TAX (EET) VIS--VIS EXEMPT EXEMPT EXEMPT (EEE) BASIS This DTC bill proposes the Exempt-Exempt-Taxation (EET) method of taxation for savings. Under this method, the

contributions towards certain savings are deductible from income (this represents the first 'E' under the EET method), the accumulation/accretions are exempt (free from any tax incidence) till such time as they remain invested (this represents the second

16

E under the EET method) and all withdrawals at any time are subject to tax at the applicable marginal rate of tax (this represents the T under the EET method). Based on the EET principle, the Code provides for deduction in respect of aggregate contributions up to a limit of (Rs.300000) three hundred thousand rupees (both by the employee and the employer) to any account maintained with any permitted savings intermediary, during the financial year. This account will have to be maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central

Government. The permitted savings intermediaries will be approved provident funds, approved superannuation funds, life insurer and New Pension System Trust. It has been represented that in India, in the absence of a universal social security system, the proposed EET method of taxation of permitted savings would be harsh. Tax payers require some flexibility in making withdrawals in lump sum without being subjected to tax. People may need lump sum funds on retirement for various family obligations. Requests have therefore been made for continuation of Exempt Exempt Exempt (EEE) method of tax treatment of investments. Alternatively, the application of EET should be restricted to new savings instruments after the date from which the DTC comes into effect, and it should not apply to existing saving instruments. Therefore, as of now, it is proposed to provide the EEE method of taxation for Government Provident Fund (GPF), Public

Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund

Regulatory and Development Authority.

Approved pure life

insurance products and annuity schemes will also be subject to EEE method of tax treatment. In order to achieve the objective of long term savings, the rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are

17

actually made and utilised by the taxpayer for the long term. Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument. TAXATION OF INCOME FROM EMPLOYMENT RETIREMENT BENEFITS AND PERQUISITES Direct Taxes Code (DTC) deals with computation of income taxable under the head Income from employment. It provides that Income from employment will be gross salary as reduced by the aggregate amount of permissible deductions. Now the term salary is defined to include the value of perquisites, profits in lieu of salary, amount received on voluntary retirement or termination, leave salary, gratuity and any annuity, pension or any commutation thereof. Contributions made by the employer to an approved superannuation fund, provident fund, life insurer and New Pension System Trust is considered as salary. Deductions from gross salary are allowed for compensation received under voluntary retirement scheme, amount of gratuity received on retirement or death and amount received on

commutation of pension to the extent such amounts are deposited in a Retirement Benefits Account. Thus, retirement benefits will be exempt only if deposited in Retirement Benefits Account and will be subject to tax on withdrawal from such account.

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) (c) The value of any leaves travel concession; The amount received on encashment of unveiled earned

18

leave on retirement or otherwise; (d) (e) Medical reimbursement; and the value of free or concessional medical treatment paid for, or provided by, the employer.

TAXATION OF INCOME FROM HOUSE PROPERTY The Direct Taxes Code (DTC) deals with the computation of income from house property. Income from house property is one of the five heads under which accruals or receipts relating to ordinary sources of income are to be classified. The bill states that income from house property, which is not occupied for the purpose of any business or profession by its owner, is to be taxed under this head. The bill 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 rateable value fixed by the local authority. However, in a case where no rateable 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

19

rent:(i) Amount of taxes levied by a local authority and tax on services, if actually paid. (ii) 20% of the gross rent towards repairs and maintenance as against thirty (iii) per cent at present.

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.

TAXATION OF CAPITAL GAINS The Direct Taxes Code (DTC) 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 in thereof and transfer-related incidental

expenses. However,

the case of a capital asset which is

20

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. The DTC proposes to abolish Securities Transaction Tax. Therefore, all capital gains (loss) arising from the transfer of equity shares in a company or units of an equity oriented fund will form part of the computation process described above. The cost of acquisition is generally with reference to the value of the asset on the base date or, if the asset is acquired after such date, the cost at which the asset is acquired. The base date will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains due to

appreciation during the period from1.4.1981 to 31.3.2000 will not be liable to tax as the assesses will have an option to take the cost of acquisition for these assets at the price prevailing as on 1.4.2000.

TAXATION OF NON-PROFIT ORGANISATIONS The Direct Taxes Code (DTC) deals with taxation of nonprofit organizations. The Code uses the phrase permitted welfare activities instead of the phrase "charitable purpose" used in the current legislation to define the activities to be pursued by these organisations. Permitted welfare activities has been defined to mean any activity involving relief of the poor, advancement of education, provision of medical relief,

preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Advancement of any other object of general public utility will not include any activity in the

21

nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a fee or for any other consideration, irrespective of the nature of use, application or retention of the income from such activity. The Discussion Paper mentions that while trusts and institutions established for charitable purposes have generally enjoyed tax exemptions, the following shortcomings have been observed in the exemption regime:-

(a)

The

exemption

regime

is

complex,

overlapping

and

dissimilar since it varies across institutions based on their activities.

(b)

The provisions fail to meet the test of efficiency as they provide different conditions for institutions carrying on similar activities.

(c)

The provisions also do not meet the test of equity as the compliance cost for an institution varies depending upon the provision of law under which the exemption is granted.

(d)

The concept of income of such an institution has been the subject matter of litigation. Should gross receipts of the institution or the net income of the institution be reckoned as the income? This question has been the subject matter of extensive debate.

(e)

vexed

issue

is

whether

the

institution

should

be

allowed

to accumulate income not applied or utilized for

charitable purposes and how the accumulation should be treated.

22

(f)

There is unending dispute whether a business is incidental to attainment of the objectives of the institution or not, since the income from incidental business is exempt from tax.

The DTC proposes a new tax regime for all trusts and institutions carrying on charitable activities. The salient features of the new regime are as under:-

(a)

An organization shall be treated as a non-profit organization if,(i) it is established for the benefit of the general public; (ii) it is established for carrying on permitted welfare activities; (iii) it is not established for the benefit of any particular caste; (iv) it is not established for the benefit of any of its members; (v) it actually carries on the permitted welfare activities during the financial year and the beneficiaries of the activities are the general public; (vi) it does not intend to apply its surplus or other income or use its assets or incur expenditure, directly or indirectly, for the benefit of any interested person; (vii) Any expenditure by the organisation does not ensure, directly or indirectly, for the benefit of any interested person; (viii) the funds or assets of the organisation are not used or applied, or deemed to have been used or applied, directly or indirectly, for the benefit of any interested person; (ix) The surplus, if any, accruing from its permitted activities does not ensure, directly or indirectly, for the benefit

23

of any interested person; (x) The funds or the assets of the non-profit organisation are not invested or held in any associate concern or in any prescribed form or mode; (xi) It maintains such books of account and in such manner, as may be prescribed;

(xii) It obtains a report of audit in the prescribed form from an accountant before the due date of filing

of the return in respect of the accounts of the business, if any, carried on by it; and the accounts relating to the permitted welfare activities and

(xiii) It is registered with the Income-tax Department under the Code. (b) The tax liability of a non-profit organisation shall be 15 per cent of the aggregate of the following:(I) the amount of surplus generated from the permitted welfare activities; and (II) the amount of capital gains arising on transfer of an investment asset, being a financial asset;

Surplus generated from permitted welfare activities; The amount of surplus generated from the permitted welfare activities shall be the gross receipts as reduced by the outgoings. The gross receipts shall be the aggregate of the following:(i) The amount of voluntary contributions received during the financial year; (ii) Any rent received in respect of a property consisting of any buildings or lands appurtenant thereto; (iii) The amount of any income derived from a business which is incidental to any of the permitted welfare activities; (iv) Full value of the consideration received from the

24

transfer of any investment asset, not being a financial asset; (v) Full value of the consideration received from the transfer of any business capital asset of a

business incidental to its permitted welfare (vi) The amount of any income received

activities; from any

investment of its funds or assets; and (vii) All other incomings, realizations, proceeds, donations or subscriptions received from any source. The amount of outgoings shall be the aggregate of(i) Voluntary contributions received during the financial year by the non- profit organisation made with a

specific direction that they shall form part of the corpus of the non-profit organisation; (ii) The amount actually paid during the financial year for any expenditure, excluding capital expenditure, incurred wholly and exclusively for earning "gross receipts"; (iii) The amount actually paid during the financial year for any expenditure, excluding capital expenditure, on the permitted welfare activities; (iv) The amount of capital expenditure actually paid during the financial year in relation toi. Any business capital asset of a business or obtaining any

incidental to any of the permitted welfare activities; or ii. Any investment asset, not being a financial asset. (v) Any amount actually paid during the financial year to any other non- profit organisation engaged in a similar permitted welfare activity; (vi) Any amount applied outside India during the

financial year if the amount is applied for an activity

25

which tends to promote international welfare in which India is interested and the non-profit organisation is notified by the Central Government in this behalf. (c) The surplus generated from permitted welfare activities be determined on the basis of cash system of accounting. (d) Capital gains arising on the transfer of an investment asset, being a financial asset, will be computed in accordance with the provisions under "Capital gains". (e) A non-profit organisation will be prohibited from any the head

of its funds or holding any of its asset in any associate concern or in any prescribed formor mode. (f) It will be mandatory to register for with every the non-profit Income-tax organisation

Department by making an application to the Chief Commissioner or Commissioner concerned. The

registration, once granted, shall be valid from the financial year in which the application is made till it is withdrawn. (g) The donations made to a non-profit organisation will be eligible for deduction in the hands of the donor at the appropriate rates. (h) The income of any trust or institution endowment the

recognised/registered under the religious Acts of the Central

Government or

State Governments shall be fully exempt from incometax. However, donations to such trusts or

institutions will not enjoy any deduction in the hands of the donor.

26

 SPECIAL ECONOMIC ZONES TAXATION OF EXISTING UNITS The Direct Taxes Code (DTC) deals with taxation of non-profit organizations. The Code uses the phrase permitted welfare activities instead of the phrase "charitable purpose" used in the current legislation to define the activities to be pursued by these organisations. Permitted welfare activities has been defined to

mean any activity involving relief of the poor, advancement of education, provision of medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Advancement of any other object of general public utility will not include any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a fee or for any other consideration, irrespective of the nature of use, application or retention of the income from such activity. It has been pointed out that while the current profit linked deductions available to developers of Special Economic Zones (SEZs) have been protected for their unexpired period in the DTC, there is no mention of grandfathering of these profit linked deductions in the case of units operating in these SEZs. CONCEPT OF RESIDENCE IN THE CASE OF A COMPANY INCORPORATED OUTSIDE INDIA Direct Taxes Code (DTC) discusses the test of residence of a person for tax purposes. The tax residence of companies (that is, where companies are established or carry on business) is usually based on either place of incorporation (legal seat), location of management (real seat) or a combination of the two. The DTC provides that a company incorporated in India will always be treated as resident in India. However, a company incorporated abroad (foreign company) can either be resident or

27

non-resident in India. It has been proposed in the DTC that a foreign company will be treated as resident in India if, at any time in the financial year, the control and management of its affairs is situated wholly or partly in India (it need not be wholly situated in India, as at present). It has been pointed out that under the new test for determining residence in the DTC, a foreign company whose control and management is partly in India will be treated as a resident of India and thus liable for taxation in India on its global income. The word partly used in the DTC sets a very low threshold for regarding a foreign company as a resident in India. Apprehensions have been expressed that it could lead to a foreign multi-national company being held as resident in India on the ground that some activity like a single meeting of the Board of Directors is held in India. Also, a foreign company owned by

residents in India could be held to be resident in India as part of the control of such company may be in India. It has been

represented that this will result in uncertainty in taxation and will impact foreign direct investment into India. Modification o f the phrase wholly or partly has therefore been suggested. The bill also proposed that a company incorporated outside India will be treated as resident in India if its place of effective management is situated in India. The term will have the same meaning as currently laid down in the part of wealth tax to the Code as under: Place of effective management of the company means(i) The place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or (ii) In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their

28

functions. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) VIS--VIS DOMESTIC LAW The bill also discussed about relief from double taxation. Ordinarily, countries f o l l o w both residence-based taxation and

source-based taxation. However, if two countries tax the same income, one based on the principle of residence and the other based on the principle of source, it could lead to double taxation of the same income. Hence, countries have agreed on certain principles to avoid double taxation and accordingly, entered into Double

Taxation Avoidance Agreements (DTAA). DTAA provides for certainty on how and when will income of a particular kind be taxed and by which contracting State. The taxation right of each State is defined. If one State has the right to tax a certain income, provision is made for the other State to give tax credit or exemption to that income in order to avoid double taxation. The DTC provides that neither a DTAA nor the Code shall have a preferential status by reason of its being a treaty or law. In the case of a conflict between the provisions of a treaty and the provisions of the Code, the one that is later in point of time shall prevail. The current provisions of the Income-tax Act provide that between the domestic law and relevant DTAA, the one which is

more beneficial to the taxpayer will apply. However, this is subject to specific exceptions e.g., the taxation of a foreign company at a rate higher than that of a domestic company is not considered as a less favourable charge in respect of the foreign company. Similarly it is proposed to provide that between the domestic law and relevant DTAA, the one which is more beneficial to the taxpayer shall apply. However, DTAA will not have preferential status over the domestic law in the following circumstances:o When the General Anti Avoidance Rule is invoked, or

29

o o

When Controlled Foreign Corporation provisions are invoked or When Branch Profits Tax is levied.

WEALTH TAX The Direct Taxes Code (DTC) deals with the levy of wealth tax. Under the DTC, wealth-tax will be payable by an individual, HUF and private discretionary trusts. It will be levied on net wealth on the valuation date i.e. the last day of the financial year. Net

wealth is defined as assets chargeable to wealth-tax as reduced by the debt owed in respect of such assets. Assets chargeable to wealth-tax shall mean all assets, including financial assets and deemed assets, as reduced by exempted assets. Exempted

assets include stock in trade, a single residential house or a plot of land etc. The net wealth of an individual or HUF in excess of Rupees fifty crore s h a l l be chargeable to wealth-tax at the rate of 0.25 per cent. GENERAL ANTI-AVOIDANCE RULE The Direct Taxes Code (DTC) deals with the provisions of the General Anti Avoidance Rule (GAAR). The GAAR provisions apply where a taxpayer has entered into an arrangement, the main purpose of which is to obtain a tax benefit and such arrangement is entered or carried on in a manner not normally employed for bona- fide business purposes or is not at arms length or abuses the provisions of the DTC or substance. lacks economic

The Assessing Officer in accordance with the

directions of Commissioner of Income Tax may in such cases determine the tax consequences for the assesses by disregarding the arrangement. Under the Code, the power to invoke GAAR is

bestowed upon

the Commissioner of Income- tax. For this

purposes the Code empowers him to call for such information as

30

may be necessary. He is also required to follow the principles of natural justice before declaring an arrangement as an

impermissible avoidance arrangement. He will determine the tax consequences of such impermissible avoidance arrangement and issue necessary directions to the Assessing Officer for making appropriate adjustments. The directions issued by him will be binding on the Assessing Officer.

31

NEED, FEATURES & OTHER SIGNIFICANT ASPECTS OF DTC

32

NEED FOR DTC

The rationale for introducing DTC is to increase the efficiency and equity of the tax system by eliminating the plethora of tax exemptions or subsidies that create distortions. Its major policies include reduction in the tax rates to bring more people and companies under the tax net. India wants to modernize its direct tax laws, mainly its income tax act which is now nearly 50 years old. The government wants a modern tax code in step with the needs of an economy which is now the third largest in Asia. The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government's funds. Diagram: 1 Features of DTC

33

SOURCE: (http://www.google.co.in/imgres?imgurl=http://www.indianmba.com/Faculty_Column/FC1213/Fc1 213.jpg&imgrefurl=http://www.indianmba.com/Faculty_Column/FC1213/fc1213.html&usg=__ciY2C SVQqzzSnUlBv9PI2L2YjM4=&h=303&w=550&sz=35&hl=en&start=27&zoom=1&tbnid=mJGH0odCiE wRTM:&tbnh=91&tbnw=165&ei=gvi4TbT1Mo2wvgOCuLWiAw&prev=/search%3Fq%3Dfeatures%2B of%2Bdirect%2Btax%2Bcode%26hl%3Den%26biw%3D1280%26bih%3D709%26gbv%3D2%26tbm%3 Disch0%2C300&itbs=1&iact=hc&vpx=711&vpy=435&dur=228&hovh=119&hovw=217&tx=93&ty=90 &page=2&ndsp=27&ved=1t:429,r:4,s:27&biw=1280&bih=709)

KEY MESSAGES OF THE DTC

Thrust of the DTC o Improve efficiency of tax system by eliminating distortions in the tax structure o Simplify the complex structure of the Act, that is incomprehensible to average taxpayer o Introduce moderate levels of taxation and expand the tax base o Simplify the language to enable better comprehension o Remove ambiguity to foster voluntary compliance o Provide stability In the tax regime based on well accepted principles of taxation and best international practices

34

SALIENT FEATURES OF THE DTC

Consolidation

of

provisions:

in

order

to

enable

better

understanding of tax legislation, provisions relating to definitions, incentives, procedure and rates of taxes have been consolidated. Further, the various provisions have also been rearranged to make it consistent with the general scheme of the Act.
Elimination of regulatory functions: traditionally, the taxing statute

has also been used as a regulatory tool. However, with regulatory authorities being established in various sectors of the economy, the regulatory function of the taxing statute has been withdrawn. This has significantly contributed to the simplification exercise.
Ensure that the law can be reflected in a Form: for most taxpayers,

particularly the small and marginal category, the tax law is what is reflected in the Form. Therefore, the structure of the tax law has been designed so that it is capable of being logically reproduced in a Form.
Flexibility: the structure of the statute has been developed in a

manner which is capable of accommodating the changes in the structure of a growing economy without resorting to frequent amendments. Therefore, to the extent possible, the essential and general principles have been reflected in the statute and the matters of detail are contained in the rules/schedules.
Providing stability: at present, the rates of taxes are stipulated in the

Finance Act of the relevant year. Therefore, there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the First to the Fourth Schedule to the Code itself thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through appropriate amendments to the Schedule brought before Parliament in the form of an Amendment Bill.

35

 Reducing the scope for litigation: wherever possible, an attempt has

been made to avoid ambiguity in the provisions that invariably give rise to rival interpretations. The objective is that the tax administrator and the tax payer are ad idem on the provisions of the law and the assessment results in a finality to the tax liability of the tax payer. To further this objective, power has also been delegated to the Central Government/Board to avoid protracted litigation on procedural issues.
Single Code for direct taxes: all the direct taxes have been brought

under a single Code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system.
Use of simple language: with the expansion of the economy, the

number of taxpayers can be expected to increase significantly. The bulk of these taxpayers will be small, paying moderate amounts of tax. Therefore, it is necessary to keep the cost of compliance low by facilitating voluntary compliance by them. This is sought to be achieved, inter alia, by using simple language in drafting so as to convey, with clarity, the intent, scope and amplitude of the provision of law. Each sub-section is a short sentence intended to convey only one point. All directions and mandates, to the extent possible, have been conveyed in active voice. Similarly, the provisos and explanations have been eliminated since they are incomprehensible to non-experts. The various conditions embedded in a provision have also been nested. More importantly, keeping in view the fact that a tax law is essentially a commercial law, extensive use of formulae and tables has been made.

36

DEVELOPMENT OF DTC
Substantial amendments to Income-tax Act, 1961, (Act) by various Finance Acts and amending statutes. Concerns raised by taxpayers and tax administrators on the complex structure of the laws o Numerous amendments have rendered the Act incomprehensible o Has resulted in increased cost of compliance and administration o Difference in interpretation on a number of issues has led to litigation o Conflicting judgements rendered by Courts at various levels have compounded the problem further Several attempts to reform the tax laws since the 1990s 2005-06 Budget : Intention to undertake major tax reforms o To improve Tax-GDP ratio, expand taxpayer base, increase tax compliance and make tax administration efficient o Proposal to introduce simplified Income Tax Bill 2007-08 Budget : Proposal to release DTC for public discussion 12 August 2009 : DTC Bill, 2009 and Discussion Paper released o 285 sections, 18 schedules, power to make rules on several aspects o 318 terms defined in Definition Section DTC to replace the Act and come into force on 1 April, 2011

37

REMOVAL OF EXEMPTED INCOME

New DTC removes most of the categories of exempted income. ULIPs, Term deposits, NSC, house loan, principal repayment, stamp duty and registration fees on purchase of house property will loose tax benefits. Surcharge and education cess are abolished and Tax exemption on LTA (leave travel allowance) is abolished.

TERMS ABOLISHED UNDER DTC

Earlier Income Tax Act and Wealth tax Act (Covering Income Tax, TDS, DDT, FBT and Wealth taxes) are abolished and single code of Tax, DTC in place. Concept of Assessment year and previous year is abolished. Only the Financial Year terminology exists. Only status of Non Resident and Resident of India exits. The other status of resident but not ordinarily resident goes away

38

TAX SLAB RATE OF DTC

39

TAX SLAB RATE OF DTC

The following are the newly announced tax slabs for individuals For Individual (Men, Women & HUF) The big change is that the same tax slabs will apply to men and women. Now both are eligible for Rs 2 lakhs tax free exemption, whereas previously it used to be up to Rs 1.6 lakhs for men and up to Rs 1.9 lakhs for women. TABLE: 2 DTC Parliamentary Bill (Aug 2010)
Up to Rs 2,00,000 From Rs 2,00,001 to Rs 5,00,000 From Rs 5,00,001 to Rs 10,00,000 Above Rs 10,00,000

Tax Rate

Current Slab under Income Tax Act

Up to Rs 1,60,000 From Rs 1,60,001 to Rs 5,00,000 From Rs 5,00,001 to Rs 8,00,000 Above Rs 8,00,000

Original DTC

Nil 10% 20% 30%

Up to Rs. 1,60,000 From Rs 1,60,001 to Rs 10,00,000 From Rs 10,00,001 to Rs 25,00,000 Above Rs 25,00,000

SOURCE:

(http://www.thewealthwisher.com/2010/10/16/direct-tax-code-dtc-impact-new-

tax-slabs-leads-to-savings/)

For men or women earning up to Rs 8 lakhs the net annual tax saving under the new DTC bill is going to be a maximum of Rs 4,000.

For men or women earning between Rs 8 lakhs to Rs 10 lakhs the net annual tax saving is going to be a maximum of Rs 24,000.

For men or women earning above Rs 10 lakhs, there is no additional net annual saving available under the direct tax code other than the Rs 24,000 as mentioned in the above example as well.

40

 For Senior Citizens For those above 65 years of age, the tax exemption limit has been raised to Rs 2.5 lakhs from Rs 2.4 lakhs, for a net new saving of Rs 1,000 per annum.

TABLE: 3 DTC Parliamentary Bill (Aug 2010)

Up to Rs 2,50,000 From Rs 2,50,001 to Rs 5,00,000 From Rs 5,00,001 to Rs 10,00,000 Above Rs 10,00,000

Tax Rate
Nil 10%

Current Slab under Income Tax Act

Up to Rs 2,40,000 From Rs 2,40,001 to Rs 5,00,000 From Rs 5,00,001 to Rs 8,00,000 Above Rs 8,00,000

Original DTC
Up to Rs. 2,40,000 From Rs 2,40,001 to Rs 10,00,000 From Rs 10,00,001 to Rs 25,00,000 Above Rs 25,00,000

20%

30%

SOURCE:

(http://www.thewealthwisher.com/2010/10/16/direct-tax-code-dtc-impact-new-

tax-slabs-leads-to-savings/)

TAX DEDUCTIONS
Currently, the Income Tax Act offers individuals an annual deduction of Rs 1 lakh under 80C that can be used for instruments such as PPF (up to cap of Rs 70,000), PF, NPS scheme, ELSS, premium for pure life insurance or ULIP, principal repayment of home loan, NSC, fixed deposits with a maturity of five years, payment of tuition fees for fulltime education for up to 2 children. In the current financial year (April 2010 through March 2011), one can get an additional deduction of Rs 20,000 for investing in certain notified infrastructure bonds under 80CCF. Additionally, 80D gives a deduction of Rs 15,000 towards medical insurance.

41

Under the DTC Bill, some of the above deductions have changed. What was previously available as the 80C deduction of Rs 1 lakh is now available as a deduction towards investments only in retiral accounts such as PPF, PF, NPS, and in savings schemes as notified by the Government. These are all eligible for taxation under EEE treatment. EEE refers to the tax incidence exempt at time of investment, exempt during accumulation, and exempt at withdrawal. These will be available for the tax year starting April 1, 2012.

Additionally, an aggregate deduction of Rs 50,000 is available for premium for pure life insurance, health insurance and tuition fees for two children.

As a result, the total deduction available is Rs 1.5 lakhs.

The previous 80C deduction investments in ELSS and ULIPs were eligible for the Rs 1 lakh deduction, as was a deduction towards repayment of principal for an outstanding home loan. Under the DTC Bill all these three options are no longer eligible for a deduction.

TABLE: 4

42

SOURCE:(http://www.google.co.in/imgres?imgurl=http://cms.outlookindia.com/Upload
s/outlookmoney/2010/20100825/page28_20100922.jpg&imgrefurl=http://money.outlookin dia.com/article.aspx%3F267163&usg=__2pYAMuRqwLf32AkBx8p5q7o9G_U=&h=447&w=80 0&sz=78&hl=en&start=165&zoom=1&tbnid=QZTbIFHz_UY3AM:&tbnh=129&tbnw=207&ei=K vq4TeLlAofMuAPU0ayiAw&prev=/search%3Fq%3DTAX%2BSLAB%2BOF%2Bdirect%2Btax%2B code%26hl%3Den%26biw%3D1280%26bih%3D709%26gbv%3D2%26tbm%3Disch0%2C34000 %2C3400&itbs=1&iact=hc&vpx=265&vpy=284&dur=1577&hovh=168&hovw=301&tx=202&ty =98&page=7&ndsp=29&ved=1t:429,r:1,s:165&biw=1280&bih=709)

POST DTC TAX LIABILITIES AND SAVINGS

TABLE: 5
Men less than 65 years Taxable Income (Rs in lakhs) Post DTC Liability (Rs)
Nil Nil Nil 4000 5000 20,000 30,000 90,000 1,00,000 1,30,000 2,05,000

Women less than 65 years Post DTC Liability (Rs)

Nil Nil Nil 4000 5000 20,000 30,000 90,000 1,00,000 1,30,000 2,05,000

Senior Citizens Post DTC Liability (Rs)

Nil Nil Nil Nil Nil 15,000 25,000 85,000 95,000 1,25,000 2,00,000

Savings(Rs.)

Savings(Rs.)

Savings(Rs.)

1.6 1.9 2 2.4 2.5 4 5 8 8.5 10 12.5

Nil 3090 4120 4240 4270 4720 5020 6820 12,270 28,620 30,870

Nil Nil 1030 1150 1180 1630 1930 3730 9180 25,530 27,780

Nil Nil Nil Nil 1030 1480 1780 3580 9030 25,380 27,630

Above table shows the post liability of tax after DTC come into existence at different level of income. Along with it, it also shows how much the tax saving can be possible through it. For example: when income of a man below 65 years of age, is 1.90 lakhs, under the DTC the tax liability will be nil but according to current income tax the tax liability will be Rs 3,090. So this amount under DTC will totally save.

43

SCHEDULES TO DTC

44

SCHEDULES TO DTC
Arrangement of Schedules The 1st Schedule. The 2nd Schedule. The 3rd Schedule. The 4th Schedule. The 5th Schedule. The 6th Schedule. The 7th Schedule. The 8th Schedule. The 9th Schedule. The 10th Schedule. The 11th Schedule. Rates of Income-tax Rates of other taxes Rates for deduction of tax at source Rate for deduction of tax at source in case of non-resident deductee Procedure for recovery of tax Income not included in the total income Persons, entity or funds not liable to Income-tax Computation of profits of the insurance business Computation of Income from Special Sources Computation of Profits of Business of Operating a Qualifying Ship Computation of Profits of the Business of Mineral Oil or Natural Gas Computation of Profits of the Business of Developing of a Special Economic Zone, Manufacture or Production of Article or Things or Providing of any Service by a Unit Established in a Special Economic Zone Computation of profits of a Specified business Determination of income on a presumptive basis Depreciation Deduction for contributions / donations Determination of cost of acquisition in certain cases Minerals and group of associated minerals Approved PF, Gratuity and Superannuation Funds Computation of Income Attributable to a controlled Foreign Company Orders Appealable before Commissioner (Appeals) Deferred Revenue Expenditure Allowance

The 12th Schedule.

The 13th Schedule. The 14th Schedule. The 15th Schedule. The 16th Schedule. The 17th Schedule. The 18th Schedule. The 19th Schedule. The 20th Schedule. The 21st Schedule. The 22nd Schedule.

45

EXPERTS VIEWS ON DTC

46

Experts Views on DTC

The proposed Direct Tax Code is a combination of major tax relief and removal of most tax-exempted benefits. It is expected to usher in a new tax regime of transparency and greater compliance. writes Dilip Maitra. Source: DH News Service (http://www.deccanherald.com/content/19934/decoding-direct-taxcode.html) Talking to Deccan Herald, KPMG Executive Director Personal Taxation, and IT & ESOP Vikas Vasal said The new proposals are in the right direction. They will simplify regulations and reduce unnecessary litigations significantly. Source: (http://www.deccanherald.com/content/19934/decoding-directtax-code.html) Agreed Bangalore Chamber of Industry & Commerce (BCIC) President K R Girish. The Code is a completely new law and not an amendment of the existing Income Tax Act. This is a commendable change as one has always experienced tinkering of existing laws, According to KPMG partner i.e. K R Girish, there is a drastic deviation from the direct tax roadmap put forward by the Kelkar Commission in the new code, The new move to bring in tax clearance certificate for business men before leaving the country will adversely affect the investment prospect in the country, he said, adding There is a marked mismatch between the governments economic policy and the provisions in the new tax code. This will give a bad name for our country overseas. Source:(http://www.deccanherald.com/content/19934/decoding-directtax-code.html) "Considering the many drafting blunders, inequities and anomalies in the revised Direct Taxes Code placed before Parliament, DTC virtually appears to be beyond repair. It needs to be dumped in the larger interests of taxpayers as well as the revenue generated," Eminent tax expert Mukesh Patel Addressing the FGI members on 'Direct Taxes in the Union Budget 2011' in Vadodara,

47

Source: (http://www.businessworld.in/bw/2011_03_03_Dump_Direct_Tax_Code _Says_Tax_Expert.html) The

postponement,

according

to

Krishan

Malhotra

Executive Director of KPMG, is logical. It technically was looking very difficult to implement from April 1, next year. The procedure will take timeat least 6 months.
Source:(http://www.moneycontrol.com/news/economy/direct-tax-codetabled-what-do-experts-makeit_481782.html) In order to execute the new laws, including the combating financing of terrorism (CFT) introduced in the code, the corporate as well as the government require preparation time, says Ajay Kumar Executive Director of PricewaterhouseCoopers (PwC). Source:(http://www.moneycontrol.com/news/economy/direct-tax-codetabled-what-do-experts-makeit_481782.html) The bill seems to resemble the current income tax more rather than the original Direct Tax Code which we saw. Some of the language seems to be again reverting back to the earlier or the current tax act. This, Amitabh Singh Tax Partner at E&Y considers to be clear negative. Largely it may be that when it went into the law ministry, they clearly didnt have time to grapple with a new set of wordings and the way the whole language was drafted and they would have been more comfortable with a language on which the jurisprudence and the court cases have already deliberated, he reasons. Source:(http://www.moneycontrol.com/news/economy/direct-tax-codetabled-what-do-experts-makeit_481782.html) Participants also criticized the new law to tax NGOs who are doing well in the country. It is a retrograde move to tax 15 per cent of the unutilized assets of NGOs in the country who have done exemplary

48

work in the socio-economic upliftment of the people of our country, said Hitesh Gajaria from KPMG. Source: (http://www.deccanherald.com/content/25994/experts-criticisedirect-tax-code.html) India: Direct Tax Code 2009 review and analysis

The government has released a comprehensive discussion paper and draft of the new Direct Tax Code that seeks to revamp and simplify the Direct Tax Law and its administration in the country through several radical changes. The code, which the government plans to enact and implement FY2012 onwards with suitable changes if required, envisages meaningful reduction in the tax rates while simultaneously being revenue neutral for the government. It aims to achieve this by increasing the tax base and rationalizing the myriad tax incentives prevalent under the current law. In our view, the overall changes proposed will be quite beneficial for a number of sectors and companies, albeit definitively withdrawing tax holidays being currently enjoyed by different sectors, something that has been contemplated and proposed often in the past and therefore should not come as a major negative surprise. Reduction in effective tax rates for Individuals a positive The Tax code proposes a significant increase in the tax slabs for personal income tax which, if implemented, will result in a meaningful increase in disposable income, especially benefiting FMCG and other domestic consumption stories. At the same time, the code proposes to do away with the distinction between long and short-term capital gains and abolish the Securities Transaction Tax (STT), effectively taxing all capital gains at the applicable marginal tax rate for the tax-payers total income. At present, the long-term capital gains tax is Nil on equity transactions on which STT is paid and 20% on all other assets, while the short-term capital gains tax rate is 10% on equity transactions on which STT is paid and 30% on other assets. In our view, the proposed

49

increase in tax slabs is quite substantial in view of the countrys per capita income distribution, and should reduce the impact of the proposed increase in capital gains tax rates. Source: (http://www.stockmarketsreview.com/news/india_direct_tax_code_2009 _review_analysis) Implementation of Direct Tax Code after comprehensive review only : Finance Minister Delhi, October 9, 2009 14:54 IST Shri Mukherjee said that he has kept his promise by putting the draft code in public domain within 45 days and he would like to expedite to give it a final shape. While thanking the industry and trade associations for enthusiastically participating in todays deliberations, Shri Mukherjee said that he looks forward to their suggestions in making the new Direct Taxes Code an effective instrument for meeting the economic challenges and development priorities of the country. The outcome of the discussions would be used for modifying the proposals contained in the draft Direct Taxes Code, the Minister said. Minister of State for Finance, Shri S.S. Palanimanickam, Revenue Secretary, Shri P.V. Bhide and senior officers of the Finance Ministry were also present at the interactive session. Source: (http://pibmumbai.gov.in/scripts/detail.asp?releaseId=E2009PR1093)

50

PART II PRIMARY STUDY

51

RESEARCH METHODOLOGY

52

RESEARCH METHODOLOGY
First we learnt the current income tax provisions and income tax rules. We understood the current income tax provisions and compare them with Direct tax code provisions. We found out the impact of Direct Tax Code on individuals tax calculation under various situations.

OBJECTIVE OF THE STUDY

To understand the Direct Tax Code 2010. To understand the Direct Tax Code 2011. To understand the provisions of current income tax provisions. To compare current income tax provisions with Direct tax code provisions. To find out the impact of Direct Tax Code on tax calculation under various situations.

53

MECHANISM OF TAXATION

54

MECHANISM OF TAXATION
The Direct Tax Code seeks to take a fresh look at the taxation of all heads and sources of income. In the existing Income Tax Act, the entire mechanism of taxation revolves around various heads of income under which there would be different sources of income. This is graphically depicted below: DIAGRAM: 6 Step 1

Step 2

55

Step 3

In the new DTC, the methodology for computing income has been revised. Firstly, the sources of income are divided into two categories: ordinary sources and special sources. Under each source, there are different heads of income, while under each head of income, there can now be different sources of income. This is graphically depicted below:

56

The steps for computing income under the new DTC: Step 1 (similar to existing Step 1)

Step 2

Step 3

57

Step 4

The aforementioned Steps 1 to 3 would also be applicable for Income from Special Sources. At the end of the Step 3, one would have the gross total income from special sources. The aggregate of this gross total income for all the special sources would constitute the total income from special sources. Thereafter, the following step needs to be followed:

These changes pertaining to the computation of income, however, comprise only a fraction of the many changes proposed in the new Direct Tax Code. SOURCE: (http://www.india-briefing.com/news/indias-direct-tax-

code-3142.html/)

58

COMPARATIVE STUDY

59

COMPARATIVE STUDY
Amended Direct Tax Code has now been converted into Direct Tax Code Bill after making amendments in particular revision of tax slabs, provision w.r.t. income from employment, personal savings, provisions w.r.t. SEZ and new insertions like provisions of CFC, Branch profit tax for foreign companies etc. It is also important to note Direct Tax Code will be implemented from start of financial year 1.4.2012. Perhaps, applicability might have been delayed since sunset clause for area based exemptions & for infrastructural development was up to 31.3.2012. And more so new laws like, DTC & GST can be implemented simultaneously i.e. with effect from 1.4.2012. However Direct Tax Code does not provide any corresponding provisions for continuity of exemption for the infrastructural projects implemented prior to 1.4.2012. We give below comparative impact of DTC Bill 2010 over Income Tax Act 1961. Residential status:Under DTC, There are only 2 categories for residential status for individual Resident & non resident. However under Income Tax Act, 1961, there are 3 categories for residential status for individual Resident, Resident but not ordinarily resident & non resident. So, the concept of Resident but not ordinarily resident has been withdrawn under DTC. Residential status in case of company incorporated outside India: Under DTC, The Company registered outside India can be resident in India if its place of effective management is situated in India. However under Income Tax Act, 1961, the company registered outside India can be

resident if the control and management of its affair during that year is wholly from India. So, now there may be litigation on the issue of less of effective management.

60

 Apportionment of Income:Under DTC, the income of the husband and wife from ordinary sources under each head of income and from special sources shall be apportioned equally between the spouses. However under Income Tax Act, 1961, there is no provision for apportionment but to determine the person liable to tax is the inadequate consideration for asset which is generating the income. But this provision is not applicable if any arising to the income

spouse where the spouse possesses technical or

professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge or experience. So, since the income of spouse will be apportioned between husband and wife is welcoming amendment. Surcharge & Cess :Under DTC, the first schedules where the rates of income tax are specified do not state anything on cess & surcharge. However under Income Tax Act, 1961, there is surcharge & additional surcharge in the form of education cess & secondary higher education cess.

So, the provisions w.r.t surcharge & cess are not applicable under DTC. This provision was not there under draft DTC. MAT(Minimum Alternate Tax):Under DTC, it is 20% of book profits. However under Income Tax Act, 1961, it was 15% till 31.3.2011 & from 1.4.2011 it is 8%. So, Under Draft DTC, the MAT was applicable on gross value of assets but in amended draft it was rectified to Book value as per current provision under Income Tax Act. Foreign Tax Credit:Under DTC, a resident assesses shall be allowed a credit in respect of income-tax paid by deduction or otherwise, in any country. However, the FTC cannot exceed the tax payable under the DTC. However under

61

Income Tax Act, 1961, allows the taxpayer to pay the tax as per DTAA & as per provisions under IT Act whichever is more beneficial to him. So, this is welcome provision. But it is not clear whether the same can be applicable in case of Controlled Foreign Company as well. Deduction for political contribution:Under DTC, as per section 81 (Deduction for political contribution) Total deduction limit is 5% of gross total income. However, under Income Tax Act, 1961, No limit for contribution is there. Under Companies act, 1956 , the limit is 5% & amount exceeding to that attract 3 times penalty. So now under DTC, the same is brought in line with Companies act, 1956. Deduction from Capital Gains:Under DTC, the deduction is allowed if investment in new asset is made (agricultural land & residential house). However under Income Tax Act, 1961, Under current provisions there are many options for investments provided under sections 5454,54B,54D,54E54EA,54EB,54EC etc. Compulsory audit of accounts:Under DTC: For Professionals - if turnover goes beyond Rs.25 Lakh For businessmen - if turnover goes beyond 100 lakh. Under Income Tax Act, 1961:For Professionals - if turnover goes beyond Rs.15 Lakhs (w.e.f.1-4-2011) For businessmen: -If turnover goes beyond (w.e.f.1-4-2011). Remark:- It is welcome move for assesses. Rs.60 Lakhs

62

 Tax rates for Individual & HUF: Under DTC: 0 - 2 Lakhs - 0% 2 Lakhs to 5 Lakhs - 10% 5 Lakhs to 10 Lakhs - 20% Above 10 Lakhs - 30% Tax rates for for senior citizens:Under DTC: 0 - 2.5 Lakhs - 0% 2.5 Lakhs to 5 Lakhs - 10% 5 Lakhs to 10 Lakhs - 20% Above 10 Lakhs - 30% Under Income Tax Act, 1961:0 - 2.5 Lakhs - 0% 2.5 Lakhs to 3 Lakhs - 10% 3 Lakhs to 5 Lakhs - 20% Above 5 Lakhs - 30% Under Income Tax Act, 1961:0 - 1.80 0% 1.8 Lakhs to 3 Lakhs - 10% 3 Lakhs to 5 Lakhs - 20% Above 5 Lakhs 30%

Tax rates for woman :Under DTC: 0 - 2 Lakhs - 0% 2 Lakhs to 5 Lakhs - 10% 5 Lakhs to 10 Lakhs - 20% Above 10 Lakhs - 30% Under Income Tax Act, 1961:0 - 1.9 Lakhs - 0% 1.9 Lakhs to 3 Lakhs - 10% 3 Lakhs to 5 Lakhs - 20% Above 5 Lakhs - 30%

Remark:- No tax benefit granted for woman assesses. Wealth tax charge :Under DTC: - Every person other than non-profit organization. Under Income Tax Act, 1961:- Every Individual, HUF and company. Wealth tax basic exemption:Under DTC: - Rs. 1 Crore Under Income Tax Act, 1961:- Rs. 15 lacs.

63

TABLE: 7 Comparison Of Tax Rate

Original DTC disscusion paper
25%

Category
Corporate Tax rate Surcharge on Corporate Tax MAT MAT credit Security Transaction Tax Tax regime on retirement saving shemes Investment related deductions limit Deduction on interest on home loans Tax on receipts from life insurance policy

Existing Act
30%

DTC bill 2010

30%

3.22 19.93 % of adj. book profit 10 years 0.25 % Max.

0% 2 % 0f gross assets Nil 0%

0% 20 % of Adj. book profit 15 years 0.25 % Max. Exempt-ExemptExempt

Exempt-Exempt-Exempt

Exempt-Exempt-Tax

1,00,000

3,00,000

1,00,000

1,50,000

1,50,000

Nil

Marginal rate

Nil

SOURCE: (http://www.google.co.in/imgres?imgurl=http://www.stockmarketsreview.com/pics/ne ws/direct_tax_code_report_no_big_change_20100908_1.jpg&imgrefurl=http://www.s tockmarketsreview.com/recommendations/direct_tax_code_report_no_big_change_ 20100908_36854/&usg=__fVoy2XWGM5lnu2WIBK06iTHDM0o=&h=263&w=789&sz =53&hl=en&start=56&zoom=1&tbnid=EGyV4R1_wsNbMM:&tbnh=55&tbnw=166&ei =UwC5TYe4HYGyvgPttdWiAw&prev=/search%3Fq%3DDIRECT%2BTAX%2BCOD E%26hl%3Den%26biw%3D1280%26bih%3D709%26gbv%3D2%26tbm%3Disch0% 2C1100&itbs=1&iact=hc&vpx=606&vpy=375&dur=659&hovh=129&hovw=389&tx=21 4&ty=70&page=3&ndsp=27&ved=1t:429,r:11,s:56&biw=1280&bih=709)

64

INDUSTRYWISE IMAPCT ANALYSIS

65

INDUSTRYWISE IMAPCT ANALYSIS

The government has released a comprehensive discussion paper and draft of the new Direct Tax Code that seeks to revamp and simplify the Direct Tax Law and its administration in the country through several radical changes. The code, which the government plans to enact and implement FY2012 onwards with suitable changes if required, envisages meaningful reduction in the tax rates while simultaneously being revenue neutral for the government. It aims to achieve this by increasing the tax base and rationalizing the myriad tax incentives prevalent under the current law. In our view, the overall changes proposed will be quite beneficial for a number of sectors and companies, albeit definitively withdrawing tax holidays being currently enjoyed by different sectors, something that has been contemplated and proposed often in the past and therefore should not come as a major negative surprise. Reduction in effective tax rates for Individuals a positive The Tax code proposes a significant increase in the tax slabs for personal income tax which, if implemented, will result in a meaningful increase in disposable income, especially benefiting FMCG and other domestic consumption stories. At the same time, the code proposes to do away with the distinction between long and short-term capital gains and abolish the Securities Transaction Tax (STT), effectively taxing all capital gains at the applicable marginal tax rate for the tax-payers total income. At present, the long-term capital gains tax is Nil on equity transactions on which STT is paid and 20% on all other assets, while the short-term capital gains tax rate is 10% on equity transactions on which STT is paid and 30% on other assets. In our view, the proposed increase in tax slabs is quite substantial in view of the countrys per capita income distribution, and should reduce the impact of the proposed increase in capital gains tax rates.

66

 Tax incentives on Savings The code also proposes to increase the tax deduction limit available on savings from Rs1lakh at present to Rs3lakh. However, the tax incentives on Interest paid on home loans is proposed to be withdrawn. On a further negative note, the code also proposes to tax the savings in various instruments including PPF, Insurance, etc. at the time of withdrawal, i.e. investments in tax savings instruments will only lead to a postponement of tax liability rather than an outright exemption as applicable at present. Moreover, retirement benefits such as gratuity will be tax-free only if deposited in specified retirement benefit schemes. Reduction in Corporate Tax rate a positive; withdrawal of tax incentives on Exports, etc. not a surprise Reduction in the Corporate Tax rate from 33% (including surcharge) to 25% will benefit companies across sectors but sectors, especially in FMCG and Banking where the effective tax rates are close to 33% for most companies. Moreover, business losses will be allowed to be carried forward indefinitely, unlike 8 years at present. The reduction in tax rates is intended to be compensated by a withdrawal of various tax incentives available to sectors such as exports, infrastructure, areabased tax holidays, etc. Moreover, the allowable Depreciation rate on plant and machinery is also proposed to be brought down to 15%. However, the code does provide for some investment-based

incentives. In respect of revenue and capital expenditure on scientific research and development, deduction to the extent of 150% of the expenditure will be allowed to all companies. Under the new provisions, tax liability will accrue in various specified infrastructure sectors only after 100% of the capital expenditure is recovered, allowing these companies to postpone the tax liability. Sectors to be covered include: - Generation, transmission and distribution of Power - Specified infrastructure projects - Hospitals - Food processing, packaging, cold storage, agricultural warehouse

67

- Oil and Gas - SEZ MAT provisions a key negative The tax code proposes a radical change in the MAT provisions. Under the new system, MAT will be paid at a specified percentage of Gross assets of a company (broadly equates to capital employed, although it is unclear whether Net or Gross Current Assets will be considered for computation). The specified percentage is 0.25% for banking companies and 2% for all other companies. Although intended to widen the tax base by reducing tax evasion, the new MAT proposals appear onerous on several counts: Companies suffering genuine losses or sub-normal RoCE (Return on Capital Employed) due to initial gestation period or cyclical downturn would also have to pay MAT at 2% of gross assets. Moreover, MAT credit will not be available, making the provisions all the more onerous.

SECTORAL IMPACT
1. Automobile - Positive Measures - Significant changes in Personal Income Tax slabs. - Cut in corporate tax rate to 25% (33% at present). - The allowed rate of depreciation on Plant & Machinery has also been cut to 15%. - Minimum Alternate Tax (MAT) will be 2% of the value of gross assets (15% of Book Profit at Impact Analysis - Change in tax slabs for personal income will boost consumption, owing to rising disposable income in the hand of consumers. Positive for most of the Auto majors. Specifically, this would boost the demand for consumer discretionary items like Two Wheelers and Passenger Vehicles. Positive for Maruti, M&M, Hero Honda, Bajaj Auto, TVS present).

68

Motors and Tata Motors. - A cut in the corporate tax rate to 25% will benefit high tax-paying companies like Hero Honda, Maruti and Bajaj Auto. - The allowed rate of depreciation on Plant & Machinery has also been cut to 15%. Thus, companies going for higher investments, like Maruti, Tata Motors and M&M, that have been paying low tax will likely pay more on a higher PBT, and mitigate the positive effect of a lower tax rate. - The rate of Minimum Alternate Tax (MAT) will be 2% of the value of gross assets. Marginally Negative for cyclical and highly capital intensive companies like Tata Motors and M&M M. - There is a lack of clarity as regards the exemptions available to certain states like Uttaranchal, where most of the Auto companies are putting up incremental capacities or shifting their existing capacities. If these exemptions are withdrawn, it could be negative for the sector. More specifically, this would be negative for Hero Honda, Tata Motors, Bajaj Auto and M&M. 2. Banking - Positive Measures - Reduction in Corporate Tax rate to 25%. - MAT at 0.25% of Gross Assets. - Increase in Tax incentive limit on savings from Rs1 to 3lakhs; taxation of such savings at the time of eventual withdrawal. - Withdrawal of a key incentive for Home Loans, viz. tax exemption on the Interest paid up to Rs1.5lakh. - Provision for NPAs allowable up to 1% of aggregate average Advances as against 7.5% of Total Income and 10% of Rural Advances at present. Impact Analysis - Positive, as majority of the companies in the Sector are paying taxes close to the maximum rate of 34%. - Very few companies (mainly Mid-cap banks like DCB, UCO Bank,

69

etc.) could be hit by the proposed MAT at 0.25% of gross assets. - Increase in the limit is a positive for banks having large financial subsidiaries in life insurance and asset management such as ICICI Bank, SBI, etc. However, the prospect of eventual taxation at the time of withdrawal could weigh on investment decisions and reduce attractiveness of tax-saving instruments such as ULIPs, ELSS, etc. - Negative for banks generally but especially for mortgage companies like HDFC and LIC Housing Finance generally, Finance. - This should generally ensure allow ability of NPA provisions for a majority of banks, except for few private banks like HDFC Bank, Kotak Mahindra Bank, etc. which have higher amount of provisioning due to larger proportion of retail loans in segments like Auto, Personal, etc. in their overall credit mix. 3. Capital Goods - Positive Measures - The Corporate tax rate is proposed to be reduced to 25% from 33% earlier. - Significant changes in Personal Income Tax slabs. Impact Analysis - Since all the Capital Goods companies under our coverage universe fall in the full tax bracket, any reduction in the their bottom line corporate tax rate would positively boost bottom-line. - The proposed increase in the personal tax slabs, prima facie, seems to place higher disposable income in the hands of individuals, thereby triggering increased consumption and spending in the economy. This would ultimately provide a fillip to industrial capex and, consequently, the Capital Goods industry would also benefit, in the form of increased inflows long run order inflows, albeit in the run. Positive for ABB, Areva T&D, BHEL and Crompton Greaves.

70

4. Cement - Positive Measures - Corporate tax rate reduced to 25% from 33% earlier. Impact Analysis - As companies under our coverage come under the full tax bracket, the reduction in corporate tax rate will bring down the overall tax liability of these companies and will provide a push-up to the bottom line. Positive for ACC, Grasim Industries, Ultratech Cement, Ambuja Cements, India Cements, Madras Cements, JK Lakshmi Cement. 5. FMCG - Positive Measures - Significant changes in Personal Income Tax slabs. No tax payable up to an income of Rs1.6lakh, 10% tax up to Rs10lakh and 20% up to Rs25lakh. - Basis for computing Minimum Alternate Tax (MAT) changed from "Book Profits" to "Gross Assets"; Gross Assets to include: Value of Gross Fixed Assets + Capital work-in-progress + Book Value of all other assets - Accumulated Depreciation - Debit Balance in P&L A/c; MAT to be charged at 2% of Gross Assets and will be the final tax and will not be available as tax credit in subsequent years. - Corporate Tax rate proposed to be reduced to 25%. Impact Analysis - Changes in the Personal Income Tax slabs are likely to drive higher consumption owing to rising disposable income levels. This is a key positive for FMCG companies. - The rate of MAT will be 2% of the value of Gross Assets. This proposed measure could have a Marginal impact on companies paying tax at lower rates - Godrej Consumer, Dabur, Marico, HUL and Colgate. However, since most of these companies manage a low Gross Asset base (Debt free and high Dividend payouts), we expect this provision is likely to have a Positive impact. - A cut in Corporate Tax rate to 25% will benefit most FMCG companies

71

which generally pay full tax rate. Key beneficiaries include GSK Consumer, ITC and Nestle. 6. Hotel - Positive Measures - Tax rate of companies (both domestic and foreign) to be reduced to 25% from 33% earlier. - Significant changes in Personal Income Tax slabs Impact Analysis - Since the industry falls in the full tax bracket (33% tax), the proposal of reducing the tax rate would be positive, consequently providing a boost to the bottom-line bottom line. - The tax slabs for individuals are proposed to be revised significantly, thereby leading to increased disposable income in hands of individuals, and triggering additional spending. As per the proposed provisions, no tax is payable up to an income of Rs1.6lakh, 10% tax up to Rs10lakh , 20% up to Rs25lakh, and 30% tax on income beyond Rs25lakh. 7. Infrastructure - Neutral Measures - Basis for computing MAT changed from "Book Profits" to "Gross Assets"; Gross Assets to include: Value of Gross Fixed Assets + Capital Work-in-progress + Book Value of all other assets - Accumulated Depreciation - Debit balance in P&L A/c; to be charged at of Gross Assets and will be the final tax and will not be available as Tax credit in subsequent years. - An investment-linked tax incentive has been proposed, which allows for tax exemption only for the period until the investment is recovered. - Corporate Tax rate proposed to be reduced to 25%. Impact Analysis - Negative for companies having presence in BOT space and claiming MAT credit such as Nagarjuna Construction credit, Construction, Madhucon Projects, etc, since they will not be able to claim further credit. However, it would be mildly negative as the BOT Segment does

72

not contribute significantly to our Target Prices. - This, in effect, implies that once all capital expenditure (exceptions: land, goodwill and financial instruments) is recovered, the entity will be subject to the normal (full) tax rates. - Proposed reduction in the Corporate Tax rate is likely to be a Positive for all Construction companies as they pay tax at a marginal rate, on a Standalone basis, and constitutes lion's share of our SOTP Target Prices. 8. Logistics - Neutral Measures - Under the new code, MAT rate will be 2% of the value of gross assets for all other companies. - Corporate tax rate proposed to be reduced to 25% from current level of 33% Impact Analysis - Marginally Negative for companies such as Allcargo, Gateway Distriparks (GDL) and Concor as they claim MAT for income generated from container rail and CFS/ICD profits However in case of GDL it is entitled for MAT only till profits. GDL, FY2011 for JNPT and Chennai CFS. So effectively they would have to pay 34% tax rate from FY2012 which would now reduced to 25% under new tax code. On other hand, new MAT law on gross block will negatively impact GDL's rail segment (which is likely to break even at PAT level in FY2011) as they are in high capex mode.

9. Metals - Positive Measures - Corporate tax rate reduced to 25% from 33% earlier. Impact Analysis - As companies under our coverage come under the full tax bracket, the reduction in corporate tax rate will bring down the overall tax liability

73

of these companies and will provide push-up to the bottom line. - Positive for Tata Steel, SAIL, JSW Steel, Nalco, Hindalco, Hindustan Zinc, Sesa Goa. Neutral for Sterlite Industries, as the company has an effective tax rate of around 27%. 10. Media - Positive Measures - Significant changes in Personal Income Tax slabs. No tax payable up to an income of Rs1.6lakh, 10% tax up to Rs10lakh and 20% up to Rs25lakh. - Basis for computing Minimum Alternate Tax (MAT) changed from "Book Profits" to "Gross Assets"; Gross Assets to include: Value of Gross Fixed Assets + Capital work-in-progress + Book Value of all other assets - Accumulated Depreciation - Debit Balance in P&L A/c; MAT to be charged at 2% of Gross Assets and will be the final tax and will not be available as tax credit in subsequent years. - Corporate Tax rate proposed to be reduced to 25%. Impact Analysis - Changes in Personal Income Tax slabs are likely to drive higher consumption owing to rising disposable income levels. Key positive for Media companies as it is likely to drive higher Advertising. - A cut in Corporate Tax rate to 25% will benefit most Media companies, which generally pay full tax rate. 11. Oil & Gas - Neutral Measures - The Draft has recommended moving away form the Profit linked tax exemption to Investment linked tax exemption for activities in E&P and refining. Under this, an entity would be allowed to recover all capex (except land, goodwill and financial instruments) Post recovery of the capex the entity would pay the Income Tax on the Profits instruments). capex, thereafter. Hence, the time taken in recovering entire capital and revenue expenditure will be the period of tax holiday. - Basis for computing MAT changed from "Book Profits" to "Gross

74

Assets"; Gross Assets to include: Value of Gross Fixed Assets + Capital Work-in-progress + Book Value of all other assets - Accumulated Depreciation - Debit balance in P&L A/c; MAT to be charged at 2.0% of Gross Assets and will be the final tax and will not be available as tax credit in subsequent years. - Corporate Tax rate proposed to be reduced to 25% for domestic and to 36.75% for Foreign Companies Impact Analysis - Shifting to Investment-linked Tax incentive from Profit-linked Tax incentive would be negative for upstream companies, such as, RIL, ONGC and Cairn India. Currently, there exists a 7-year tax holiday on crude production from the NELP blocks and certain pre-NELP blocks, while there exists ambiguity regards Taxability of the Gas Profits from the NELP blocks. Upstream companies tend to recover the capex involved within the 3-4 years depending on realizations, capex and ramp-up in production. Thus, under the current scenario of 7-year tax holiday, the upstream companies earn Tax-free Income for the remaining period However given that the proposal impacts the fiscal Tax period. However, stability clause under the PSC, implementation of the recommendation appears difficult. - Shifting of MAT computation coupled with absence of MAT credit is likely to adversely impact RIL as it will have to pay higher tax based on Gross Assets as the business is capital intensive. - Proposed reduction in the Corporate Tax rate is likely to be a Positive for companies that are expected to pay tax rates in excess of 25% by FY2012, such as ONGC, OMCs, IGL, Gujarat Gas and Petronet LNG. 12. Power - Neutral Measures - Basis for computing MAT changed from "Book Profits" to "Gross Assets"; MAT to be charged at 2% of Gross Assets and will be the final tax and will not be available as tax credit in subsequent years. - Gross Assets to include: Value of Gross Fixed Assets + Capital Work-

75

in-progress + Book Value of all other assets - Accumulated Depreciation - Debit balance in P&L A/c - Corporate Tax rate proposed to be reduced to 25%. - Reduction in rates of Depreciation on Plant & Machinery to 15%. Impact Analysis - Discontinuance of the provision to carry forward MAT is a negative for companies availing MAT such as CESC and GIPCL. However, since the companies have a pass through clause (as the Returns are regulated), we believe that it will not impact the financials of these companies. - Reduction in the Corporate Tax rate to 25% from 33% is a positive for the companies not covered under MAT and which fall under higher tax bracket like Lanco Infratech on a Standalone basis. - Reduction in rates of Depreciation on Plant & Machinery to 15% will negatively impact companies availing high rates of Depreciation. Neutral for the sector as the tax benefits would be somewhat mitigated by the decrease in depreciation expense claimed. 13. Pharmaceutical - Negative Measures - Basis for computing MAT changed from "Book Profits" to "Gross Assets"; Gross Assets to include: Value of Gross Fixed Assets + Capital Work-in-progress + Book Value of all other assets - Accumulated Depreciation - Debit balance in P&L A/c; MAT to be charged at 2% of Gross Assets and will be the final tax and will not be available as tax credit in subsequent years. - Corporate Tax rate proposed to be reduced to 25%. - Export-based incentive under Section 10 to be eliminated. Impact Analysis - The stated provision will be a negative for most Pharma companies under our coverage as Tax expense in the Income statement is likely to increase on non-availability of MAT credit. We believe Sun Pharma, Piramal Healthcare and Indoco Remedies would be primarily affected.

76

- Reduction in Corporate Tax rate will be beneficial for companies such as Dr Reddy's Labs. - Negative for most Pharma companies under our coverage. 14. Retail - Positive Measures - Tax rate of companies to be reduced to 25% from 33% earlier. - Significant scale-up in the tax slabs for individuals. Impact Analysis - Since the industry falls in the full tax bracket (33% tax), the proposal of reducing the tax rate would be positive, conseq entl pro iding a boost to the bottom line consequently providing bottom-line. - The tax slabs for individuals are proposed to be revised significantly, thereby leading to increased disposable income in hands of individuals, and triggering additional spending. As per the proposed provisions, no tax is payable up to an income of Rs1.6lakh, 10% tax up to Rs10lakh , 20% up to Rs25lakh, and 30% tax on income beyond Rs25lakh.

We believe that the proposed provisions will be positive for Pantaloon Retail Ltd, Shoppers Stop Ltd, Titan Industries Ltd and Vishal Retail Ltd. 15. Software - Neutral Measures - Basis for computing MAT changed from "book profits" to "gross assets"; gross assets to include: Value of Gross Fixed Assets + Capital work-in-progress + Book value of all other assets - Accumulated depreciation - Debit balance in P&L A/c; MAT to be charged at 2% of gross assets and will be the final tax; will not be available as tax credit in subsequent years. - Corporate tax rate proposed to be reduced to 25%. Impact Analysis - Negative for companies with a low tax rate and claiming MAT credit, such as 3i Infotech, since they will not be able to claim further credits.

77

- There is a lack of clarity as regards the exemptions available to SEZs (currently under Section 10AA), which is where IT companies are shifting most of their incremental business owing to the sunset clause for the STPI scheme (Section 10A/B). - If the exemptions under the SEZ scheme are withdrawn, there is no rationale for shifting to an SEZ, and this is likely to lead to IT companies coming under the purview of a full tax regime, which is a Negative for companies like Cranes Software, 3i Infotech and Tech Mahindra. - However we do not expect this to significantly impact the top tier IT companies under our coverage universe as we However, top-universe, have already factored in effective tax rates in excess of around 20-24% in FY2012E, thus leading to the impact being Neutral for TCS, Infosys, Wipro and HCL Technologies. - The proposed reduction in the Corporate Tax rate is likely to be a Positive for companies that are expected to pay tax rates in excess of 25% by FY2012E, such as Infotech Enterprises, Bartronics India, Sasken Communication Technologies Educomp Solutions and Everonn Systems Technologies, Systems. 16. Telecom - Negative Measures - Basis for computing MAT changed from "book profits" to "gross assets"; gross assets to include: Value of Gross Fixed Assets + Capital work-in-progress + Book value of all other assets - Accumulated depreciation - Debit balance in P&L A/c; MAT to be charged at 2% of gross assets and will be the final tax; will not be available as tax credit in subsequent years. - Corporate tax rate proposed to be reduced to 25%. Impact Analysis - Negative for companies with a low tax rate and claiming MAT Reliance credit, such as Bharti Airtel, Communications, Idea Cellular and Tulip Telecom. - The proposed reduction in the Corporate Tax rate is a Positive for the sector.

78

17. Agriculture Neutral Measures - Reduction in the Corporate Tax rate from 33% to 25%. - Introduction of long term capital gain tax long-tax. - Decrease in the depreciation rate for Plant & Machinery. - As per current regulations, SEZ profits are 100% exempt for the first five years, then 50% for the next 5 years, and again 50% for the next five years, subject to re-investment. Impact Analysis - The industry is currently under a full tax regime; hence, a reduction in the tax rate would definitely increase profits of company. Positive for Jain Irrigation and Rallis. - Negative for cash rich companies that have invested surplus cash in mutual funds and other financial instruments. Negative for Rallis. - Reduction in the tax shield: negative for all companies. However, the lower income tax rate might compensate for the same. Negative for Jain Irrigation and Rallis. - However, in new tax code there is no mention about continuity of the above-mentioned SEZ regulations. If SEZ profits were to be taxed like regular profits, it would be substantially negative for Rallis, as it is setting up a new SEZ plant to cater to the export market, and plans to derive substantial revenue from it going forward.

79

EXAMPLES

80

Examples
To show you an actual example of the scope of savings, lets look at the hypothetical case of Mr Prakash, an individual tax payer aged 40. His salary income is Rs 18 lakhs and he takes advantage of investing in certain instruments that offer him a tax deduction. The table below compares Mr Prakashs tax liability under the three scenarios: the DTC Bill as introduced in the Parliament, the Current Slabs under the Income Tax Act, and the Original DTC when it was first announced.

Particulars

DTC Parliamentary Bill (Aug 2010)

Current Slab under Income Tax Act Rs. 18,00,000 Rs. 1,50,000

Original DTC

Mr. Prakashs Salary Income for the Year Investments in tax free instruments*

Rs. 18,00,000 Rs. 1,50,000

Rs. 18,00,000 Rs. 1,50,000

Computation of Taxable Income Salary Income Less: Savings eligible for tax deduction* Net Taxable Income Computation of Tax Liability Tax Liability on: Rs 0 to Rs 160,000 Rs 160,001 to Rs 200,000 Rs 200,001 to Rs 500,000 Rs 500,001 to Rs 800,000 Rs 800,001 to Rs 10,00,000 Rs 10,00,001 and above Total Income Tax Add: Education Cess Total Tax Liability Nil Nil Rs. 30,000 Rs. 60,000 Rs. 40,000 Rs. 1,95,000 Rs. 3,25,000 Rs. 9,750 Rs. 3,34,750 Nil Rs. 4,000 Rs. 30,000 Rs. 60,000 Rs. 60,000 Rs. 2,10,000 Rs. 3,64,000 Rs. 10,920 Rs. 3,74,920 Nil Rs. 4,000 Rs. 30,000 Rs. 30,000 Rs. 20,000 Rs. 1,30,000 Rs. 2,14,000 Rs. 6,420 Rs. 2,20,420 Rs. 18,00,000 Rs. 1,50,000 Rs. 16,50,000 Rs. 18,00,000 Rs. 1,00,000 Rs. 17,00,000 Rs. 18,00,000 Rs. 1,50,000 Rs. 16,50,000

81

Note: The above example does not consider the additional tax benefit this current financial year for Rs 20,000 for investments in notified infrastructure bonds under 80CCF. * Under the current Income Tax Act these are up to Rs 1 lakh under 80C, but under the DTC bill they can total up to Rs 1.5 lakhs.

As you will see in the above table, the tax liability under the DTC Bill is lower by approximately Rs 40,000 compared to the current rules. However, these savings could have been far more if the DTC in its original form had been implemented, as can be seen if one compares the total tax liability in the columns marked DTC Parliamentary Bill vs. Original DTC. For this reason we believe that the Bill has watered down some of the exemptions and the deductions. Nevertheless, the following are the sources of the total Rs 40,000 of savings for Mr Prakash under the DTC Bill:

Source

Amount of Saving compared to Existing Income Tax Act

Additional Rs 50,000 deduction

Rs 15,000 (Rs 50,000 x 30% marginal tax rate = Rs 50,000, Mr Prakash is in the highest tax bracket, and this is the additional saving that he can get by the additional Rs 50,000 deduction now available for tuition fees, pure life insurance and medical allowance)

Tax saving up to Rs 2 lakhs Tax saving between Rs 8 lakhs to Rs 10 lakhs Education Cess

Rs 4,000

Rs 20,000 Rs 1,170

SOURCE: (http://static.reuters.com/resources/media/editorial/20100831/iTrust.pdf) Lets take some examples that enlighten the tax calculations which differentiate DTC from Income Tax Act.

82

1. Comparison between current tax rates & Direct tax code slabs TABLE: 8
Tax to be paid under DTC Tax to be paid earlier

Taxable income (Rs. Lakh)

Person less than 65 years

Senior Citizen (>65 yrs)

Person less than 65 years

Senior Citizen (>65 yrs)

4 5 10 20

20,000 30,000 1,30,000 4,30,000

15,000 25,000 1,25,000 4,25,000

24,720 35,020 1,58,620 4,67,620

16,480 26,780 1,50,380 4,59,380

At taxable income of Rs.4 lakh, under DTC the individual has to

pay Rs.20,000 and under Income Tax it is Rs.24,720. So 19.09% of tax liability will be saving.

At taxable income of Rs.5 lakh, under DTC the individual has to

pay Rs.30,000 and under Income Tax it is Rs.35,020. So 14.33% of tax liability will be saving.

At taxable income of Rs.10 lakh, under DTC the individual has

to pay Rs.1,30,000 and under Income Tax it is Rs.1,58,620. So 18.04% of tax liability will be saving.

At taxable income of Rs.20 lakh, under DTC the individual has

to pay Rs.4,30,000 and under Income Tax it is Rs.4,67,620. So 8.04% of tax liability will be saving.

2. MAT calculation
For example, taxable income of a company is 12,50,000 Rs. in 2010-11 and book profit 20,00,000. Then tax liability would be

83

Particulars

When Taxable income is Rs 12,50,000 (A)

When Taxable income is Rs 12,50,000 (B)

3,75,000 7500 3750 3,86,250

Tax (30% of taxable income) Add: Surcharge Add: Education cess @ 2 % Add: S&H cess @ 1 % Less :- Deductions Tax under normal provisions

3,75,000 7500 3750 3,86,250

Book profit Tax on book profit (Under IT Act = 15%) (Under DTC = 20%) Add: Surcharge Add: Education cess @ 2 % Add:- S&H cess @ 1 % Tax under Minimum alternate tax

20,00,000 3,00,000 6,000 3,000 3,09,000

20,00,000 4,00,000 8,000 4,000 4,12,000

Here, column A shows the of pre DTC picture in which the provision for tax to the company is that: 30% of taxable income or 15% of book profit, whichever is higher. So in that case, the tax liability to the company will be Rs 3,86,250 as it is higher than Rs 3,09,000. In the initial period of DTC when it is passed for discussion in Parliament, it proposed changed in MAT calculation that it will be calculated 2% of gross asset. It is one of the restrictive decisions for who are the tax avoiders as in it there is a provision that the company have to pay the tax according to above mentioned calculation whether there is a profit or loss to the company. But now, it will be going to change in proposed MAT calculation of DTC. Now, it is proposed that it will be calculated as: 30% of taxable income or 20% of book profit, whichever is higher. As calculated in column B

84

3. Capital Gains Comparison o No distinction in short term and long term capital gain. o Indexation advantage available on asset held for more than one year. o Single tax rate for short term and long term capital asset. o Very disadvantageous for capital gains in case of equity shares which is zero at present. o There will be no distinction in Short term and long term Capital Gains. Case Study (Capital Gains): o Mr. X sold 200 shares of Reliance @ 1100. 100 shares were purchased 5 years back by him at indexed cost of 500 and 100 shares were purchased 9 months back at the cost of 900. Calculate Capital Gains tax. o Current Tax Rates o Long term zero. No tax on shares which are listed and held for 1 year. Short term 100 Shares *(1100{Selling price}900{Cost}) 20000 Rs. Capital Gain Tax is 10% of 20000 or Rs. 2000/-

Direct Tax Code Tax is 200 shares (1100{selling price} - 900 {cost}) 40,000 Rs. Capital Gain Tax is 20% of 40,000 or Rs. 8000/-

4. Income from House Property o Two major changes have taken place in income from house property. o Amount of repairs allowed as deduction has been reduced from 33.33% of rent to 20% of rent. o Amount of deduction available on interest paid on own house, not let out is totally eliminated. o

85

 Case Study o Mr. A is the owner of 2 houses. House 1 is used by the owner as his residence. House 2 is let out by him and he is earning annual rent of Rs. 90,000. The house which

is used by him as own residence is purchased by taking a loan the interest of which is 45000. o Current Tax Calculations Income from Own house Rent 0 (as it is not let out) Interest paid is 45000. So total income is 45000. Income from house let out Rent 90,000 Repairs 30,000 (1/3 of rent) o Direct Tax Code Calculation Rent = 0 Interest allowed = 0 Total = 0 Total 60,000

Total income from house property is 15,000.

Income from house let out Rent 90,000 Repairs 18,000 (1/5 of rent) Total = 72,000

Total income from house property is Rs. 72,000.

5. Income from Salary o Also a major development has been the EET proposal from EEE o EET stands for Exempt Exempt Tax o Whenever money is invested it leads to exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end will now be taxable. o EEE stood for Exempt exempt exempt o Whenever money is invested it leads to exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end were also totally exempt from tax.

86

 Case Study (EEE) : o Mr. A has invested money in retirement benefit plan amounting to Rs.100, 000 every year. He has been investing money since last 15 years. He gets Rs. 8500 as interest every year on the money invested which gets accumulated. On retirement he will get a total amount of Rs. 30, 00,000. o Current tax regime : EEE is the current system. So whenever he invests money he gets exemption of Rs. 100,000 every year. The interest earned by him every year is exempt from Tax. On retirement Rs. 30, 00,000 received by him will be exempt from tax. o Direct Tax Code: EET is the proposed system. So whenever he invests money he gets exemption of Rs. 100,000 every year. The interest earned by him every year is exempt from Tax. On retirement Rs. 30, 00,000 received by him will be taxable. The taxable amount will be Rs. 15,00,000 (30,00,000-15,00,000) There is no clarity on the plans which wont fall under EET scheme. Case study (Rent free Accommodation) o Mr. X is a government employee. He has been provided with the house by the government. The rent paid by the government for that house is Rs.1, 20,000 per annum. The license fees paid for the house is Rs. 10,000. His total taxable salary including all the allowances amounts to Rs. 15, 00,000.

87

o Current Tax Regime Under the current tax regime the amount of taxable Rent free accommodation will be the license fees that are Rs.10, 000. So taxable amount is Rs.10, 000. o Direct Tax Code Under the new tax code the taxable amount will be: 10% of salary that is Rs. 1, 50,000 or Rent paid by the government that is Rs. 1, 20,000 whichever is less. So taxable amount is Rs. 1, 20,000. 6. Other salient features of the Act o Capital Gains to be proposed at the normal rates as per the slab of assesses. o Corporate tax will be reduced to 25%. o TDS of 10% on capital gains. o STT to be abolished. o Base year shifted from 1/4/1981 to 1/4/2000. o Capital Gains taxable at 30% for non residents. o Wealth Tax raised to 0.25% from 1%. o Wealth tax exemption enhanced from 30 lakhs to 50 crores. o 80C benefit limit rose to Rs. 3, 00,000.

88

RESULTS & FINDINGS

89

RESULTS & FINDINGS

How DTC will affect the people paying taxes?? o Rs. 0 to Rs. 1,60,000 : No difference (Neither they paid earlier, nor would they now) o Rs. 1,60,000 to Rs 2,00,000 : Earlier they were paying 10% and they dont pay now o Rs. 2,00,000 to Rs 5,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%) o Rs. 5,00,000 to Rs. 8,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%) o Rs. 8,00,000 to Rs.10,00,000 : Earlier they were paying 30% and will now pay only 20% o Rs. 10,00,000 and above: No difference (They were paying and continue paying 30%) Data crunching how many people paid tax at what rate o Total number of tax payees during last year: 3.25 crore people (in 3 slabs of 10, 20 and 30%) o 95.25% of the total tax payers fall under Rs.1 lakh to Rs.5 lakh slab; contributing 30% of total taxes collected. o 2.05% of the total tax payers fall under 20% slab; and their contribution is 10% of all taxes collected. o 2.2% of the total tax payers fall under 30% slab; and their contribution is 60% of the total tax collected. Interesting Observations: The above figures indicate that vast majority of our fellow countrymen fall in the income range of Rs. 1,60,000 to Rs. 5,00,000 per annum. Though the successive governments drum up the fact that we are a middle-class economy, the facts state that we are infect a lower middle-class economy as 96% of our tax payees are at the

90

lowest level and contribute only 30% of taxes while the cream of the society of 4% contribute 70% of the taxes. Government and many international agencies claim that the middle class population in India is 300 million strong and is more than the entire population of Germany. Now consider this 300 million people mean at least 60 million families i.e. 60 million heads of families (consider one family pays only one tax). Still our tax payees are only 3.25 crores. Why the other 2.75 crore people are not paying taxes? Are they farmers (as farm income is tax free)? Are they businessmen (a chunk of whom earn in black)? Are they politicians (who dont declare their incomes)? Who are they? Benefits to government due to Direct Tax Code (DTC) Government by increasing the taxpaying limit to Rs. 2,00,000 will effectively bring down the tax payers by almost 10-15% (those falling in the nominal Rs.1,60,000 and Rs.2,00,000) and consequently reducing its paper work. Loss to government due to Direct Tax Code (DTC) On the other hand, by raising the tax slab from Rs. 8,00,000 to Rs.10,00,000 at the rate of 20%, from earlier 30%; it will lose a decent chunk of its tax income as the segment of Rs.8,00,000 and above contributes around 60% of all taxes collected, though the numbers are only 2.2% of tax payers this, assuming that the majority chunk of tax contributors likes at the lower band of a tax slab. From the above, you can see that due to these changes very few income groups benefitted. We have a strong feeling that this exercise is to reduce the paper work of the tax department rather than to transfer benefits to people.

91

 Instead what government could have done? For transferring the benefits to people it is equally important to consider two factors. o Increase taxable slabs (of course, until a certain point), and o Reduce tax rates. Since last decade, we have seen only the taxable slabs going up from Rs. 90,000 to the present Rs.2,00,000. This sure is a welcome gesture from government. However, the other component is conveniently overlooked while increasing taxable income ranges liable for paying taxes, the government could have brought down the effective tax rates from 10%, 20% and 30% to 8%,15% and 25% and, so on, gradually up to 5%, 10% and 15% for the above income groups (in line with many developed nations). This way instead of only two groups of income groups, everybody could have benefited from the exercise.

92

PROPOSED NEW CHANGES IN DTC IN CURRENT YEAR

93

PROPOSED NEW CHANGES IN DTC IN CURRENT YEAR

The code proposes some far reaching changes, some pleasant and some not. They are.. Deduction (the popular section 80C) increased to Rs 3 lakh from present Rs 1 lakh Thus, a person with taxable income of Rs 10,00,000 is likely to save approx Rs 1,20,000 annually Corp tax rates, including for foreign cos, reduced to 25% from 34% Net wealth tax exemption limit increased to Rs 50 crores from Rs 30Lakhs Wealth tax rate cut to 0.25% from 1% Indefinite carry forward of tax losses Deduction for donation towards scientific research @ 125% Agricultural income stays outside tax net Deductions for Royalty income of authors who are individual residents up to Rs 3Lakhs Deduction for Royalty income on patents for individual residents up to Rs 3Lakhs STT abolished Cost inflation adjustment to be available for transfers anytime after one year from end of year in which asset is acquired (earlier 3 yrs, except for shares) Base date for capital gains tax shifted from April 1, 1981 to April 1, 2000capital appreciation up to 2000 not taxable

94

 Max penalty down to two times tax amount (from three times tax) Branch profit tax to be introduced @ 15% Reintroduction of capital gains tax on listed shares & MF units Tax incentivesfor new contributions on or after commencement of code, EET method of taxation for savings introduced (section 80C effectively diluted) Deduction for rent paid restricted to Rs 2,000 per month Profit-linked incentives dropped Receipt of LIC policy taxable except for pure life insurance policy Distinction between short term and long term assets done away with Cost of acquisition/improvement NIL if not determinable

Roll over benefits for capital gains tax exemption trimmed to only one residential house Profits on sale of business capital assets/undertaking no longer treated as capital gains, but as biz income.

95

PROS & CONS OF DTC

96

PROS
Earlier, as per Income Tax Act 1961, most of the investments came under EEE (Exempt-Exempt-Exempt) Category. What that meant was the tax exemption is enjoyed at all the Three Stages Investment, Accumulation and Withdrawal. All this is going to change, once DTC regime comes in place. As per DTC proposals, most of these investments (except few mentioned in the second paragraph) will now be considered under EET (Exempt-ExemptTax) Category. What is means is you will have to pay taxes on any money being withdrawn from these funds.

Earlier it was supposed to cover most of the investment avenues like Life Insurance, Mutual Funds and Equity Linked Saving Schemes etc. But Thank God, our parliament members showed some sympathy and revised the rules on 15th June, 2010 to exclude some investments from EET category. Now 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 will all continue to follow the EEE Regime. On top of existing Rs 1 lakh tax benefit, an extra Rs 50,000 has been added for Pure Life Insurance(Sum insured is at least 20 times the premium paid), health insurance, mediclaims

policies and tuition fees of children. Maximum limit for medical reimbursements has been increased to Rs 50,000 per year from current Rs 15,000 limit. Tax Exemption for interest-payment on housing loan for selfoccupied property will remain the same i.e., Rs 1.5 lakhs per year. For

income/losses

from

housing

property,

deductions

for

Maintenance and Property Tax would be reduced from 30% to 20%

97

of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from tax. Tax exemption on Education Loan Payments to continue. Surcharge and Education cess are abolished. Corporate tax to be reduced from presents 34% to 30 % including education cess and surcharge.

CONS
No tax benefit on Principal Repayment on House Loan and Stamp duty and Registration Charges on purchase of house property. No tax benefit for LTA (Leave Travel Allowance). No tax benefits for investments made as part of Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term Deposits, NSC (National Savings Certificates), Long Term Infrastructures Bonds. All dividends will attract 5% tax. As per the existing laws, an NRI (Non Resident Indians) is liable to pay taxes on his or her global income, if he or she stays in India for a period more than 182 days in a financial year. But DTC is going to shorten this duration to just 60 days. We can only hope that all the good things are implemented as part of DTC and bad ones, if not dropped altogether, will at least be made reasonable. So lets keep our fingers crossed and wait for its final implementation.

98

CONCLUSION

99

CONCLUSION
It may be observed that there exist both good and bad things in the DTC. The biggest advantage for the individual tax payers is that the tax slab is just 10% for the income group (income ranging between Rs.2,00,000 to Rs.5,00,000). This will be certainly beneficial to the middle class section of the population because the tax which will be charged is just 10%. The taxable salary will go up because of some changes but real tax liability will actually reduce. Though, at the last, it may not get reduced too much but surely it will be a reason to cheer.

But it is obvious that the tax rates as proposed by the DTC will help in tax savings only for higher income group and not for lower middle income group. It actually defeats all the cannons of taxation which always advocate that the main aim of direct taxation is to reduce the economic disparity in the society. With this new rate of taxation, the individuals, with income ranging from Rs.5, 00,000 to Rs.10, 00,000, will be able to save more than 50% of their present tax burden, while the persons, with income of less than Rs.3,00,000, will be able to save nothing due to the proposed tax rates. Not only this, this section of people will be facing increased burden of taxes because of withdrawal of many deductions allowed to them from salary income like perquisites, leave travel concessions, medical reimbursements, etc. Even persons with income up to Rs.50, 00,000 can save nearly 20% on taxes. So, it can be observed that the tax rates and the other provisions proposed in the DTC are more in favour of the rich people than the people who belong to middle and lower income groups. According to the paper writer, the basic exemption should, at least, be raised to Rs.3, 00,000 which is the present ceiling for the 10% slab. If it is accepted and incorporated accordingly in the DTC, everyone will be benefitted. Further this basic exemption should be linked to the cost of living index. So, it can be increased every year based on inflation levels. Most of the time, the

100

increase in salary is linked to inflation and it is also essential that such increase should be protected from the tax burden. Here, the paper writer does not deny the fact that the rich are getting more benefits from tax savings but it has to be ensured that the low and middle income groups are also benefited by the DTC.

The application of EET should be restricted to new savings instruments after the date from which the DTC comes into effect, and it should not apply to existing saving instruments. The proposed EET method of taxation of permitted savings would be harsh. Tax payers require some flexibility in making withdrawals in lump sum without being subjected to tax. People may need lump sum funds on retirement for various family obligations. Requests have therefore been made for continuation of Exempt Exempt Exempt (EEE) method of tax treatment of investments.

101

BIBLIOGRAPHY

102

BIBLIOGRAPHY
Revised discussion paper on DTC, June 2010, Central Board of Direct tax, Department of Revenue, Ministry of Finance. www.caclubindia.com www.taxguru.com www.deccanherald.com www.businessworld.in www.moneycontrol.com www.stockmarketsreview.co www.trackin.com www.indianexpress.com www.timesofindia.com

103