DTC 2010 Click to edit Master subtitle style Bill) (Direct Tax Code

2012

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What Is A Tax?

Let us begin by understanding the meaning of tax. Tax is a fee charged by a government on a product, income or activity. are two types of taxes .

There

Direct taxes and indirect taxes.

If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax, wealth tax.

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Why Are Taxes Levied? The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so raised is utilised for meeting the expenses of government like defence, provision of education, health-care, infrastructure facilities like 5/3/12

Overview Of Income-tax Law In India

Income-tax is the most significant direct tax. In this material, we would be introducing the students to the Income-tax law in India. The income-tax law in India consists of the following components. Income Tax Act Annual Finance Acts Income Tax Rules Circulars/Notifications Legal decisions of Courts
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Income-tax Act

The levy of income-tax in India is governed by the Income-tax Act, 1961. We shall briefly refer to this as the Act. This Act came into force on 1st April, 1962. The Act contains 298 sections and XIV schedules. These undergo change every year with additions and deletions brought about by the Finance Act passed by Parliament. In pursuance of the power given by the Income-tax
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The Finance Act

Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Part A of the budget speech contains the proposed policies of the Government in fiscal areas. Part B of the budget speech contains the detailed tax proposals. In order to implement the above proposals, the Finance Bill is introduced in the Parliament.
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Income-tax Rules

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962. It is important to keep in mind that along with the Income5/3/12

Levy of Income-tax
Income-tax

is a tax levied on the total income of the previous year of every person. A person includes
An individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), A firm, A company etc.
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Concept of Income

The definition of income as per the Income-tax Act begins with the words Income includes. Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not confine the scope of income but leaves room for more inclusions within the ambit of the term. Certain important principles relating to income are enumerated below

Income, in general, means a periodic monetary return which accrues or is expected to accrue regularly from definite sources. However, under the Income-tax Act, even certain income which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries, crossword puzzles.

Income normally refers to revenue receipts. Capital receipts are generally not included within the scope of income. However, the Income-tax Act has specifically included certain capital receipts within the definition of income e.g. Capital gains gains on sale of a capital asset like land.

Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each head.

Income is taxable either on due basis or receipt basis. For computing income under the heads Profits and gains of business or profession and Income from other sources the method of accounting regularly employed by the assessee should be considered, which can be either cash system or mercantile system.

Income earned in a previous year is chargeable to tax in the assessment year. Previous year is the financial year, ending on 31st March, in which income has accrued/ received.

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Classification of income under different heads

HEADS OF INCOME: The Act prescribes five heads of income.
SALARIES INCOME FROM HOUSE PROPERTY PROFITS AND GAINS OF BUSINESS CAPITAL OR PROFESSION GAINS INCOME FROM OTHER SOURCES

These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer. Salary, pension earned is taxable under the head Salaries. Rental income is taxable under the head Income from house property. Income derived from carrying on any business or profession is taxable under the head Profits and gains from business or profession. Profit from sale of a capital asset (like land) is taxable under the head Capital Gains. The fifth head of income is the residuary head under which income taxable under the Act, but not falling under the first four heads, will be taxed. The tax payer has to classify the income earned under the relevant head of income.

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Total Income And Tax Payable

Income-tax is levied on an assessees total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total income for the purpose of levy of income-tax. Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Determination of residential status Classification of income under different heads Exclusion of income not chargeable to tax Computation of income under each head Clubbing of income of spouse, minor child etc. Set-off or carry forward and set-off of losses Computation of Gross Total Income. Deductions from Gross Total Income Total income

Step 10 Application of the rates of tax on the total income 5/3/12 Step 11 Surcharge

Introduction

In August 2009, Government unveiled the Direct Taxes Code, 2009 along with a discussion paper for public comments to replace the Income-tax Act, 1961 and the Wealth tax Act, 1957. In June 2010, the Government released the Revised Discussion Paper to address concerns over some major issues arising therefrom. In August 2010, the Government tabled a revised Direct Taxes Code, 2010 in the Lok Sabha which was then referred to the Standing Committee on Finance for its review and comments. Various stakeholders have submitted their suggestions to the Standing Committee on the Direct Taxes Code, 2010. 5/3/12

Residential Status
NRI ( Non Resident of India) NRIs to retain their non-resident status may be restored to the existing 182 days, subject to two conditions, namely (i) each person claiming NRI status should simultaneously indicate the tax jurisdiction in which he is resident and, (ii) that all cases of fraud should be severely dealt with and nobody is allowed to become a global nonresident. Place of Effective Management The reference to ED or officer may be removed from the definition of POEM and residency should instead be determined on the basis of internationally accepted standards and judicially settled principles, where the focus is on the place, where the key management and commercial decisions as a whole are made or where the head and brain of the company is situated
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Computation of Book Profit (MAT)

Carry forward of unutilised MAT credit balance as on 31 March 2012 or a later date. Suitable amendments / rectifications should be considered relating to waiving of MAT specifically on insurance companies, banks and electricity companies. MAT on SEZ has already brought on the statute and necessary amendments in DTC shall be made accordingly. SEZ Act in this regard should also be modified so as to bring harmony between both the Acts.
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Dividend Distribution TAX

The levy of additional income tax : The Committee recommends that a suitable amendment in the DTC be made to ensure that non-resident shareholders become entitled to tax credit for the additional income tax paid by the Indian domestic company. of DDT to foreign companies which are regarded as resident based on place of effective management
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Applicability

Tax Incentives

Tax incentive for housing projects The Committee has recommended that business of developing and building a housing project under a prescribed scheme for affordable housing as specified under Section 35AD(5)(ad) of the Act may be included in the Thirteenth Schedule of DTC for the purpose of investment linked deduction Health care and education sector The Committee has recommended that health and education may be considered for inclusion under infrastructure and hence allow tax incentive under the Thirteenth schedule of DTC. Area based deductions The Committee believes that in order to encourage business and industrial investment in neglected areas or regions requiring special attention, a few selected districts based incentive schemes may be considered on investment linked basis. Further, the existing schemes should not be discontinued half way and must be allowed till the last course. Deduction under Section 80P of the Act for co-operative societies Keeping in view the large number of representations received from different co-operative societies, the Committee 5/3/12 recommends that the ministry may consider the same for

Income from House Property

Taxability of income from any house property under the head Income from House Property Therefore, the definition of house property should be re-drafted so that the distinction between commercial and non-commercial property is clearly brought out. Scope of gross rent

As per DTC, Gross rent in respect of a house property or any part of the property, shall be the amount of rent received or receivable, directly or indirectly, for which such property is let out. In case rent is received in any form other than cash, it shall neither be construed as letting nor receiving the amount.
5/3/12 In such cases, income in respect of property

Income from House Property

Deductions from gross rent for computation of income from house property

As provided under the current provisions of the Act, deduction in respect of unrealised rent is not currently provided under DTC. The quantum of deduction (i.e. 20 percent) permissible towards repair and maintenance of house property (both of the rent received as well as arrears of rent) should be raised to a more reasonable percentage.

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Income from Residuary Sources

Taxability of Life Insurance Receipts

As per DTC, all proceeds/benefits of life insurance policies are tax exempt subject to the condition of sum assured being at least 20 times the annual premium, as against 5 times the annual premium every year as per the Act. Increasing the tax exempt sum assured to premium ratio of 20 times is a drastic change and it may have an adverse impact on the life insurance sector. Therefore, a more reasonable multiple/ratio of 10 times the annual premium should be prescribed. Refund of sum assured under money back policies as well as accrued bonuses should also be treated as sum assured payable on the happening of certain event of life and should not be taxable under DTC. As regards the requirement for grandfathering, it is 5/3/12

Individual taxation
Slab (lakhs) 0L-3L NIL 3L-10L 10L-20L : 10 percent : 20 percent

Beyond 20L: 30 percent

The Committee also recommended relaxation in the age for senior citizens from 65 years to 60 years. DTC allowed an individual a maximum deduction of INR 100,000 per FY towards long-term savings, being contributions to provident fund, superannuation fund, gratuity fund and pension fund. The deduction limit for investment in long-term savings to be increased from INR 100,000 to INR 150,000 per FY . 5/3/12

Individual Taxation

The overall deduction limit towards life insurance premium, health insurance premium and tuition fee to be doubled to INR 100,000 per FY . Additional deduction of INR 20,000 per FY to be allowed towards health insurance premium paid for dependant parents who qualify as senior citizens. This benefit should also be granted for dependant grandparents. Additional deduction of INR 50,000 per FY to be specifically provided for higher professional education

Deduction of interest on loan taken for self occupied house property

Deduction to be available with respect to loans taken from all types of employers and financial institutions. Time limit for completion of repair and renovation to be specified as a period of three years from the receipt of loan.

Deduction of interest on loan taken for higher education

Education loan taken from other sources like other institutions, self-help community group to be also considered for deduction.

Deduction for medical treatment and maintenance of a dependent person with disability 5/3/12

Individual Taxation
Deduction for contribution or donation to certain funds or NPO DTC 2010 made certain Universities, Colleges or other institutes eligible for 175 percent and 125 percent deductions, respectively, as against maximum deduction of 100 percent specified under the current Act. The restrictions on deduction towards donations to certain funds/NPO, as imposed in DTC, to be made more donee-centric. Universities, Colleges or other institutes which were eligible for 175 per cent and 125 per cent deductions, respectively, under the DTC, should be made eligible for 100 per cent deduction. Deduction for rent paid The proposed monetary limit of INR 2,000 per month to be enhanced to INR 5,000 per month. The limit may be periodically revised to keep it in sync with the 5/3/12 prevailing market conditions.

Wealth Tax

The ceiling for wealth tax exemption should be increased to INR 50 Million. The wealth tax rates recommended by committee are as under: Net Wealth (INR In Millions)
0 50 NIL 50 200 0.5 percent 200 500 0.75 percent 500 and above 1 percent

The Committee recommended a built in statutory mechanism, based on Consumer Price Indices for updating tax slabs (including wealth tax) periodically for inflation. Religious trusts should be excluded from the purview of wealth tax provided that they undertake significant charitable 5/3/12 activities.

Final Words!

The Standing Committee on Finance while releasing the report on DTC referred to various essential pre-requisites and guiding principles viz. provision of tax consolidation of group entities, accountability of tax officers, fast track special courts, modernisation and computerisation of tax departments operation, quick refunds and fast assessments, investment linked incentives, etc. The Committee has recommended certain welcome provisions like increase in the threshold limit and tax slabs for individuals and wealth tax, grandfathering of SEZ provisions vis-a-vis levy of dividend distribution tax and availability of tax credit to non-resident shareholders on the additional 5/3/12 dividend distribution tax paid by the Indian

Final Words!

The Committee has suggested for accountability of tax officers in their career dossier where unreasonable tax demands are raised by them which are quashed at higher levels. Further, the Committee has also suggested disciplinary action in cases of irrational tax assessment. These recommendations would bring fairness into the tax system. The DTC was to come into effect from 1 April 2012. Since the recommendations of the Committee are before the Parliament for their consideration, DTC may come into force at a later point of time.

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Thank you!
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