Diluted Form Huge Revenue Loss For Govt: Direct Taxes Code Watered Down To Keep All Happy

DILUTED FORM HUGE REVENUE LOSS FOR GOVT
Direct Taxes Code watered down to keep all happy

Our Bureau NEW DELHI
THE government has retained the form, but abandoned the spirit of the Direct Taxes Code (DTC) to have a simple, clean tax system without
exemptions.
A revised discussion paper on the Direct Taxes Code, released by the Central Board of Direct Taxes (CBDT) on Tuesday, dropped many
controversial proposals of the original draft code to help individuals and companies save on their tax outgo.
These include levying minimum alternate tax (MAT) on gross assets and taxing savings schemes such as the public provident fund at the time of
maturity. Companies will pay MAT on book profits.
A dilution of the proposals in the draft code would mean a huge revenue loss for the government, which, in turn, will impact fiscal deficit. The
trade-off could be to scale down the liberal tax slabs for individuals proposed in the original code. And that is bad news for taxpayers.
"The proposed revisions are like old wine in a new bottle," said Deloitte partner Homi Mistry.
But revenue secretary Sunil Mitra said the slabs proposed in the draft code were only illustrative. The code has addressed 11 issues, including
MAT, tax treatment of savings, taxation of house property, tax treatment of capital gains, status of double taxation agreements and general anti-
avoidance rules.
CBDT chairman SSN Murthy said the decision on tax rates will be taken later.
The draft code had proposed a 10% tax rate for taxable income between Rs 1,60,000 and Rs 10 lakh, 20% for income above Rs 10 lakh but
below Rs 25 lakh, and 30% for income above Rs 25 lakh.
This could be tweaked and the prerogative to fix the rate will be with the legislature, said a senior CBDT official.
Domestic investors in equities will, however, pay capital gains tax on listed shares, with CBDT retaining the overhaul of the tax treatment
proposed in the draft code to scrap this exemption. Capital gains will be added to income and taxed according to an individual’s slab. The tax
treatment will be similar for nonresidents. The securities transaction tax (STT) will, however, stay and rates will be calibrated.
CBDT has also sought to end the uncertainty over tax treatment of FIIs. The income of FIIs that buy and sell shares will be treated as capital
gains and not business income, which could increase their tax liability.
Going by the revised code, individuals will enjoy tax exemptions in select, but fewer, savings schemes. These include the public provident fund,
pension schemes, including the government’s new pension scheme, general provident funds, recognised provident funds, pure life insurance and
annuity schemes. These schemes will not be taxed at any stage. The move will give a boost to the new pension scheme, which has not found many
takers so far.
Other savings schemes such as the national savings certificate, bank deposits, unit-linked insurance plans and equity-linked mutual funds will
continue to enjoy tax breaks for their full duration. There is, however, no clarity on their tax treatment when the code comes into force.
CBDT has also softened the blow on the tax treatment of house property by scrapping the proposal to compute gross rent on 6% of the cost of
construction or acquisition. The salaried class too has been spared of a higher tax burden on perks.
"The exempt exempt exempt tax (EEE) system on retirement benefits will help senior citizens who do not have social security benefits. Similarly,
the valuation of perquisites as per prescribed rules rather than linked to market rates will help lower the tax-burdened salaried class. Exempting
single house owners from house property income would contribute to investment in the housing sector," said Kaushik Mukerjee, executive director,
PwC.
REFRESHED CODE
For individuals
Tax exemption at all three stages—savings, accretions and withdrawals—to be allowed for provident funds, pension scheme administered by PFRDA,
pure life insurance products & annuity schemes. DTC wanted to tax withdrawals
Proposal to introduce Retirement Benefits Account for depositing amounts received by salaried as retirement benefits such as gratuity to avoid taxes
scrapped
Monetary limits for medical facilities and reimbursement provided by employers to enhanced
For investors
Income from capital gains on equities and units of equity oriented funds, both short term and long term, to be treated as income from ordinary
sources and taxed accordingly
STT to be retained & calibrated based on revised taxation regime for capital gains & flow of funds to the capital market
For companies
Basis of calculation of MAT changed to book profit of the company from value of gross assets proposed in DTC
Existing units in SEZ to enjoy profit-linked deductions just like the developers of these zones for a limited period when the new code comes FIIs’
Mauritius party may end
COMPANIES will pay tax on their book profits. Loss-making companies will not come into the net. "Capital-intensive infrastructure companies and
FIIs will get some relief," said Sunil Gidwani, executive director, PwC. But the revenue loss could be offset with a hike in MAT rate, said an official
who did not wish to be named. Existing companies in special economic zones (SEZs) will enjoy tax exemptions or profit-linked deductions for a
limited period till the new code comes into force. Only unproductive assets will attract wealth tax, with CBDT dropping the proposal to levy tax on
the net wealth on the valuation date.
The party for FIIs investing through Mauritius could end, with the code proposing general anti-avoidance rules. Tax authorities will have the
powers to lift the corporate veil and examine the substance of a transaction. There, however, will be safeguards. "Treaty override has been a
serious concern for international investors. In the revised discussion paper, it is now clarified that DTC will not conflict with the other benefits
available under tax treaties. However, where anti-avoidance provisions such as GAAR or CFC are invoked, treaty will not apply", said Shefaili
Goradia, partner, BMR Advisors
However, it has introduced Controlled Foreign Corporation rules wherein it can levy a tax on a foreign subsidiary of an Indian company that does
not distribute dividends.
Finance minister Pranab Mukherjee on Tuesday expressed confidence that the government will be able to introduce DTC in the next financial
year. "I feel that we have addressed all the major concerns of the stakeholders. If there are any more suggestions, we shall look into it," he had
said earlier in the day at the annual conference of chief commissioners of indirect taxes.
‘All stakeholders will be happy’

Having kept his word on finalising the
DTC draft within the month, revenue secretary Sunil Mitra is a satisfied man. In a chat with ET's Athar Khan and Soma Banerjee, Mr Mitra sounded
confident that this time around stakeholders will be a happier lot. Adding that the bill would be introduced in the monsoon session, Mr Mitra said the
aim was to make the DTC easy, transparent so that it is easily compliant.
• EFM: PAGE 15
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DILUTED FORM HUGE REVENUE LOSS FOR GOVT

Direct Taxes Code watered down to keep all happy

‘All stakeholders will be happy’

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