Direct Taxes Code Bill, 2010 (DTC)

Personal Tax Submitted by:Rajiv Ranjan 10PT1-075 Rakesh Bhat 10PT1-076

CONTENTS
Philosophy and Strategy of DTC
Personal Tax Highlights Rates of Tax Scope of Total Income Income From Employment Income from House Property Tax Incentives & Retirement Benefits Deduction of Tax at Source Wealth Tax

Direct Tax Code, 2010

PHILOSOPHY & STRATEGY OF DTC

Direct Tax Code, 2010

Philosophy

PHILOSOPHY & STRATEGY

Use of simple language to ensure clarity.

Reduction in scope for litigation by avoiding ambiguity in provisions.

Use of flexible structure to accommodate changes in the growing economy without resorting to frequent amendments. Form based law - Incorporate a design which can be logically reproduced in a Form. Consolidate and rearrange various provisions to make them consistent with the general scheme of the Act.

Direct Tax Code, 2010

Strategy

PHILOSOPHY & STRATEGY

Expand tax base by adopting a comprehensive definition of income by including all accruals and receipts of revenue and capital nature unless otherwise specified. Remove tax exemptions to achieve equity, reduce compliance cost, lower administrative burden, discourage corruption.

Liberalize tax rates -expected to yield existing level of revenues with the revised comprehensive tax base.
Provide limited exemptions. Provide exceptions, essentially in the nature of deferrals, with a view to mitigating the problem of liquidity.

Direct Tax Code, 2010

PERSONAL TAX - Highlights

Rationalisation of tax rates by removal of surcharge and shift of slabs Due Date of filing of tax returns

30 June Non business non corporate tax payers

31 August All other tax payers No distinction between Capital Gains basis long term and short term Removal of many benefits currently exempt / taxed at lower rates - House Rent Allowance, LTC, Retirement benefits etc. Exempt Exempt Taxable (EET) to guide the philosophy of taxation of all savings

Overall limit of savings based deductions/tax incentives increased to Rs. 3

Lakhs.

Direct Tax Code, 2010

RATES OF TAX

Direct Tax Code, 2010

TAX RATES
Income Slab (Rs.) Upto Rs.1,80,000* 1,80,000 to 5,00,000 5,00,000 to 8,00,000 Above Rs 8,00,000 10,00,000 to 25,00,000 Above Rs. 25,00,000

RATES OF TAX
Proposed Rates Nil 1,50,000 Income (Rs.) Current tax (Rs.) Nil 14,420 55,620 1,32,870 2,10,120 5,19,120

TAX SAVINGS (without considering the effect of HRA, LTA etc)

Proposed tax (Rs.) Nil 14,000 34,000 59,000 84,000 2,84,000 Savings (Rs.) 420 21,620 73,870 1,26,120 2,35,120 Savings (%) 3 39 56 60 45

Existing Rates Nil 10%

3,00,000 20% 10% 30% 30% 30% 20% 30% 5,00,000 7,50,000 10,00,000 20,00,000

*Higher limits for working women and senior citizens Direct Tax Code, 2010 8

RATES OF TAX - Observations

No change in lowest slab (Rs.180,000)
Upward shift of slabs intended to neutralise impact of removal of many of the current exemptions and benefits Individuals on borderline, currently not paying taxes, may become tax payers due to removal of exemptions
Direct Tax Code, 2010 9

SCOPE OF TOTAL INCOME

Direct Tax Code, 2010

10

SCOPE OF TOTAL INCOME

No change in Scope of total income but no NOR:
In India
Income accrued / deemed to accrue Resident Non-Resident Income received

Outside India
Income accrued / deemed to accrue * Income received *

*Subject to exception in case of new residents (see next slide)

INCOME FROM EMPLOYMENT

Direct Tax Code, 2010

12

INCOME FROM EMPLOYMENT

Particulars Existing provision
Not

Proposed provision

Impact

Definition

of

Employer

employer

specified.

defined to mean an entity which controls and directs the individual under express or implied employment contract and is obligated to pay compensation to him.

Concept

of economic employer recognized in statute.

INCOME FROM EMPLOYMENT

Particulars
Meaning

Existing provision
Not

Proposed provision
With reference to the employee, the term person, individual, employee and assesses is used in different sections, and sometimes differently within the same section.

Impact
Inconsistency

of

employee

specified.

in terms used

INCOME FROM EMPLOYMENT

Particulars Existing provision Proposed provision
Taxable

Impact

Commuted

Fully

pension & gratuity

exempt for Government employees. Partially exempt for other employees.

but tax may be deferred provided amount is deposited in a Retirement Benefit Account (RBA).
Withdrawals

Parity

of treatment between Government and nonGovernment employees.

Conforms

to EET principle.

from RBA will be taxed.

INCOME FROM EMPLOYMENT

Particulars Existing provision Proposed provision
Taxable

Impact

VRS

Conditionally

compensation exempt up to Rs. 5 lakh.

on deferred basis, as per guidelines to be prescribed, provided amount is deposited in RBA.

Withdrawals

Conforms

to EET principle.

from RBA will be taxed.

INCOME FROM EMPLOYMENT

Particulars
Leave

Existing provision
Taxable

Proposed provision
Taxable

Impact
Parity

encashment

if received while in employment (Relief of tax available). If received on retirement or otherwise, fully exempt for Government employees and partial exempt for private employees.
None

whether received during employment or on retirement or otherwise, for all employees.

of treatment between Government and nonGovernment employee. No relief or deferment of tax.

Retirement

Benefits Account (RBA)

Interest accrual in RBA not exempted.

INCOME FROM EMPLOYMENT

Particulars
Transport

Existing provision
Exempt

Proposed provision
Deductible

Impact
To

up to 800

allowance

p.m.

up to certain limits (Rs 3200 to be prescribed).

be analyzed once limits are prescribed .

Will

HRA

Exempt

(subject to certain limits).

Prima

facie

taxable.

increase tax base. .

INCOME FROM EMPLOYMENT

Particulars
Special allowances u/s 10(14)

Existing provision
Exemption for Prescribed allowances u/s 10(14) : Rule 2BB(1) such as To meet expenses away from normal place of duty ( also called Per Diems) Rule 2BB(2) such as To meet personal expenses at place of employment or residence
Personal

Proposed provision

Impact
Will

increase taxable salary

Deductible

as prescribed to the extent actually incurred. Impact will be clear once rules are prescribed.
Only

Allowances

transport allowance deductible to the extent prescribed

like compensatory allowance, children education allowance, etc., will now be fully taxable.

allowance for performing duties of special nature, related to place of posting or residence

Taxable

INCOME FROM EMPLOYMENT

Particulars
Accommodation

Existing provision
Valued

Proposed provision
Valuation

Impact
Parity

as per Rules. Preferential treatment for Government employees.

Rules to be prescribed. Expected to cover both company leased and HRA.

of treatment between Government and non-Government employee. Impact can be ascertained once Rules are prescribed. HRA stands withdrawn while accommodation continues.

INCOME FROM EMPLOYMENT

Particulars
LTC

Existing provision
Exempt

Proposed provision
Taxable.

Impact
Will

(subject to limits).

increase taxable salary.

Motor

car; domestic

Valued

servant, gas/electricity/water; educational facilities; transport facility

as per Rules.

Valuation

Impact

Rules to be prescribed.

can be ascertained once Rules are prescribed.

INCOME FROM EMPLOYMENT

Particulars
Medical

Existing provision
Medical

Proposed provision
Taxable.

Impact
Increase

facilities and reimbursements

treatment in specified hospitals not taxable. Payment of medical insurance premium not taxable. Reimbursement on medical treatment not taxable up to Rs. 15,000. Medical treatment abroad not taxable subject to certain conditions.

in

Taxable.

taxable salary as Employer funded medical benefits become taxable.

Taxable.

Taxable.

INCOME FROM EMPLOYMENT

Particulars
Tax

Existing provision
Tax

Proposed provision
Omitted.

Impact
Higher

on nonmonetary perquisites

on non monetary perquisites not subject to grossing up under section 10(10CC).

tax

outgo.

Stock

Taxable

options/sweat equity

on allotment or transfer of shares as per prescribed valuation rules and then on sale as capital gain.

Taxable

on allotment or transfer of shares as per valuation rules to be prescribed and then on sale as capital gain.

No

change in provisions.

INCOME FROM HOUSE PROPERTY

Direct Tax Code, 2010

24

INCOME FROM HOUSE PROPERTY

Particulars
Income

Existing Provision
Taxable

Proposed Provision
Taxable

Impact
Letting

from business of letting

as business income.

as house property income (except hotel, convention centre or cold storage).

out of commercial complexes, theatres, etc. may be taxed on presumptive basis.

Commercial

letting will be taxable as house property income even though in the nature of business.
Fixed

deductions as against actual expenses and depreciation.

INCOME FROM HOUSE PROPERTY

Particulars
Tax

Existing Provision
Annual

Proposed Provision
Gross

Impact
New

base

value is the basis for taxation.

Rent

realized and fair market value form the basis for determining annual value.

rent is the basis for taxation. Contractual rent and presumptive rent* form the basis for determining gross rent. *6% of (a) ratable value, or (b) cost of construction or acquisition, if no ratable value is fixed.

concept of presumptive rent introduced.

May

result in inconsistency where ratable value is not fixed. This may lead to fixation of rent which is higher than standard rent in case the ratable value is not fixed.

INCOME FROM HOUSE PROPERTY

Particulars
Definition

Existing Provision
Any

Proposed Provision
Also

Impact
Income,

of

house property income expanded

buildings or lands appurtenant thereto.

includes building along with machinery, plant, furniture or any other facility, if letting of both is inseparable.

hitherto, taxed as income from other sources, shall now be taxed as house property income.
Fixed

deductions will be available as against actual expenses.

Property

Annual

acquired during the year

value is considered for the proportionate period.

No

provision to apportion presumptive rent.

Tax

may be payable in respect of entire year even if property is owned for a part of the year.

INCOME FROM HOUSE PROPERTY

Particulars
Unrealised

Existing Provision
Deductible

Proposed Provision
No

Impact
Tax

rent

while computing annual value.

deduction provided.

may be payable on unrealised rent.

Vacancy

Income

allowance

not included for period property is vacant for whole or part of the year.

Though

Tax

contractual rent factors in the vacancy, presumptive rent does not do so.

may be payable even though no income is earned.

INCOME FROM HOUSE PROPERTY

Particulars
Standard

Existing Provision
30%

Proposed Provision
20%

Impact
Will

deduction
Deduction

of Gross Annual Value

No

of Gross Rent

increase taxable income.

Tax

for tax on services

specific provision

Specific

provision included.

on services will be deductible.

INCOME FROM HOUSE PROPERTY

Particulars
Interest

Existing Provision
Allowed

Proposed Provision
No

Impact
Provision discriminatory in favor of multiple home owners. May result in sham let-out deals.

on

borrowed capital

upto Rs. 150,000 for self occupied property.

deduction available for self occupied property.

Allowed

without limit for let-out properties.

Allowed

without limit for let-out property.

May discourage investment in property by lower and middle income taxpayers.

INCOME FROM HOUSE PROPERTY

Particulars
Deduction

Existing Provision
Allowable

Proposed Provision
Apparently

Impact
Such

in

not

for interest paid on loan during the preconstruction or preacquisition period

5 installments.

allowed.

interest may be sunk cost.

TAX INCENTIVES

Direct Tax Code, 2010

32

TAX INCENTIVES Savings Based Deductions

All savings instruments transitioned to EET basis

Overall limit of Rs.300,000 per annum paid to any permitted savings intermediaries
Approved provident fund Approved superannuation fund Life insurance New Pension System (NPS)

Roll over or purchase of annuity plan will be tax free Employer contributions to PF, SAF to be included in the limit

Direct Tax Code, 2010

33

TAX INCENTIVES- Other Deductions

Tuition fees for children
For maximum of two children Educational institution should be situated within India Covered under the overall limit of Rs 300,000 per annum for savings instruments

Interest on education loan Health insurance premium, treatment of prescribed diseases, maintenance of a disabled dependent Deduction in respect of donations subject to various limits Deduction for rent paid by a self employed person

Direct Tax Code, 2010

34

TAX INCENTIVES
Avenue
Life

Existing provision
Premium

Proposed provision
Premium

Impact
Objective

insurance

deductible u/s 80C upto Rs. 1 lakh (if premium does not exceed 20% of sum assured).
Sum

deductible within the overall tax incentive limit of Rs. 3 lakh.

Sum

appears to limit EEE benefit to pure life insurance policies.

Existing

received (including bonus) is exempt if premium does not exceed 20% of sum assured.
Receipt

received (including bonus) is exempt if premium does not exceed 5% of sum assured and sum is received only on completion of contracted period or on death.

life insurance policies where premium exceeds 5% of the sum assured adversely impacted.

on death is exempt.

TAX DEDUCTION AT SOURCE (TDS)

Direct Tax Code, 2010

36

 Liability to deduct tax at source is on the employer

TAX DEDUCTION AT SOURCE - Salaries

Residents at average rate of tax Non Residents flat rate of 35% as per Fourth Schedule as applicable on residuary income

Requirement to deduct appears on payment or credit. Amount payable defined to include by credit to any account, whether called Suspense Account or by any other name No provisions to address dual employment / successive employment / split salary situations Loss from house property or any other income of the employee, if any, cannot be factored into the computation of tax to be deducted Lack of clarity on whether or not employer can factor in foreign tax credits to reduce tax to be deducted at source

Direct Tax Code, 2010

37

WEALTH TAX

Direct Tax Code, 2010

38

WEALTH TAX - Highlights

Threshold limit increased from Rs 30 lakhs to Rs 50 Lakhs Rate of tax reduced from 1% to 0.25% No special exemptions for returning non-resident Indians (earlier provisions exempted the money and assets brought into India for a period of 7 years after the return of the individual into India) Private discretionary trusts covered Valuation Rules to be prescribed

Direct Tax Code, 2010

39

Thank You