23 Draft Direct Tax Code Bill 2009 by Jain k V

8/8/2019 23 Draft Direct Tax Code Bill 2009 by Jain k V

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Sub Regional Conference of NIRCHosted by Shimla Branch

From 19thAugust 2010 to 22ndAugust, 2010

Venue:Shilon Resort, Shilon Bagh, Kufri-Chail Road,

Distt. Shimla (H.P.)

JAIN K. VRIND & CO.

Chartered Accountants

Draft Direct Tax Code Bill 2009

Presentation by :

CA. K. Vrind JainFCA,AICWA

9417009490, [email protected]
mailto:[email protected]


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The Current law Income-tax Act, 1961

Almost five decades old

Over 5000 amendments seriously mutilated!

New Code in the making for four years.

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Will be applicable from April 1, 2011 if passed.

The proposed Direct Tax Code is a combination ofmajor tax relief and removal of most tax-exemptedbenefits. It is expected to usher in a new taxregime of transparency and greater compliance.


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OBJECT/SCOPE

Concept of Assessment Year done away with :

Replaced with Financial year (as stated in

Discussion Paper of New Code said change will

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no mpac e ex s ng sys em o ; vance

Tax; Self Assessment Tax etc and is aimed to

reduce confusion in compliance and

administration)


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New Concept of Tax base

275.tax basesmeans-

(a) income or total income, as the case may be, inrelation to income-tax;

b net wealth in relation to wealth-tax;

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(c) dividend distributed in relation to dividenddistribution tax; and

(d) the income or total income, net wealth, ordividend distributed referred to in sub-clauses (a)to (c) of any other person in respect of which theassessee is assessable under this Code


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The Code is not an attempt to amend the Income Tax Act,1961;nor is it an attempt to "improve" upon thepresent Act.In drafting the Code, the Central Board ofDirect Taxes(the Board) has, to the extent possible,

started on a clean drafting slate. Some assumptionswhich have held the round for man ears have been

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discarded. Principles that have gained internationalacceptance have been adopted. The best practices in theworld have been studied and incorporated. Tax policiesthat would promote growth with equity have been reflected

in the new provisions. Hence, while reading the Code, itwould be advisable to do so without any preconceivednotions and, as far as possible, without comparing theprovisions with the corresponding provisions of theIncome Tax Act, 1961 (Para 1.7)


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Stability

At present, the rates of taxes are stipulated in theFinance Act of the relevant year. Therefore, thereis a certain degree of uncertainty and instability in

the prevailing rates of taxes. Under the Code, all

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First to the Fourth Schedule to the Code itselfthereby obviating the need for an annual Finance

Bill. The changes in the rates, if any, will be donethrough appropriate amendments to the Schedulebrought before Parliament in the form of anAmendment Bill.


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Revenues Objective in DiscussionPaper towards Business Taxation

There are two models for computation of income under this head.The first is the model where the taxable income is equal tobusiness profits with specified adjustments. However, thismodel does not provide for items of receipts which form part ofbusiness profit and deductions to be made therefrom. As a

result, there are frequent disputes about taxability of

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.is the income-expenses model which is now followed incountries like U.S.A., Canada, Australia and most Asiancountries. The computation of income from business

under the Code will be based on the income-expensesmodelwhere the taxable income under this head will beequal to gross income minus allowable deductions. To theextent possible, the items of receipts and deductions forexpenses are enumerated to reduce the scope for litigation


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Each business unit is separate

Section 28 of the DTC provides that for purpose ofcomputing the income from business the incomefrom each business will be computed separately;

DTC introduces a rovision whereb each unit of the

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taxpayers business shall be deemed to be distinctand separate from another unit.

As a result it seems that all the provisions ofcomputation of profits will apply separately to each

such unit;


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Each business unit is separate

The taxpayer might therefore be required tomaintain separate books of accounts for each

such unit and get the same audited as per

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to Section 44AA and 44AB of the IT Act.

The proposed section will cast a more

burdensome duty on the taxpayer to complywith the extra documentation requirement.


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Rise in the Income Slabs

While retaining the basic exemptionlimits at Rs 1.6 lakh (for individuals), Rs

1.9 lakh (for women) and Rs 2.4 lakh (for

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the retired), the slabs have been hikedsubstantially.

The 10 % tax bracket raised up to Rs 10lakh, 20 % between Rs 10 and 25 lakhand 30 % for over Rs 25 lakh.


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MAT original Draft DTC

The DTC has proposed a Minimum Alternate Tax (MAT) oncompanies calculated with reference to the "value of grossassets". The rate of MAT will be 0.25 per cent of the value ofgross assets in the case of banking companies and 2 per

cent of the value of gross assets in the case of all other

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compan es.

Problems____________

all companies to pay tax even if they are loss making companiesoroperating in a cyclical downturn.

not reasonable to apply this for newly set up infrastructure companieswhich have long gestation periods.

Assuming the same net income as a percentage of gross assets forall taxpayers is not practical


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Problems_______MAT As perDraft DTC

The inclusion of capital works in progress which is not used in thebusiness and does not contribute in revenue generation would distortthe asset based tax.

The proposed MAT does not allow for any carry forward.

Revised ro osals

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Considering the above critics, it has been

proposed that MAT will be computed according to

Book Profit rather than gross assets. However, it isnot clear that credit will be given for MAT paid ornot.


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Tax treatment of savings Exempt Exempt Tax(EET) v/s Exempt Exempt Exempt (EEE) basis

Most countries that follow the EET method of

taxation of savings also have a social securitysystemin place for all their citizens.

it is proposed to provide the EEE method of

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,Public Provident Fund (PPF) and RecognizedProvident Funds (RPFs) and the pension scheme

administered by Pension Fund Regulatory andDevelopment Authority. Approved pure life

insurance products and annuity schemes will alsobe subject to EEE method of tax treatment.


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Income and Treatment

Salary perks as part of income: Would includeperks like house rent, leave travel allowance, medicalimbursement

Gratuity on change of jobs: Will be tax-exempt on

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Income from ordinary source: Would includeincome from employment, house property, business

and so on. Income from special source: Would include capital

gains on equity and equity oriented funds, income ofany other nature


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Taxation of income from employment -Retirement benefits and perquisites

Deductions under EET regime will be allowed if savings are invested in aseparate account retirement benefits account.

Retirements benefits such as leave salary, annuity, pension, and gratuitywill be fully taxable.

Medical perquisite will also be fully taxable.

Revised proposals

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On receipt of various critics from various stakeholders govt. decided to-Withdraw the Retirement Benefits Account scheme.

Exempt withdrawal of retirement benefits from tax subject tocertain limits.

Perquisites in relation to medical facilities/reimbursementprovided by an employer to its employees shall be valued asper the existing law with appropriate enhancement ofmonetary limits.


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Wealth Tax

Wealth limit: Increased substantially from Rs 30lakh to Rs 50 crore. Will not apply to privatediscretionary trusts

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.per cent

More instruments: Will include equity, mutual

fund units purchased and fixed depositinvestments


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wealth tax

DTC provides that wealth tax will be levied on allassets including productive assets. This has beencriticized on the ground that taxation of productive

assets will be a ainst the basic line of char in of

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wealth tax. Therefore revised code proposed to taxonly unproductive asset.

Again the threshold limit of Rs.50 crores wasargued to be too high hence it was decided bygovt. to calibrate it in the context of overall taxrates.


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Income from House property

Housing Deduction: The deduction of Rs 1.5 lakh for housingloan interest payment removed for a self-occupied residence

Gross Rent Calculation: The gross rent for calculating incometax will be based either on the rent that the house owner has

contracted or on the presumptive rent, whichever is higher.

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rent or 6 per cent of the rateable value of a property fixed by localauthorities, or 6 per cent of the cost of buying or building theproperty

Joint Ownership: If two people own the house, the tax will belevied based on the proportion of their ownership

Rent Deductions Capped: The deduction from gross rent for anyrepair work or municipal taxes is capped at 20 per cent from theearlier 30 per cent


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loan interest payment for a self-occupied residence

Considering the oppositionsraised against this aspect it was

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to Rs.1.5 lacs. In the revised

draft


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Capital Gains

Distinction Scrapped: The distinction between short- and long-term capital gains tax scrapped

Indexation benefit: One year cap remains to avail indexationbenefits. The same applied for house sold after one year

Rate of Capital Gains: The rate of capital gains tax as per income

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Equity Investment: Investors will not enjoy zero tax on equity heldfor over one year

Dividend: Dividends paid out on equity investment are fully tax

exempt Exceptions: Capital gains will not apply to transfer of assets on

partition of Hindu undivided family, gifts, transfer under anirrevocable trust, of any investment asset, other than sweat equityshare


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Revised proposal

Capital gains arising from transfer of an investment asset, being equity

shares of a company listed on a recognized stock exchange or units of an

equity oriented fund, which are held for more than one year, shall be

computed after allowing a deduction at a specified percentageof capitalgains without any indexation. This adjusted capital gain will be included in the

total income of the taxpayer and will be taxed at the applicable rate. The loss

arising on transfer of such asset held for more than one year will be scaleddown in a similar manner.

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Income arising on purchase and sale of securities by an FII shall be deemed

to be income chargeable under the head capital gains. This would simplifythe system of taxation, bring certainty, eliminate litigation and is easy to

administer.

The capital gains arising to FIIs shall not be subjected to TDSand they willbe required to pay tax by way of advance tax on such gains as is the existing

practice.

STT is proposed to be calibrated based on the revised taxation regime forcapital gains and flow of funds to the capital market.


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Agriculture land and Income

Urban Agriculture Land is a capital asset and saleof such land purchased one year before shouldhave been used in last 2 years for agriculture.

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land.

However no tax on agriculture income being state

subject.


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Unexplained Income in New Code

New Section 56(2)(l)

any amount found creditedin thebooks of an person maintained

for the financial year, if-

Earlier section 68 Cash credits Where any sum

is found credited in the booksof an assessee maintained for

any previous year, and theassessee offers no

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about thenature and sourcethereof; or

(ii) the person offers anexplanation butfails to

substantiate the explanation;or(iii) the explanation offered by him

is not, in the opinion of theAssessing Officer, satisfactory;

explanation about the natureand source thereof or theexplanation offered by him isnot, in the opinion of theIncome-tax Officer,satisfactory, the sum socredited may be charged toincome-tax as the income ofthe assessee of that previousyear".


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New Section 56(2)(m)

the value of any investment

made by the person in the

financial year to the extent forwhich,-

Earlier section 69/69B Unexplained investments. Where

in the financial year immediatelypreceding the assessment year theassessee has made investments

which are not recorded in thebooks of account, if any,

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(i) the person offers no explanationabout thenature and source ofthe investments; or

(ii) the person offers an explanation

butfails to substantiate theexplanation; Or

(iii) the explanation offered by

him is not, in the opinion of the

Assessing Officer, satisfactory;

maintained by him for any sourceof income, and the assessee offersno explanation about the natureand source of the investments orthe explanation offered by him isnot, in the opinion of the Income-

tax Officer, satisfactory, the valueof the investments may be deemedto be the income of the assesseeof such financial year".


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New Section 56(2)(N)the value of any money, bullion,

jewellery or other valuable articleowned by the person to the extentfor which,-

(i) the person offers noexplanation about the nature and

Earlier section 69AWhere in any financial year theassessee is found to be the owner ofany money, bullion, jewellery or othervaluable article and such money,bullion, jewellery or valuable article is

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source of acquisition of the money,bullion, jewellery or other valuablearticle; or(ii) the person offers anexplanation but fails to

substantiate the explanation; or(iii) the explanation offered by himis not, in the opinion of theAssessing Officer, satisfactory;

,if any, maintained by him for anysource of income, and the assesseeoffers no explanation about thenature and source of acquisition ofthe money, bullion, jewellery or othervaluable article, or the explanationoffered by him is not, in the opinion ofthe Assessing Officer, satisfactory,the money and the value of thebullion, jewellery or other valuablearticle may be deemed to be theincome of the assessee for suchfinancial year


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Sec 80C now Renamed 66

80C limit: From Rs 1 lakh at present to Rs 3 lakh for a hindu undivided family(HUF) or individual Sec 66

Less instruments in 80C: Equity-link savings scheme and 5-year fixeddeposit will not be included

Definition of higher education expanded under 80C: Higher education will

now include graduation and post graduation studies and the tuition fees willbe exempt section 67

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Insurance

Medical insurance: Existing exemptions retained for individuals, seniorcitizens and the handicapped

Tax-free: Pure life insurance and policies whose premiums less than 5 percent of sum assured, even on bonuses

Exempt-Exempt-Tax (EET): New tax regime for all provident funds,superannuation funds, life insurance and New Pension Scheme (NPS).These investment to be taxed on withdrawal

Grandfathering Clause: Withdrawal of any amount invested in retirementand superannuation schemes as on March 31, 2011 will not be taxed


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Deductions for Donations sec 72 ie.of 80G of the Act.

125% of the amount of money actually paid Anyscientific research association or NationalLaboratory or Any university, college or other

institution en a ed in carr in on scientific

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research, statistical research or research in socialscience.

100%

50%


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Books

Every person shall keep and maintain books of account andother documents

(a) any person carrying on legal, medical, engineering,architectural profession or profession of accountancy, technical

consultancy, interior decoration or any other profession as is

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no e y e oar n e c a aze e;

(b) any other person carrying on business, if,-

(i) his income from the business exceeds two lakh rupees;

(ii) his total turnover or gross receipts, as the case may be, in

the business exceeds ten lakh rupees in any one of the threefinancial years immediately preceding the relevant financialyear;


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TaxAudit and NGOs Tax audit

Tax Audit limits same as earlier there is no change.

Only In case of presumptive tax it is now 1 crore.

For NGOs it obtains a report of audit in prescribed formfrom an accountant before due date of filin of the return in

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respect of,-

(A) the accounts of business, if any, carried on by it inaccordance with the provisions of section 84; and

(B) its accounts relating to the permitted welfare activities ina case where the gross receipts referred to in section 89exceeds one lakh fifty thousand rupees;


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CHARGE OF BRANCH PROFITS TAX

Every foreign company shall be liable to branchprofits tax, at the rate of 15% on total income forthe financial year as reduced by the amount of

income tax thereon.

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104 Disallowance of expenditurehaving regard to fair market value

A person shall not be allowed a deduction under this Code inrespect of so much of the expenditure, whether capital orrevenue in nature, as is considered by the Assessing Officer tobe excessive or unreasonable if,-

(a) the payment in respect of the expenditure has been, or is to be,

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ma e o any assoc a e person; an

(b) the expenditure is excessive, or unreasonable, having regardto,-

(i) the fair market value of the goods, services or facilities for

which the payment is made;(ii) the legitimate needs of the business of the person; or

(iii) the benefit derived by, or accruing to, the person therefrom.


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Arms Length Advance pricing

The amount of any income, or expense, arisingfrom an international transaction shall bedetermined having regard to the arm's length

price.

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e oar , w t t e approva o t e entraGovernment, may enter into an advance pricingagreementwith any person in respect of the arms

length price in relation to an internationaltransaction which may be entered into by thatperson on the basis of the prescribed methodbeing the most appropriate method.


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Advance pricing & Reporting ofInternational transaction

Such Agreement shall be valid for such financial years asspecified in the agreement which in no case shall exceedfive consecutive financial years.

Reporting of international transaction

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149.(1) Every person who has entered into an internationaltransaction during the financial year shall furnish a reportof the transaction to the Transfer Pricing Officer on orbefore the due date.

(2) The report referred to in sub-section (1) shall be obtainedfrom an accountant in the prescribed form duly signed andverified in the prescribed manner by such accountant.


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Sec 150 Tax Return Preparer

The Board may, without prejudice to the provisionsof section 148, frame a Tax Return PreparerScheme so as to allow a Tax Return Preparer to

re are and furnish the return of tax bases of an

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specified class of persons.

Every Tax Return Preparer shall affix his signature

on the return so prepared by him.


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162 Assessment

(3) The Assessing Officer shall, regardless of anything to thecontrary contained in this Act, in the first instance, forward adraft of the proposed order of assessment (hereinafter in thissection referred to as the draft order) to the assessee if he

proposes to make any variation in the income or loss returned

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.

(4) On receipt of the draft order, the assessee shall, within thirtydays of the receipt by him of the draft order,-

(a) file his acceptance of the variations to the Assessing Officer; or

(b) file his objections, if any, to such variation to,-(i) the Dispute Resolution Panel; and

(ii) the Assessing Officer.


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162 Assessment

(5) The Assessing Officer shall complete the assessment on the basis ofthe draft order,

if- (a) the assessee intimates to the Assessing Officer the acceptance ofthe variation; or(b) no objections are received within the period specified in sub-section(2).

(6) The Assessing Officer shall, notwithstanding anything contained in

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sect on , pass t e assessment or er un er su -sect on w t none month from the end of the month in which,-

(a) the acceptance is received; or(b) the period of filing of objections under sub-section (2) expires.

(7) Upon receipt of the directions issued under sub-section (5), theAssessing Officer shall, in conformity with the directions, complete theassessment within one month from the end of the month in which thedirection is received notwithstanding anything to the contrarycontained in section 146.


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GENERAL ANTI-AVOIDANCERULE (GAAR)

The code has inserted the concept of GAAR wherebycommissioner will be given power to investigate in acase where a taxpayer has entered into an

arrangement, the main purpose of which is to obtain

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a tax benefit and such arrangement is entered orcarried on in a manner not normally employed forbona-fide business purposes

1.or is not at arms length

2.or abuses the provisions of the DTC

3.or lacks economic substance.


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Revised GAAR

The following safeguards are proposed for invokingGAAR provisions:-

The Central Board of Direct Taxes will issue guidelines to

provide for the circumstances under which GAAR may be

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nvo e .

GAAR provisions will be invoked only in respect of anarrangement where tax avoidance is beyond a specified

threshold limit.

The forum of Dispute Resolution Panel (DRP) would beavailable where GAAR provisions are invoked.


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Documents

23 Draft Direct Tax Code Bill 2009 by Jain k V