ASSIGNMENT ON

DIRECT AND INDIRECT TAXES

Prof:

Salmantaj patel

SUBMITTED BY

Dimpi Sanghavi

Roll no 50

Decoding the new tax code

What does the proposed Direct Taxes Code hold for the common man? A look at visible effects and implications of the proposals on our monies.

The most fascinating aspect of the new tax code is that it will divide the salaried class into three broad categories for taxing their income as shown in the table below.

In the first part of a three-part series we focus on the impact for those having taxable income of up to Rs 10 lakhs:

The code proposes to create 4 slabs for the sake of income tax calculations. 

For Men

Slab 1: Total income is lesser than Rs 160,000

The income tax for the above slab is proposed to be nil. This is what currently exists and hence does not in any way change anything for individuals earning below 160,000.

Slab 2: Income is between 160,001 and Rs 10, 00,000

This is the most drastic change proposed. The tax for the above slab is proposed to be 10 percent of the amount by which the total income exceeds 1, 60,000. Meaning, if your income is 572,000/- then, the income tax would be 10% of (Rs 572,000-Rs 160,000). 

Although for individuals who were earlier earning between Rs 160,000 and Rs 300,000 this does not bring about any change, it brings great cheer for individuals earning between Rs 300,000 and Rs  500,000 as they straight away save 10% of any income that exceeds Rs 300,000, but is lesser than Rs 500,000. Today they have to pay 20% on this amount!

For individuals who are today earning above Rs 500,000, this would bring even more cheer as they save a flat Rs 20,000,plus  20% of any amount above Rs 500,000 and lesser than Rs 1,000,000!

Example: Ram's income today is Rs 7 00,000

Income tax as per present rates = Rs 118,450 (excluding surcharges and any cess)

Income if new code comes into effect = Rs 54,000, a saving of Rs 61000

Slab 3: Income is between Rs 10, 00,001 and Rs 25, 00,000

The code proposes the income tax for this slab to be Rs 84,000 (10% of 840,000) plus 20% of any amount above Rs 10,00,001 but lesser than Rs 25,00,000. This would also bring about happy tidings for people who are currently earning above Rs 1,000,000 as they save around Rs 100,000 plus 10 per cent of any income which exceeds 10,00,000.

Slab 4: Income exceeds Rs 25, 00,000

The code proposes the income tax for this slab to be Rs 384,000 plus 30% of any amount exceeding Rs 25, 00,000. People currently earning above 25, 00,000 would expect savings of over 40% of their current tax liabilities.

Away with 'assessment and previous year'

The new code has proposed to do away with the concept of using 'previous year' to denote the year in which you earned the money and 'assessment year' the year in which you pay the self assessment tax and file your return.

The new proposal is to use the simpler terminology of Financial Year (FY). For example if you earned income in FY09-10 then, your pay advance tax in FY09-10 and any balance tax and returns in FY10-11

Source of income defined:

The income is proposed to be bifurcated into 'special sources' and ordinary sources. The special sources include items like lotteries, games and non residents etc which will be charged on the basis of a rate schedule. Thus while calculating the total income we will have to add total income from ordinary sources and total income from special sources.

Source based versus Residence based taxation:

Source based taxation is a process in which the income tax is calculated on the basis of the source of income whereas residence based taxation calculates income on the basis that individuals are taxable in the country or tax jurisdiction in which they are residing.

The debate has been for long on which methodology to use. The new code proposes to use residence based taxation for residents and source based taxation for non-residents.

It states 'a resident in India will be liable to tax on his worldwide income and a non-resident will be liable to tax in India only in respect of receipts in India'.

What this means is that if you have been out of India for more than 183 days you would be treated as a non-resident and you need not pay tax on income which has already been taxed in the country where you get the income from and also if it's not taxed there.

Capital gains

The new code proposes two important ideas. The concept of long term and short-term defined by the period of holding of a capital asset will be removed.

Instead, for any capital asset which is transferred, to get a gain, anytime after one year from the end of the financial year in which it was acquired, the cost of acquisition and cost of improvement will be adjusted on the basis of cost inflation index to reduce the inflationary gains?

The base date for calculation of cost of acquisition of a capital asset has been proposed to be shifted from 01-01-1981 to 01-04-2000. This would be a big disadvantage to people who had brought the assets very long ago.

The reason is that you would have brought it for very low prices but the capital gains will be calculated based on the price of the asset on 01-04-2000.

Main differences between GST and the existing Sales Tax

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the supply of goods or services. The basic idea behind GST was to bring in a common tax across the country to bring in uniformity in prices and conceive an idea of borderless states for trade. The foundation to GST was the gradual phase-out of CST in four years time from 4% to nil.

While CST was successfully reduced from 4% to 3% from April 1, 2007, but owing to differences between Centre and States over compensation, the move to make it 2% from April 1, 2008 didn’t work out and decision is being regularly postponed.

The contention is over the revenue loss to states which is expected to be around Rs.6000 crores. The Central Government wants states to increase VAT on intermediate goods from 4% to 5% and introduce VAT on textiles.

Who would be impacted: All businesses, whether engaged in sales /

supply of goods or supply of services, would be

impacted by GST. The impact would be on supply chains, ERP, product pricing, dealer margins etc.

Applicability to service providers :-Unlike the transition from the sales

tax regime to the VAT, where only businesses dealing in goods were affected, in the case of GST, as the name suggests, both goods and service providers will be impacted. Thus, even pure service providers need to plan for the transition to the GST.

Time to Plan for GST:-The draft laws will clarify finer aspects of GST such as rates, classification and compliances. However, based on the material in the public domain, one can begin with spreading awareness among various stakeholders within the organization and identifying broad areas of action before the draft laws are published. Experience of VAT implementation suggests that there may not be enough lead-time available between the date of announcement of GST implementation and the actual date of GST implementation.

Taxable event:-  The “Taxable event” will be the „supply of goods? and the „supply of services?. Hence, the current taxable events such as

‘manufacture of  goods’,  ’sale of goods?’  And ‘rendition of services’ will not

be relevant under the GST regime.

Applicability of both CGST and the SGST on all transactions: - A transaction of    ’supply of goods’ will attract both the CGST & SGST as

applicable on goods. Similarly, a ‘ supply of service’

will attract both the CGST & SGST as applicable on services.

GST collection model: - GST is collected on the value added at each stage

of sale or purchase in the supply chain. The tax on value addition is ensured through a tax credit mechanism throughout the

supply chain. GST paid on the procurement of goods and

services is available for set-off against the GST payable on the supply of goods or services. The idea is that the final consumer will bear the

GST charged to him by the last person in the supply chain. It is thus a consumption based indirect tax.

Applicability of taxes on imports of goods:- It must be understood that

customs duties will remain outside the GST regime. Thus, the

applicable basic customs duty will continue to be leviable on import of goods. In addition, both the CGST and the SGST are expected to be levied on imports of goods. Thus, the additional duty of customs in lieu of excise (CVD) and the additional duty of customs in lieu of sales tax / VAT will both be subsumed in the import GST.

Tax on import of services and person liabile to pay:- Importation of services will be taxed and both the CGST & the SGST will apply on such imports. The tax will be payable on a reverse charge mechanism and the importer of services will hence need to self declare and pay the tax. As to which State will have authority to collect the relevant SGST, this will be

determined based on the place of supply rules that the government is expected to notify for this purpose.

Separate enactments for the Central and State GST:-There will be separate enactments. The CGST will be a common code throughout India. Further, each State will legislate its own enactment to levy and collect the SGST.

Expected aggregate rate of GST:-The aggregate rate of GST, across the

Central and State GST, is expected to be approximately 16%. This is currently the subject matter of discussion within the Empowered Committee.

Taxation of Inter-State sale transactions: Presently, inter-State sales are subject to CST, which is origin based. However, the GST regime would work under a destination / consumption based concept and hence the tax on inter- State sale transactions will accrue to the destination State. As a

corollary, it will be zero rated in the Origin State.