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| Decoding the new Direct Taxes Code |
| Girish Mistry / Aug 13, 2009, 01:28 IST |
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New Finance Minister Pranab Mukherjee, in his Budget speech last month, promised that the much-awaited new Direct Taxes Code would be released within 45 days. And the promise was duly met on Wednesday when the draft of the Code was released for public comments. While the FM clearly delivered as far as the timeline is concerned, let us now see certain reactions at first sight on the content of the Code.
The Code is proposed to come into effect from April 1, 2011. The Foreward to the Code clarifies that the Code is to eliminate distortions in the tax structure, introducing moderate levels of taxation, expanding the tax base and simplify the language.
Some of the key changes bought about by the Code are as under:
First and foremost, the Code proposes that the tax rate for companies (both domestic and foreign) can be substantially reduced to a uniform rate of 25 per cent. However, foreign companies would be required to supplement their corporate tax liability by a branch profits tax of 15 per cent on branch profits (that is, total income, as reduced by the corporate tax).
Further, for the individual taxpayers, the taxation continues to be on slab basis. However, the limits under the tax slab are proposed to be considerably increased as under:
Up to Rs 1.6 lakh: Nil; Rs 1.6 lakh to Rs 10 lakh: 10 per cent; Rs 10 lakh to Rs 25 lakh: per cent; above Rs 25 lakh: 30 per cent.
The Code now provides for the Minimum Alternate Tax calculated with reference to the “value of the gross assets”. This is on the premise that the shift in the MAT base from book profits to gross assets will encourage optimal utilisation of the assets and thereby increase efficiency. 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 present distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset is proposed to be eliminated. The Securities Transaction Tax, or STT, is proposed to be withdrawn.
One of the things on the simplification front is that the separate concepts of ‘previous year’ and ‘assessment year’ will be replaced by a unified concept of ‘financial year’.
Consistent with the international trend, the Code contains a specific section on general anti-avoidance rule saying that any ‘arrangement’ entered into by a person may be declared as an impermissible avoidance arrangement. It may be noted that such general anti-avoidance rule is non existent in the present statute.
Tax incentives for savings is proposed to be rationalised to an ‘Exempt-Exempt-Taxation’ method. Under this method, the contributions are exempt from tax, the accumulation/accretions are also exempt, however all withdrawals at any time are subject to tax at the applicable personal marginal rate of tax. It is proposed that the withdrawal of any amount of accumulated balance as on the March 31, 2011 from PPF and EPF will not be subject to tax. In other words, only new contributions after the Code commences will be subject to EET method of taxation.
The Code also substitutes profit-linked incentives by a new scheme. Under the new scheme, a person would be allowed to recover all capital and revenue expenditure (except expenditure on land, goodwill and financial instrument) and he would be liable to income-tax on profits made thereafter. The period consumed in recovering capital and revenue expenditure will be the period of tax holiday. The new scheme applies to developing, operating, maintaining of infrastructure facilities, power generation and distribution, exploration and production of mineral oil or natural gas, developing of SEZs, etc.
It will now take some time before the entire fine print is slowly decoded and then the other side which is the tax experts, companies and associations take off with their comments. These may be provided at directtaxescode-rev@nic.in. So happy commenting.
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