Thursday, September 24, 2009


The Finance Minister recently announced the proposed Direct Tax Code effective April 2011. The code aims at a comprehensive reform in the sphere of personal and corporate taxation. We would however discuss the impact of the code on common people. To safe guard the interest of business, industry and workmen there are number of chambers of commerce and Trade Unions but for common self employed people and retired people there are none. The Code is open for Public discourse hence it should be debated, discussed and recommendations need to be sent to finance Ministry.

There is a great difference between" Code" and the "ACT". The government is trying to bring in Direct Tax Code" instead of present system of "Tax under Finance Act".
.The Code would be permanent affairs like "Cr P C" or "I PC". Once tax act is converted into a code it would generally not be necessary to introduce changes every year along with budget. This is a reform which the government wants to bring in for the good of the people. The code has proposed no change in the exemption limit of the personal tax. It remains 1,60000 for men,1,90,000 for women and 2,40,000 for senior citizen. Yet percentage of taxation has been reduced up to income of Rs.Ten lakh.

Prima facie, the tax liability will reduce significantly as the draft code proposes to tax incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in excess of that at 30%. Now people pay 10% tax only if his income is less than Rs Three lakh. A person drawing Rs 10 lakh now pays Rs 2.11 lakh as tax. If Code is implemented he would pay tax amounting to Rs 84,000/- only. Is it not really good?

But all deduction now under 80 c will vanish as it is available now except for a few like new pension schemes, LIC etc! This means death nails on small saving schemes. However deduction under 80 C will be enhanced from Rs one lakh to Three lakh. This allowance would surely help generation next. But the exemption on retirement benefits would vanish. The retirement savings will become taxable on withdrawal, as the draft code has proposed to usher in exempt-exempt-tax (EET) regime. The PPF and PF will loose all its glamour and tax benefit.

For younger Home owner there is a bad news too, the deduction of Rs 1.5 lakh allowed on interest paid on home loans appears set to be scrapped. There is no mention of such a deduction being allowed in the draft code. Young people will not get tax benefit.

On implementation of the code all perks would considered part of the gross salary for the purpose of taxation. The impact of that on tax liability of an individual will be known only when the rules are prescribed by the income-tax department at a later date.

But there would be equity in the tax system both vertically and horizontally across all sectors.. The tax treatment of the perks enjoyed by the government employee and the private sector employee will be the same. Till now government sector was in advantage!

It has also proposed that benefits such as gratuity payment made to employees on change of jobs will be allowed tax exemption only if it is invested in a retirement fund.
The most significant reform would be to bring in the EET regime for all approved provident funds, approved superannuation funds, life insurance and New Pension System trust from April 1, 2011 . The PF and PPF were under EEE system now. This benefit will vanish. The amount would be taxed on the year of withdrawal. This would hurt middle class and specially retired lot.
However, the proposed code provides that the withdrawal of any accumulated balance as on March 31, 2011 , from the specified instruments such as PPF will not be subject to tax. The senior citizen should not withdraw amount in a hurry to save tax. Because, where ever they invest the interest would be taxed. The money in PPF should be kept there itself, if possible, as the interest earned would be exempted from tax. When ever emergent requirement occurs then only it should be taken out after paying tax .In that event tax incidence would be much lower. Of course, the rollover from one exempt fund to another fund will not be subject to tax. This means from PF or PPF you can transfer it to NSC and NPS without attracting tax...
The code has proposed to continue with other deductions such as medical insurance premium, medical treatment or maintenance of disabled dependent, treatment for specified diseases for self and dependents, for the handicapped, interest on loan taken for higher education, rent paid for residence, donations to certain non-profit organisations and specified institutions and tuition fees for children.

The long term capital gain tax on equity based instrument was exempt from Taxes till now. But if code is approved it would be taxed like short term capital gains. This would affect the sentiments of investors. Now mutual fund investor would prefer to invest in dividend mode for the dividend would remain exempt from tax.
It appeared that for middle class two things would adversely effect. The taxation on withdrawal of PPF and PF and withdrawal of long term capital gains tax. The code was released for Public response. It would not be wise to sleep over it. Posterity would blame if present generation do not participate in such reform process for common people


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