India Tax For Private Circulation Only
GES Tax Alert
20 August 2009 Volume : GES/04/2009
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The Direct Taxes Code (DTC) Bill 2009 - Focus on Personal Tax implications
Background As a first step towards simplifying and bringing about structural changes in direct taxes, the new Direct Taxes Code (DTC) Bill 2009 has been released for public debate. This is expected to be presented in the winter session 2009 of the Parliament. The Code, once enacted, is proposed to be effective from 1st of April 2011. The Code attempts to simplify the language to enable better comprehension and remove ambiguity. It is expected that this would specially meet the aspirations of the young and professionally mobile population. The Code has been drafted considering the “principles that have gained international acceptance”. Key Highlights of the DTC The due date of filing tax return has been advanced to 30 June from 31 July for individuals who do not have business income. While the tax rates remain the same, major changes are proposed in the income slabs. Surcharge and Education Cess have been removed. The concept of “Resident but not ordinarily Resident” has been omitted. Introduction of Exempt Exempt Tax (EET) method for taxation of savings introduced as against the current Exempt-Exempt -Exempt (EEE) method.
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A certificate of Residency to be produced for claiming treaty benefits. India not to provide credit for taxes paid overseas in respect of India sourced income, where there is no treaty in place.
Automatic treaty override, where the treaty provisions are more beneficial, done away with. The DTC provides that the later of the Code or the treaty would prevail.
Concept of previous year and assessment year done away with.
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Snap shot of the current and proposed income slabs Amounts in INR Tax Rate Basic Exemption 10% 20% 30% As proposed by Finance Bill, 2009 160,000 *** 160,001 – 300,000 300,001 – 500,000 > 500,000 Proposed as per DTC 160,000*** 160,001 – 1,000,000 1,000,001 – 2,500,000 > 2,500,000
*** INR 190,000 for Resident Female individuals, and INR 240,000 for senior citizens. Currently, an education cess of 3% is applicable on the taxes, and hence the maximum marginal rate is 30.90%. The proposed maximum marginal rate is 30%. Residential Status and Scope of Income Individuals are categorized into Residents and Non-Residents. The definitions for Residents and Non-Residents as per existing tax laws are retained., The current provisions categorise residents into Residents and Ordinarily Residents (ROR) and Residents but not ordinarily residents (RBNOR). This bifurcation has been omitted in the DTC. Residence-based taxation is applicable to “Residents” and accordingly worldwide income is liable to be taxed. Source-based taxation to be applied for Non-Residents. However, Residents would not be taxed on income accrued / received outside India if the income relates to: the financial year in which the individual ceases to be a non-resident, or the financial year immediately succeeding such financial year, provided the individual was a non-resident for nine years immediately preceding the financial year in which he ceased to be a non-resident. Rules for computation of total income The incomes have broadly been categorized into “Income from ordinary sources” and “Income from special sources”. Ordinary Sources Special Sources includes Coverage Employment income Income from house property Income from business Capital gains Income from residuary sources Interest, dividends, capital gains etc received by a non resident on investment income, Winnings from lottery, crossword puzzle, gambling received by any assessee etc.
Deduction of incentives permissible Possible within the head Ordinary Sources. However, losses under the head Capital Gains and from speculative business are ring fenced and cannot be set off from income under any other head At normal rates after basic exemption, as per slab rates provided for Mandatory where the taxable income exceeds the maximum amount not chargeable to tax
Deduction of incentives not permissible Set off of loss from one source with profits from another source not permissible.
Set off & Carry forward of losses
At rates specified, basic exemption not available.
Return filing obligation
The various heads of income under Ordinary Sources have been elaborated below Income from employment, which includes Gross salary as reduced by the sum of permissible deductions and the value of perquisites and profits in lieu of salary. The permissible deductions are Professional tax paid Transport allowance to the extent prescribed Special allowance or benefit to meet expenses incurred wholly and exclusively in the performance of duties to the extent actually incurred. Compensation under Voluntary retirement / Gratuity received on retirement or death / amounts received on commutation of pension - as prescribed Pension received by gallantry awardees.
Permitted deductions with respect to gratuity / voluntary retirement / commutation of pension etc would be available to the extent the same is deposited in a prescribed account. On withdrawal from such accounts, these would be subject to taxes. Salary would inter-alia include perquisites in nature of: Rent free or concessional accommodation provided by the employer. Value of any sweat equity share, including employee stock options allotted or transferred, on the date of exercise. Value of any amenity, facility, privilege or service, computed as prescribed.
It would also include the following for which currently exemptions are available: Leave Travel concessions - for travel within India. Leave salary Medical reimbursements House Rent Allowance.
Income from house property There are no benefits available for self occupied house property (currently, interest costs not exceeding INR 150,000 is allowed as a deduction). Where the property is deemed to be let out, or actually let out, the income shall be the gross rent less specified deductions. Gross rent would be the higher of the contractual rent or presumptive rent calculated at 6% of The value fixed by the local authority or in its absence, Cost of construction/acquisition. Gross rent for one self occupied property would be considered Nil. Advance rent to be taxed in the financial year to which it actually relates. The deductions available in the case of a rented property / deemed to be let out property would include taxes levied by the local authority as well as taxes on services paid to Central Government, 20% of gross rent towards repairs and maintenance (currently this is at 30%) Interest payable on borrowed capital.
Income from business needs to be computed as per the provisions of the DTC. From the perspective of an employer on withholding tax compliances, where there has been no compliance with respect to tax withholding, (including on salary payments) by the employer, the related expenditure would not be allowed as a deduction. However, such expenses could be claimed in the year the actual deduction and deposit takes place, provided such payment is within 2 years from the end of the financial year in which the taxes were deductible. Capital Gains Income from transactions in investment assets (capital assets other than business capital assets) would be taxed under the head “Capital Gains”. Distinction between short-term investment asset and long-term investment asset has been eliminated. Assets held for more than one year are entitled to indexation benefit (currently for shares /security the period of holding is one year, and for other assets the period is three years). Capital gains arising from transfer of personal effects and agricultural land to be excluded from the ambit of taxation. Base date for determining cost of acquisition for the purpose of computing capital gains shifted from 1 April 1981 to 1 April 2000. Securities Transaction Tax to be abolished. In case cost of acquisition and cost of improvement of an investment asset cannot be determined, the same shall be deemed to be Nil for the purposes of computing capital gains.
Current exemption provisions based on investments of sale proceeds have been significantly revised. Capital gains income derived by non-residents brought within the purview of Special Sources resulting in differential and possibly higher taxes as compared to resident individuals. While resident individuals would be taxed at their personal marginal rate, the non-residents are liable to be taxed at 30% on the capital gains. More clarity is required with respect to the computation of capital gains in the case of non-residents. Losses under the head capital gains would be ring fenced and such loss shall not be allowed to be set off against income under other heads. Further, such loss (as is the case with loss under other heads) is allowed to be carried forward indefinitely. Currently, the period for which losses can be carried forward, is limited to 8 years.
Income from Residuary sources Residuary income would comprise any income which does not form part of any other head of income under ordinary sources / special sources. Withdrawal under the savings scheme / retirement benefit account maintained by the employees (both the investment amounts, as well as the interest accrued) would be taxable under this head. However, the amount of accumulated balance as on the 31st day of March, 2011, in the account of an employee participating in an approved provident fund and any accretion thereto shall be excluded from taxation. Any sum received under a pure life insurance policy including bonus shall be exempt from tax.
Tax Incentives Income from Special Sources is not entitled to incentives. However, income from Ordinary Sources is entitled to a deduction of incentives which includes the following: Contribution to Permitted Savings Intermediaries (including contributions to approved provident fund, approved superannuation fund, new pension fund, life insurer etc). Payment of tuition fees towards children education (for two children)
(Tax incentives relating to the above shall be subject to a maximum of INR 300,000 per annum). Other incentives (subject to conditions and limits as prescribed) include interest on higher education loan, payment of health insurance premium for self and dependents, deduction for expenses incurred on maintenance of disabled dependent, medical treatment of prescribed diseases, deduction for persons with specified disability, donations etc.
Wealth Tax Individuals, Hindu Undivided Families and private discretionary trusts liable to wealth tax on specified assets. Net wealth in excess of INR 500 Million to be chargeable to wealth-tax at the rate of 0.25%. Value of assets located outside India in the case of an individual who is not a citizen of India / or not a resident of India is not chargeable to wealth tax. The definition of wealth has been extended to include all assets other than specific exclusions such as one house, or part of the house or plot belonging to the individual which is acquired or constructed before 1st day of April 2000. The value of the assets shall be as per prescribed rules (except for cash).
Comments The Code will need to be read with the related rules / notifications which are expected to be notified at a later point. The full impact will be known once these are available. Nevertheless, the Code broadly indicates the intent of the Government to move towards a simpler tax structure with lower tax rates, higher compliance through stringent penalties, resulting in a wider tax base. While most of the tax deductions and exemptions have been done away with, the government has been fairly generous in increasing the slabs of income resulting in lowering tax liabilities for all. Source: (1)Direct Code – August 2009 (2)Discussion paper on Direct Tax Code – August, 2009
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