PRESENTATION ON DIRECT TAX CODE 2010 Presented by: CA Verendra Kalra ORGANISED BY University Of Petroleum and Energy Studies, Dehradun ON DEC 14, 2012 AT UPES- Dehra Dun

2 DIRECT TAX CODE 2010 The much talked about Direct Tax Code (DTC) was proposed to replace the Income Tax Act from April 1, The new tax code aims to make the system more efficient and easy for tax payers, with simplified rules and regulations. Direct Tax Code, 2010

3 DIRECT TAX CODE 2010 The DTC proposes substantial changes to the current direct tax legislation and is likely to have significant impact on the business community. The proposed DTC is a combination of major tax relief and removal of most tax-exempted benefits. The various twists and turns are highlighted below: Direct Tax Code, 2010

4 DIRECT TAX CODE 2010 Direct Tax Code, 2010 August 2009 Draft legislation and discussion paper issued for public comments June 2010Revised discussion paper brought in August 2010DTC bill, 2010 introduced in parliament April 2011DTC misses deadline March 2012 Standing Committee tables its report on the DTC in parliament. Implementation of DTC postponed to April 2013 August 2012P.Chidambaram takes over as finance minister, DTC Bill to be reworked.

5 DIRECT TAXES 1.SALIENT FEATURES 1.Single Code for Direct Taxes All the direct taxes have been brought under a single Code and compliance procedures unified. Direct Tax Code, 2010

6 DIRECT TAX CODE Assessment Year Under the Income Tax Act, concept of Assessment year and previous year prevailed where assessment year means the period of 12 months commencing from the first day of April every year. Previous year is the financial year immediately preceding the assessment year. Under the Direct Tax Code there is no concept of ‘assessment year’ or ‘previous year’. Only the “Financial Year” is being mentioned. Direct Tax Code, 2010

7 DIRECT TAX CODE Residence in India Under the Income Tax Act, an individual’s residential status was determined as follows: Direct Tax Code, 2010 Individual ResidentNon-Resident Ordinary Resident Not Ordinary Resident Non-Resident

8 DIRECT TAX CODE Due Date for filing Income tax Returns: Under the Income Tax Act the due dates for filing Income Tax Return are as follows: Direct Tax Code, 2010 Where the assessee is:  Company  Accounts of assessee are to be audited  Working partner of a firm whose accounts are to be audited under Income Tax Act 30 st September of the Assessment Year Any Other assessee31st July of the Assessment Year

9 DIRECT TAX CODE 2010 Under the Direct Tax Code the due dates for filing Income Tax Return are: Direct Tax Code, 2010 If the person is not a company and does not derive any income from business 30 Th June following the Financial Year In all other cases31st August following the Financial Year

10 MAIN HEADING: CALIBRI CLASSIFICATION OF INCOME For the purpose of computation of total income of any person for any financial year, income from all sources shall be classified as follows: a. Income from ordinary sources b. Income from special sources The special sources (specified in a separate Schedule) generally reflect items like:  Royalty,  Fees for Technical Services (FTS),  investment income etc. Direct Tax Code, 2010

11 MAIN HEADING: CALIBRI 48 All other sources of income will be ordinary sources.  Special sources would be subject to tax on the gross amount.  The Total Income of the taxpayer for a financial year will be ‘Total Income from ordinary sources’ + ‘Total Income from special sources’  Further the income from ordinary sources will be divided into: Direct Tax Code, 2010

12 MAIN HEADING: CALIBRI 48 Direct Tax Code, 2010 Income from Employment Income from House Property Income from Business Income from capital Gain Income from Residuary Sources

13 DIRECT TAX CODE TAX RATES Individual (Other than senior citizen)/HUF/Artificial Juridical Person UNDER DIRECT TAX CODE- Direct Tax Code, 2010 Income RangeTax Rate Upto Rs. 2,00,000NIL Rs. 2,00,000 to Rs. 5,00,00010% Rs. 5,00,000 to Rs.10,00,00020% Above Rs. 10,00,00030%

14 DIRECT TAX CODE 2010 Companies UNDER DIRECT TAX CODE- Direct Tax Code, 2010 Tax rate in case of all companies is proposed at 30%. No surcharge and no education cess is proposed. A foreign company is required to pay an additional branch profits tax of 15%. Note: Branch profit is the income attributable, directly or indirectly, to the Permanent Establishment or an immovable property situated in India.

15 DIRECT TAX CODE 2010 UNDER INCOME TAX ACT For AY Direct Tax Code, 2010 Domestic companies are where income exceeds Rs. 1 crore. Foreign companies are % where income exceeds Rs. 1 crore.

16 DIRECT TAX CODE Major Changes under the different heads A.Income from Employment Leave travel concession Under the Income Tax Act leave travel concession received in respect of travel expenses for self/family was exempt subject to certain conditions. However, The Leave travel concession exemption has been removed under the Direct Tax Code. Medical Reimbursements Under the Income Tax Act medical treatment in specified hospitals is not taxable, nor is payment of medical insurance premium. Moreover reimbursement of medical bills is exempt up to Rs. 15,000. Direct Tax Code, 2010

17 DIRECT TAX CODE 2010 The Direct Tax Code proposes to raise the tax-free limit for the medical reimbursement from Rs. 15,000 to Rs. 50,000. Impact So, there is continuation of exclusion of medical facilities out of perquisite net. Increase of medical expenses reimbursement limit to Rs. 50,000 is commensurate to the increased medical costs. Direct Tax Code, 2010

18 DIRECT TAX CODE 2010 Pension The difference in exemption for commuted pension between Government employees and non-government employees is proposed to be done away with. All employees will enjoy exemption up to one-third of commuted value of pension (if gratuity received) and exemption up to one-half commuted value of pension (if gratuity not received). Impact The exemption to commutation of pension received under pension scheme of insurers under Income Tax Act is proposed to be withdrawn, displaying unnecessary bias against the self- employed class. Direct Tax Code, 2010

19 DIRECT TAX CODE 2010 Under the Direct Tax Code Tax exemption at all three stages (EEE) —savings, accretions and withdrawals—to be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc.), pure life insurance products & annuity schemes. Direct Tax Code, 2010

20 DIRECT TAX CODE 2010 B. Income from House Property Annual Letting Value Under the Income Tax Act, house property (other than self occupied) income is taxed on deemed rent basis, even if not actually let out. Under the Direct Tax Code, house property income is taxable only where rent is actually received/ receivable. Impact The hardship of taxation on notional basis through above provision gets removed. Direct Tax Code, 2010

21 DIRECT TAX CODE 2010 Standard deduction Under the Income Tax Act deduction of expenses for repair and renewals in regard to property income is 30% of gross rent. Under the Direct Tax Code the deduction has been reduced to 20% of gross rent. Impact In view of the increased cost of construction the proposed reduction from 30% to 20% is of an arbitrary and ad-hoc nature. Direct Tax Code, 2010

22 DIRECT TAX CODE 2010 C. Income from business An important change proposed by the DTC 2010 under this head of income is that every business will constitute a separate source of income, necessitating separate computation of income for each business. Tax Audit Under the Income Tax Act the threshold limit of total sales, turnover or gross receipts, for obtaining a mandatory tax audit report are as follows: Direct Tax Code, 2010

23 DIRECT TAX CODE 2010 Direct Tax Code, 2010 Assessment Year Person carrying on business (Rs.) Person carrying on profession (Rs.) AY ,00,00015,00,000 AY ,00,00,00025,00,000

24 DIRECT TAX CODE 2010 Under the Direct Tax Code the limits of turnover/gross receipts for applicability of tax audit is proposed to be Rs.1 crore in case of business and Rs.25 lakh in case of profession. Taxation of foreign company Under the Income Tax Act Section 6(3) of the Act states that a company would be regarded as resident in India only if during the year its control and management of affairs is situated wholly in India. Direct Tax Code, 2010

25 DIRECT TAX CODE 2010 Under The Direct Tax Code Section 4(3) of the Code, a company is regarded as resident in India, if, its place of effective management, at any time, in the year, is in India. “Place of effective management” is defined under section 314(192) of the Code, which states: “(i) The place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or Direct Tax Code, 2010

26 DIRECT TAX CODE 2010 (ii) In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.” The aforesaid definition read with provisions of section 4(3) of the Code implies that when at any time during the year, a foreign company takes such strategic decision in India, it would be considered as a resident in India. Direct Tax Code, 2010

27 DIRECT TAX CODE 2010 In effect, if foreign companies are effectively managed from India, they would be treated as residents and their global income would become taxable. Impact Under the Code, on bare reading of the provisions, if even for a single day, it is established that effective control/ management was in India, such company would qualify as resident of India and would be subject to tax in India on global income and such a situation could lead to potential double taxation. Direct Tax Code, 2010

28 DIRECT TAX CODE 2010 Maintenance of Books of Accounts Under the Income Tax Act Section 44AA provides for maintenance of books of accounts. Following persons are required to maintain books of account as prescribed by Rule 6F. Direct Tax Code, 2010

29 DIRECT TAX CODE 2010 Direct Tax Code, 2010 Person carrying on ‘specified profession’ whose gross receipts in the profession  Exceeds Rs. 1,50,000 in all 3 years immediately preceding the previous year.  Where profession is newly set up in previous year, his gross total receipts for that year likely to exceed Rs. 1,50,000 Person carrying on ‘non-specified profession’ which includes Whose  Income from such business or profession exceeds Rs. 1,20,000, or  Total gross sales, turnover, or gross receipts are in excess of Rs. 10,00,000  When the business or profession is newly set up, income /total sales etc. are likely to exceed the aforesaid amount.

30 DIRECT TAX CODE 2010 Clause 87 of Direct Tax Code seeks to provide for the system and procedure of maintenance of accounts. The clause provides Direct Tax Code, 2010 Any person carrying on legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other notified profession or carrying on business shall keep and maintain such books of account if (i) his income from the business exceeds Rs. 2,00,000 (ii) his total turnover or, gross receipts as the case may be, in the business exceeds Rs. 10,00,000 in any one of the 3 financial years immediately preceding the relevant financial year (iii) his income or, total turnover as the case may be, his in a case of a newly set up business in any financial year, is likely to exceed Rs. 2,00,000 or Rs. 10,00,000 respectively, during such financial year.

31 DIRECT TAX CODE 2010 Minimum Alternate Tax Under the Income Tax Act MAT rate is 18.5 %(exclusive of surcharge where income exceeds Rs. 1 crore and education cess). Tax credit for MAT paid is available for 10 years. Under Direct Tax Code MAT is proposed to be levied on of book profit, as compared to 18.5% under the present act. However, the credit for MAT paid would be allowed to be carried forward for up to 15 years, as against the present permissible period of 10 year, to be set-off against the excess of tax payable in the years in which tax computed under the normal provisions exceeds the tax on book profits. Direct Tax Code, 2010

32 DIRECT TAX CODE 2010 D. Income from Capital Gains Transfer of asset In Income Tax Act under section 50C, the assessee is allowed to claim before the Assessing Officer that the valuation adopted by the stamp duty authorities exceeds the fair market value on the date of transfer. If the stamp duty value is not disputed in appeal or reference or revision before any other authority/Court/High Court, the Assessing Officer may refer to Valuation Officer to determine the fair market value of the asset. This right of the assessee is sought to be taken away by the Code. Direct Tax Code, 2010

33 DIRECT TAX CODE 2010 Under Direct Tax Code transfer of any investment asset being land or building, the Code proposes to take the stamp duty value as the full consideration received or accruing on transfer. This is irrespective of whether the consideration shown in the agreement is higher or lower than the stamp duty value and irrespective of whether the stamp duty value exceeds the fair market value on the date of the transfer. Direct Tax Code, 2010

34 DIRECT TAX CODE 2010 Capital Gain on short term listed equity shares or units of equity oriented fund Under the Income Tax Capital gains on listed equity shares or units of equity oriented fund held for less than one year, on which STT is paid, is 15%. Under Direct Tax Code capital gain on listed equity shares or units of equity oriented fund held for less than one year would be taxable at 50% of the applicable rates i.e. the rate would be 5%, 10% and 15% for a person falling under the 10%, 20% and 30% slab brackets, respectively i.e. only half of the short term capital gain will be taxed. Direct Tax Code, 2010

35 DIRECT TAX CODE 2010 In case of companies, the rates of Capital Gains would be 15%. In case of other assets benefit of indexation was available if the investment asset is held for a period of 3 years under the Income Tax Act. However under the Direct Tax Code if the investment asset is held for more than one year from the end of the financial year of acquisition, benefit of indexation would be available. The base date for indexation would be Direct Tax Code, 2010

36 DIRECT TAX CODE 2010 E. Income from residuary sources Presently, if rural agricultural land is received by an individual or HUF without consideration, the same is not liable to tax under section 56(2)(vii) of the Act as income from other sources. This exemption is sought to be withdrawn by the Code. Direct Tax Code, 2010

37 DIRECT TAX CODE Set off and carry forward Income from Ordinary Sources Any loss from business, house property or residuary source is eligible for set off against income from employment' or capital gain from any investment asset (it may be noted that any gain or loss from business capital asset is treated as part of business income/loss). However, no loss from any ordinary source is eligible for set off against income from any of the special sources. Direct Tax Code, 2010

38 DIRECT TAX CODE 2010 Loss from house property is eligible for set off even after carry forward against any income, except income from special sources. Similarly, loss from business could be set off against salary income, which is contrary to Section 71(2A) of the Income-Tax Act, No time limit for carry forward and set off: No time limitation is put for carry forward of losses for set off in the subsequent financial years in the DTC and hence it seems that a loss Direct Tax Code, 2010

39 DIRECT TAX CODE 2010 quantified under DTC under any head is eligible for carry forward and set off indefinitely without any time limitation. However, the eligibility for carry forward of loss is subject to filing of return within the prescribed due dates mandated by Section 67 of the DTC. Direct Tax Code, 2010

40 DIRECT TAX CODE 2010 Income from Special Sources Income from special sources are clearly spelt out in Part 3 of the First Schedule to DTC and it covers winnings from lottery or crossword puzzle, income from horse racing, card game or any other game, gambling or betting. Additionally, the schedule covers income of non-residents from income by way of interest, dividend (on which no DDT was paid), non-resident sportspersons who are not citizens of India and non-residents sports association or institution. Direct Tax Code, 2010

41 DIRECT TAX CODE 2010 Incomes from special sources are liable for flat rate of tax similar to present status with no basic exemption limit whatsoever. The current income from the special source shall be aggregated with the unabsorbed preceding year loss from the special source, if any; and the income so aggregated shall be the gross total income from the special source, for the financial year. Direct Tax Code, 2010

42 MAIN HEADING: CALIBRI Deductions In respect of the present section 80C deductions, the proposals in the Code are: Deduction to approved fund (approved provident fund/approved superannuation fund/approved gratuity fund/approved pension fund) to the account of individual/spouse/children deductible to the extent of Rs. 1,00,000. Direct Tax Code, 2010

43 MAIN HEADING: CALIBRI 48 Life Insurance Premium, Health Insurance and fees for education of children – deduction for all these together not to exceeding Rs. 50,000. Thus, total deductions proposed under the Code is Rs. 1,50,000 for individuals. For HUFs only deduction upto Rs. 50,000 is available Direct Tax Code, 2010

44 MAIN HEADING: CALIBRI 48 No deduction is allowable for re-payment of principal of housing loan or investment in NSC/ELSS under the Code as was allowed under the Income Tax Act. Only long term savings schemes such as the public provident fund, new pension scheme, recognised provident funds presently qualify for the tax deduction of Rs. 1 lakh under what is now called Section 80 C of the Income Tax Act and are exempt from tax at all stages. Direct Tax Code, 2010

45 DIRECT TAX CODE Non-Profit Organisations (NPO) As per paragraph C of the First Schedule to the Code, the taxability of NPO shall be 15%. The tax liability shall be calculated on the aggregate of the following: o Amount of surplus generated from the permitted welfare activities i.e. ‘gross receipts’ as reduced by ‘outgoings’. o Amount of capital gains arising on transfer of an investment asset, being a financial asset. Direct Tax Code, 2010

46 DIRECT TAX CODE 2010 Accumulation of income: There is no provision for flexibility to spend income in the subsequent year in line of option under explanation (2) to section 11(1) of Income Tax Act 1961 or to accumulate any portion of the income or even to accumulate income for the purpose of specific long term projects [on the line of section 11(2) of Income Tax Act] such as construction of building for setting up of hospitals, educational institutions, other required infrastructural facilities like setting up Machineries or equipments for laboratories or Medical Institution or setting up a Library or Research Centre etc. Direct Tax Code, 2010

47 DIRECT TAX CODE 2010 Under the Code, every receipt is required to be spent in the same year with the only exception of corpus donations. Higher Income 30% on Net Worth in certain situations: As per section 94(1) of the Code, a NPO shall be liable to 30% in respect of its net-worth if- Direct Tax Code, 2010

48 DIRECT TAX CODE 2010 o It converts into any form of organization which does not qualify as a non profit organization; o It merges with any form of organization which does not qualify as a non-profit organization. o It fails to transfer, upon its dissolution, all its assets to any other NPO. Direct Tax Code, 2010

49 DIRECT TAX CODE 2010 WEALTH TAX Presently, under the 1957 Act, wealth tax is levied on the excess of net wealth over Rs. 30, 00,000. This threshold is proposed to be increased in the Code to Rs.1 crore. The liability to pay wealth tax under the 1957 Act is on individuals, HUFs and companies. Under the Code, every person other than a non-profit organization is liable to wealth tax. The following items which do not attract wealth tax at present shall attract wealth tax under the Code: Direct Tax Code, 2010

50 DIRECT TAX CODE 2010 Direct Tax Code, 2010 S.No.Particulars 1Watch having value exceeding Rs. 50, Deposits of individuals and HUFs in banks located outside India. 3 Such deposits not recorded in books of account in case of other persons. 4 Helicopter (not used in business of running on hire or held as stock-in-trade), 5Equity or preference shares held by a resident in a controlled foreign company.

51 DIRECT TAX CODE 2010 Direct Tax Code, Interest in a foreign trust or other body located outside India other than a foreign company. 7Under the Income Tax Act, cash in hand in excess of Rs. 50,000 is includible in net wealth. This limit is proposed to be increased to Rs. 2,00,000.