the new tax code

8/6/2019 The New Tax Code

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THE NEW

TAX CODE


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Thrust of the code,

would be to improve

efficiency and equity ofour tax system by

eliminating distortions in

the tax structure,introducing moderate

levels of taxation and

expanding the tax base.


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It is also believed that complex provisionsand tedious explanations may be replaced

with mathematical formulae as far as

computational provisions are concerned for,

say, tax holidays.

The Income-tax (I-T) Act, 1961, and the Wealth

Tax Act, 1957 arethe proposal goesto be

replaced with a unified direct taxes code.

The new code is expected to clear the

numerous complexities and interpretation

issues that shroud the present I-T law. I


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THE PROPOSAL

The draft Direct Taxes Code proposes raising taxexemption limit on savings to Rs three lakhs fromthe present Rs one lakh, while suggesting taxingmoney withdrawn from savings schemes like PPF,EPF and GPF.

Withdrawals should be included in the income ofthe assessee during the relevant year and taxed

accordingly.

Retirement benefits would be exempt from tax ifsaved in the Retirement Benefits Account.


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Contd

Corporate tax rate may be cut to 25% from 30%.

Under the new proposal, the period of the taxholiday will not be pre-fixed. The firm will not be

taxed till it recovers its investments.

All capital and revenue expenditure barring on land,

goodwill and financial instruments. Once it has

recovered these investments, profits will become

taxable.


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Contd

The code also proposes to rationalize the manner in

which amalgamations and demergers are dealt with. The

idea is to ensure that these do not change the tax liability

of the combined entity.

Stringent penalty provisions are proposed in case ofwilful attempt to evade tax, but maximum penalty

mooted will not be more than two times the amount of

tax payable in respect of the amount of tax base

underreported. Imprisonment for a term which mayextend to seven years and with fine has been proposed

for a person who wilfully attempts in any manner to

evade any liability in respect of tax, interest or penalty.


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Contd

The code proposes to exempt the general taxpayer from paying income tax if his income isRs1,60,000 in a year. He would pay just 10% up to

Rs10 lakh, 20% beyond that and Rs25 lakh and

30% beyond Rs25 lakh.

The code proposes abolition of the controversial

STT. This will be a major setback for investors inthe stock markets. At present, all the long-terminvestment of more than one year in equities

attracts zero tax.


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MAT

The MAT liability will now be calculated not ontheir profits but on change in the valuation of their assets. The idea clearly is to ensure thatfudging of the books does not lead to avoidance

of tax.The authors of the code justify the re-definitionof MAT as an assets tax saying that this wouldallow companies to expect to earn a specified

average rate of return on their assets which is anincentive for efficiency.


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CAPITAL

GAINS

The code proposes to treat capital gains as

business income. Losses would be allowed to

be carried forward indefinitely.

It decided to do away with the distinction

between long-term and short-term capital

gains tax.


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CAPITAL GAINS

However, the short term capital gains become partof the income of the investor and taxed

accordingly. However, as tax slabs can go for achange, the impact on small investors will be

lesser. But large investors will have to pay hugetax in case of a bullish market.

The code, however, left the provision for taxing thedividend unchanged. While the dividenddistribution tax, payable by the company,

remained at 15%, it will remain non-taxable atthe hand of recipients.


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GOOD

For taxpayers earning Rs. 5 lakh 25 lakh, who

will enjoy net tax saving of 10% to 20%.

For agriculture income earners, who have

been assured of continuous tax exemption.


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GOOD

For all companies & individuals/HUFs havingwealth of less than Rs. 50 crores proposed to

be exempted from wealth tax.

For investors, who will continue to enjoy

exemption if capital gains are invested in new

house.


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BAD

For investors currently earning exempt longterm & concessional short term market gains,

now required to pay tax at regular rates.

For taxpayers being required to pay wealth tax

on all assets, including hitherto exempt

financial assets.


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BAD

For salaried taxpayers losing LTC, medical &leave encashment exemptions.

For house rent earners currently enjoyingstandard deduction of 30%, now to get lower

deduction of 20%.


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UGLY

For small taxpayers earning up to Rs. 3 lakh,who will get no tax benefit, but will effectively

bear higher load due to change in tax

concessions.

For private discretionary trusts, who will not

enjoy the basic exemption limit of Rs. 50

crore.


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UGLY

For salaried class, whose retirement benefitswill be required to be separately deposited

and will be taxed on any withdrawal.

For self-occupied house owners paying

interest on housing loan, losing benefit of

current deduction of up to Rs. 1,50,000.


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Illustration

Mr. Tripathi, a middle class employee earningmonthly salary of Rs. 40,000 ( 4,80,000 p.a.),currently manages to maintain a zero-taxstatus by availing tax free LTC & medical perksof Rs. 70,000, deduction of interest onhousing loan of Rs. 1,50,000 & repayment ofsuch loan of Rs. 1,00,000 eligible for

deduction u/s 80C.SHOCKED..


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Illustration

Mr. Kapoor, a top notch executive currentlyreturning annual taxable income of Rs. 25

lakhs and paying income tax of Rs. 6,54,000

thereon, will party for sure when he learns

that he will reap a whopping tax saving of Rs.

2,70,000, since he will pay only Rs. 3,84,000

on the proposed new tax rates coming into

effect.

ELATED..


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Conclusion

The new code would first be put in publicdomain for comments from stakeholders and

then it would be placed before Parliament for

approval.

Since the new code is based on well accepted

principles of taxation and best internationalpractices, it will eventually pave the way for a

single unified tax reporting system.


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Conclusion

Meanwhile, on the structural changes in indirect

taxes, the minister promised to speed up the

process for implementing Goods and Services Tax(GST) by 1 April 1 2010.

The GST, a new indirect tax regime, would doaway with most of the indirect taxes and would

have a dual structure. The two components

would be Central GST and the states GST.


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Conclusion

The net impact of these measures onI

ndiaI

ncwould be substantial and mostly positive but

might vary from company to company, say tax

experts. There could be cases where the removal

of incentives coupled with the new methodscomputation would expand the tax base by up to

40%, netting out the benefit of the low tax rate.


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By the time thecode becomes law,it may be 2011 --

the golden jubileeof the old law.


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the new tax code

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