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Direct Tax Code In India

IndianMoney.com Research Team | Posted On Tuesday, December 01,2009, 06:20 PM

Direct Tax Code In India

 

 

In the year 1991 when Mr. Manmohan Singh was presenting the budget as the finance minister had said that there is a need of new tax code which is very simple and which can be easily understood by a common man. It was not practical till Mr. P. Chidambaram was included in UPA government and was made the finance minister at the centre. It was him who stated the importance of net income tax law but he could not bring it to reality but was successful in bringing into light the change of tax code. Mr. Pranab Mukherjee on 6th July 2009 while presenting the budget in the parliament has said that draft of new tax code will be prepared and presented to the general public in the next 45 days and on 12th August finance minister presented a discussion paper and draft of direct tax code to the public. Not only this, Mr. P.Chidambaram was specially invited to the function and it was told that a small part of the new direct tax code has been drafted by Mr. Chidambaram himself. The direct tax code will be presented in the parliament during the upcoming winter session and is said that if everything goes as planned then it would be implemented in 2011.

The direct tax code is the modified version, which is a combination of the Income Tax Act of 1961 and Wealth tax Act 1957. This code is consolidation of all the direct taxes such as income tax, fringe benefit tax, dividend distribution tax, wealth tax etc. Direct tax code will have 16 chapters, 285 sections and 18 schedules.

See Also: What Is Direct Tax? Know The Types Of Direct Taxes In India

The Objectives for the Preparation of Direct Tax Code

  • To make the taxation process very easy by removing complexities and interpretation issues.

  • There are mathematical formulas used to make the whole process easy.

  • It should be easily understandable for a common man

After reading all this one question that lingers in our minds is after all why there is a need to change the whole code why can’t we just make some changes to the existing code to suit the needs of the hour? Well then let me tell you something about the existing income tax code.

  • Since its implementation post independence till 2009 there have been around 25 amendments to this by finance act. Just imagine that you have a new cell and it falls on ground for 25 times and you fix it with fevi kwik, will it be the same one as it was when you had purchased it? The answer would be definitely no. hence in the same way there have been so many changes made to the IT Act that some of the experts feel that it has lost its originality.

  • The economic conditions that were prevailing during drafting of IT Act are completely different to the present economic condition. Indian economy has taken a U-turn especially after the reforms of 1991.

  • Small changes in the tax rates were being made from past few years which were not feasible anymore. Hence to rationalize the tax base had to be increased to enhance revenue productivity and have a good tax to GDP ratio.

  • To decrease the litigations and reduce scope for disputes.

  • For example wealth tax when it was introduced, considered almost all the assets after an amendment now only few assets are considered.

See Also: History of Tax

PROPOSED SLABS

Income (Rs)

Existing
Tax (%)

Proposed Tax

MALE

Up to 1,60,000

Nil

Nil

1,60,001 -3,00,000

10

10% of the amount by which the total income exceeds Rs 1,60,000

3,00,001-5,00,000

20

10% of the amount by which the total income exceeds Rs 1,60,000

5,00,001-10,00,000

30

10% of the amount by which the total income exceeds Rs 1,60,000

10,00,001-25,00,000

30

Rs 84,000 plus 20% of the amount by which the total income 
exceeds Rs 10,00,000

Above 25,00,000

30

Rs 3,84,000 plus 30% of the amount by which the total income 
exceeds Rs 25,00,000

FEMALE

Up to 1,90,000

Nil

Nil

1,90,001 - 3,00,000

10

10% of the amount by which the total income exceeds Rs 1,90,000

3,00,001-5,00,000

20

10% of the amount by which the total income exceeds Rs 1,90,000

5,00,001-10,00,000

30

10% of the amount by which the total income exceeds Rs 1,90,000

10,00,001-25,00,000

30

Rs 81,000 plus 20% of the amount by which the total income 
exceeds Rs 10,00,000

Above 25,00,000

30

Rs 381,000 plus 30% of the amount by which the total income 
exceeds Rs 25,00,000

SENIOR CITIZEN

Up to 2,40,000

Nil

Nil

2,40,001 - 3,00,000

10

10% of the amount by which the total income exceeds Rs 2,40,000

3,00,001-5,00,000

20

10% of the amount by which the total income exceeds Rs 2,40,000

5,00,001-10,00,000

30

10% of the amount by which the total income exceeds Rs 2,40,000

10,00,001-25,00,000

30

Rs 76,000 plus 20% of the amount by which the total income exceeds 
Rs 10,00,000

Above 25,00,000

30

Rs 3,76,000 plus 30% of the amount by which the total income 
exceeds Rs 25,00,000

Changes Incorporated in New Direct Tax Code

  • Taxation was decided based on residential status of an individual or company like Resident, Resident but not-ordinarily Resident and Non-Resident. In new code resident but not-ordinarily resident is done away with.

  • There have been some provisions made to avoid double taxation.

  • Introduction of “low incentive- low tax” system as was suggested by Kelkar committee in 2002 which was made for tax reforms.

  • Exemptions and concessions were spread across in the old tax code whereas they have been consolidated at one place in new code.

  • New tax code has done away with concept of Assessment year and previous year as there was some confusion in regard to these concepts. Both of these have been replaced by financial year now.

  • Capital gains irrespective of short term or long term will be taxed at same rates. Previously long term capital gains enjoyed some tax concessions.

See Also: Income Tax Rules For FY 2018-19

Tax deductions for Individuals

  • The deduction has been increased from 1 lakhs to 3 lakhs (from April 1, 2011).

  • Some of the experts have opined that the people coming under the income group of 5 lakhs to 25 lakhs will have get tax savings of upto 10 to 25%.

  • Salaried individuals who received exemption for earned leave, travel concession, medical facilities etc won’t be getting the above as exemptions as per the new code.

  • Assesses’ having assets below 50 crores need not pay any wealth tax

  • An individual was receiving 30% deduction for repairs of the house but it has been reduced to 20% in new code.

  • Home loans: interest paid on money borrowed to buy a home was allowed as a deduction under section 24 (US 24) and limit was upto 1.5 lakhs per year. The interest paid in the above case is not a deduction according to new code.

  • Under Section 80C the principal amount repaid (limit- 1 lakh) which is taken for purchasing a house was given as a deduction but it’s been removed in new code.

  • Majority of tax saving instruments such as National Saving certificates, 5 year bank deposits, Equity linked saving scheme, ULIP & Senior citizens scheme are not given any deduction.

  • The section 66 (replacing 80C) has schemes such as Employees provident fund, New Pension Plan and pure insurance.

Stock Market

  • The securities transaction has been completely done away with.

  • The exemption on dividends of mutual funds has been carried over just to encourage the investors to invest in this field.

  • Abolition of difference between long term and short term capital gains has come as a surprise.

Companies

  • Companies, which have whole or partly management in India, will be considered as Resident. According to the current tax code a company was considered as Resident if the management was carried out completely in India. Even if one board meeting was held outside India then it became a non-resident.

  • Tax slab has been made

  • Domestic companies or foreign companies: 25%

  • Foreign companies who have branches in India need to pay 15% of branch profits in addition to 25%. According to present tax code it is 30%

  • Dividend distribution tax is 15%. The dividends are part of the profits distributed to share holders. This dividend was earlier taxable for the shareholders. Now company which is distributing the dividends has to reduce the tax from that and then distribute it.

  • Minimum Alternate Tax (MAT) has been fixed to 0.25% for banks and 2% for other companies. MAT will be calculated depending on the “value of gross assets”. Presently MAT was taken as 10% of book profits.

See Also: What is Tax Avoidance?

This is a draft and this will be made a law only after it is accepted in the parliament. So it cannot be said that whatever given in the draft is final. There may be some corrections made taking into consideration suggestions given by the authorities.

It has been said in the discussion paper that this code is not an amendment of the IT Act of 1961. Best practices in the world have been studied and incorporated to suit the needs. Many of concepts which have an ambiguity have been discarded. It is open for public viewing and public can share their views on it. So just watch out for the winter session because this is one of the topics that will be discussed at length in the Parliament.

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