Thursday, August 5, 2010


The second revised draft tax code is ready and it was unveiled recently for discussions and to get feed back so that it can be introduced in Parliament during the ensuing Monsoon session of Parliament by present Finance Minister, Pranab Mukherjee. The biggest relief, as per the revised draft, is that PPF and Bank FD will be tax free. The First draft envisaged taxes on both these items. The last date of sending suggestion by common people is 30th June 2010.

Mr. Chidambaram as then finance minister spent time and energy in creating a new code, and even guided a close-knit team of revenue officials on how to write a simplified version of an income tax code that would eventually replace five decades old Income-Tax Act. Recognising the pioneering effort, Pranab Mukherje brought in Mr. Chidambaram during last August when he unveiled the first draft tax code for the country..

But as Mr. Mukherjee launched the second version of the draft discussion paper this week( 18TH JUNE) which ultimately will be sent to Parliament for approval, there has been a paradigm shift from what Mr. Chidambaram and his team originally conceived. It’s now much simpler, but it has full of exemptions to make all stakeholders happy.

The new draft code has accommodated concerns of India Inc as companies would now pay minimum alternate tax (MAT) on book profits and not on gross assets as was originally proposed. Also, the salaried class which bears the brunt of the current tax regime has a sigh of relief as their tax savings schemes such as the public provident fund would remain intact.

These provisions would definitely mean loss of revenue for the exchequer and impact fiscal deficit situation, but the windfall of Rest 1 lakh crore from 3G and broadband auctions led the government ignore the macro economic scenario and create a feel-good situation among its constituents.

Yet upper middle class population remained unhappy as the revised draft did not exempt long term investment from Capital Gains tax.( At present there is no tax on long term capital gains) As per revised draft the long term capital gains will be applicable to all concerned at the applicable rate of income tax. This means if tax payer pay income at the rate of 10% he would have to pay long term capital gains tax at the same rate. Incase someone pay income tax at the rate of 20% or 30% his rate of capital gain tax to be charged would be at the same rate. This proposed draft provision has brought in anguish among the high middle class people. They felt investment by middle class would go down. The Indian Capital market would not take this provision kindly. The market would turn greatly volatile initially and later bull effect would not set in for quite sometime easily. Of course these are the proposal only and people can represent their case to enable Government in power to finalize the Code.

During the last few months, there were intense deliberations both inside and outside the North Block on whether tax saving retirement benefits should be done away with, as was conceived in the first draft of direct tax code. Finally, the argument that prevailed was to make a complete U-turn on the earlier provision of taxing the retirement benefits which would have forced the salaried class feel the heat.

Now, EEE (exempt) tax system on retirement benefits would surely help senior citizens in a country like India which is yet to adopt an effective social security mechanism. This provision will be applicable to select schemes like PPF, pension schemes, general provident funds, recognized provident funds, and pure life insurance and annuity schemes. Also, lesser tax burden on perks and tax exemption for single house owners are a few more positives for middle class families which have been hit hard by economic recession and food inflation during the last couple of years.

In fact, the code addressed 11 issues, including MAT, dilemma between EEE and EET, taxation of house property, capital gains tax, status of double taxation agreements and general anti-avoidance rules etc. The capital gains will now be added to an individual income, meaning that your tax liabilities from capital gains will be more than the one who has lesser income from other sources.

Also, securities transaction tax (STT) will stay though rates have not been announced so far, keeping in mind the market sensitivity over the issue. The revised paper has also attempted to end uncertainty over taxing the FIIs and tax rules regarding double taxation agreements. The first DTC draft, released in August, had proposed 10 per cent tax on the income of Rs 1.6 lakh-Rs 10 lakh, 20 per cent on Rs 10 lakh-Rs 25 lakh and 30 per cent beyond Rs 25 lakh in a year. At present, 10 per cent is levied on income between Rs 1.6 lakh-5 lakh, 20 per cent on Rs 5 lakh-8 lakh and 30 per cent over Rs 8 lakh.

The revised draft, on which the Finance Ministry has invited comments from the public till June 30, is silent on tax slabs. However, it did mention that tax slab and rates proposed in the first draft would be revised.
"The proposal in this Revised Discussion Paper would lead to a reduction in the tax base proposed in the DTC. The indicative tax slabs and tax rates and monetary limits for exemptions and deductions proposed in the DTC will, therefore, be calibrated accordingly while finalising the legislation," the revised draft had said.

Yet, the revised direct tax code has maintained silence over individual’s tax slabs making tax payers guessing whether it would be tweaked in every General Budget. Will tax payers be forced to wait for the last portion of FM’s Budget speech to know their tax liabilities?

Direct tax code is sincere attempt to reform the archaic tax rules and hope tax payers are greatly benefited from this revision.


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