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Direct Tax Code Bill - Changes in Personal Taxation

Its here! With the amount of anticipation that normally accompanies a hotly publicized Bollywood movie, the Direct
Tax Code (DTC) bill is finally here. The DTC will replace the Income Tax Act, and rings many changes in personal
and corporate taxation. It will come into effect starting April 1, 2012. Here we demystify what the impact of the DTC
will be towards the personal taxation for salaried individuals. Following on from its original proposal last year, the
Government had issued a revised discussion paper in June 2010. In its original form the DTC was expected to bring
about far reaching changes in the personal taxation slabs and available exemptions. Fast forward to today, and whats
been tabled in Parliament appears to be a watered down version of the 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.

Tax Rate DTC Parliamentary Bill Current Slab under Income Original DTC
(Aug 2010) Tax Act
Nil Upto Rs 2,00,000 Upto Rs 1,60,000 Upto Rs. 1,60,000
10% From Rs 2,00,001 to Rs From Rs 1,60,001 to Rs From Rs 1,60,001 to Rs
5,00,000 5,00,000 10,00,000
20% From Rs 5,00,001 to Rs From Rs 5,00,001 to Rs From Rs 10,00,001 to Rs
10,00,000 8,00,000 25,00,000
30% Above Rs 10,00,000 Above Rs 8,00,000 Above Rs 25,00,000

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.

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.

Tax Rate DTC Parliamentary Bill (Aug Current Slab under Income Original DTC
2010) Tax Act
Nil Upto Rs 2,50,000 Upto Rs 2,40,000 Upto Rs. 2,40,000
10% From Rs 2,50,001 to Rs 5,00,000 From Rs 2,40,001 to Rs From Rs 2,40,001 to Rs
5,00,000 10,00,000
20% From Rs 5,00,001 to Rs From Rs 5,00,001 to Rs From Rs 10,00,001 to Rs
10,00,000 8,00,000 25,00,000
30% Above Rs 10,00,000 Above Rs 8,00,000 Above Rs 25,00,000

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 full-
time 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.

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.

Please note that under 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.

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 Prakash’s 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.

DTC Current Slab


Parliamentary under
Particulars Original DTC
Bill (Aug 2010) Income Tax
Act

Mr. Prakash’s Salary Income for the Year Rs Rs 18,00,000 Rs 18,00,000


18,00,000
Investments in tax free instruments* Rs Rs Rs
1,50,000 1,50,000 1,50,000

Computation of Taxable Income


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

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 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 Rs 4,000
Tax saving between Rs 8 lakhs to Rs Rs 20,000
10 lakhs
Education Cess Rs 1,170
By www.iTrust.in - India’s leading one-stop financial supermarket for real estate, home loans, investments, taxes and financial
planning.

Tuesday August 31, 02:34 AM Source: Indian Express Finance

Corporate India welcomes MAT at 20% book profit

India Inc may be a tad miffed that the corporate tax will be levied at 30% rather than the 25% envisaged in the earlier
version of the Direct Taxes Code (DTC). However, the Minimum Alternate Tax (MAT) will now be charged on a
company's book profits at the rate of 20%, rather than on its gross assets as was proposed earlier, is a welcome relief.
R Seshasayee, managing director, Ashok Leyland (ASHOKLEY.NS : 73.6 0 ), says, "The lower corporate tax of
30% is fine and the balance between direct and indirect taxes is being restored. However, over a period of time the
government should be looking to bring down tax rates progressively and there should be a road map towards this
end." Uday Phadke, president (finance), Mahindra and Mahindra (M&M), adds, "Although we would have been
happier with 25%, which had been suggested earlier, 30% seems to be fine."

Many corporates, who were anxious about whether the MAT credit could be carried forward, can now rest assured.
Explains Gautam Mehra, executive director, Pricewaterhouse Coopers (PwC), "The eligible credit can be carried
forward for 15 years work and set off against future liabilities." However, Subba Rao Amarthluru, Group CFO, says
"Even a 20% MAT is too high, the rate should be pegged at 15%, which is half the rate of corporation tax. MAT was
justified at a time when there were exemptions and deductions. Since these are being out, there is no place for MAT."
He also believes that the government should consider the group taxation approach.

In what can be considered a positive step for corporate India, Dinesh Kanabar, deputy CEO and chairman Tax,
KPMG points out, "Companies setting up infrastructure projects should be particularly happy because the
grandfathering of incentives is being continued and moreover, instead of the grandfathering being on the basis of the
investments, the exemption is being allowed on profits."

In another important move, the government now proposes to tax indirect overseas transfers with more than 50% value
in India. "These will be regarded a transfer of assets in the country and will be liable to long-term capital gains tax on
a pro-rata basis. This is a departure from the earlier stance," explains KPMG's Kanabar. PwC's Mehra points out that
the DTC retains the dividend distribution tax, to be paid by corporates at 15%. However, Mehra believes that the
CFC regime could be a negative step for those Indian companies that have set up overseas companies that derive
investment income. The idea brings the Indian tax system in line with the CFC regimes in advanced jurisdictions.

Tuesday August 31, 02:34 AM Source: Indian Express Finance

New CFC regime won't help Indian cos' ops abroad


By fe Bureaus

The Direct Taxes Code Bill has put Controlled Foreign Company (CFC) Rules in black and white to deal with firms
operating through low tax countries to avoid taxes in India.

Spelling out clearly the conditions for treating a company as a subsidiary of a foreign company or a CFC, the DTC
Bill has said that a company which is a resident of a country which has a lower tax rate and one or more Indian
residents hold management control over it, will be treated as a CFC and taxed accordingly in India. The rules in the
DTC also have the formula for the income attributed to the CFC for tax purposes.

Here, it is important to mention that the foreign firms, where a CFC rule is applied will be taxed as per the domestic
tax rules and not as per the treaty with the firm's resident country. Meanwhile companies which are listed on a stock
exchange are also spared from the CFC rule.
India has been dealing with the problem of tax avoidance with many foreign companies operating in India through
tax haven nations to take the benefit of lower or no tax in the tax haven. The use of intermediary entities in a tax-free
or low-tax jurisdiction enables a tax resident to defer (or avoid) the domestic tax liability on the income until it is
repatriated to the residence state.

"The CFC rules have been primarily framed as an anti-deferral measure. It is also applied in many well developed
economies of the world," revenue secretary Sunil Mitra told reporters while briefing on the issue.

Under the CFC rules, the domestic law effectively extends the residence rules to tax the income. The CFC rules are in
use in almost 25 countries over the world.

With regard to the CFC rules prescribed by Indian tax authorities in form of the DTC Bill, experts say that the
drafting needs to bring clarity on the foreign tax credit that would be claimed.

"The issue that needs a clarity is the availability of foreign tax credit. How is a company going to avail tax credit for
the tax paid by it in other country," said K R Sekar Partner Deloitte.

"Inclusion of CFC regulations will have significant impact on Indian companies establishing global foot print by
setting up intermediary holding companies. Generally, holding companies are set-up to mobilize investments or raise
funds for investing in various jurisdictions," said Samir Kanabar, Tax Partner, Ernst & Young.