Wednesday, September 2, 2009

Article in taxindiaonline on new Direct Tax Code

New Direct Taxes Code: Comforting the comfortable! - Is it Income Tax's H1N1?

SEPTEMBER 02, 2009

By Subhashree Kishore

(H1N1 is a variant of the 1919 Spanish Influenza,and the present Direct Tax Code is a variant of the Income Tax Act of 1961. Both are curable but fatal if left untreated.)

The New Direct Tax Code has been hailed and hollered as per individual tastes. It claims to make the process simpler and intoxicate assessees into compliance.

Well, it begins earnestly enough by merging the assessment year and financial year concepts and removing the resident not ordinarily resident proviso. It seeks to tax��on-profit (a much maligned term) organizations at 15%. It is sincere in promotion of economic activities and fuelling investment and growth by bringing down rate of corporate tax, doing away with STT and indefinite carry forward of losses. It is true to industry by relaxing the individual tax slabs so that people have more purchasing power.

Amongst the bright lights and concentrated intellectual exercise of over three years to sweeten taxes, unfortunately at the end of the day, as usual, the individual tax payer has got a raw deal.


The simplest ‘technical’ error in the carefully drafted code is ‘turst’ an unexplained word which appears in Part D, Clause 101 (3). It may however be overlooked considering that this section could hardly touch salaried classes as the threshold limit for wealth tax has been generously hiked to Rs. 50 Crores.

Renting ideas from Uncle Sam

The bursting of the realty bubble in the US led to a global depression-like (depression is after all a bad word) situation and hence every attempt has been made to deglamourize this sector.
Once the draft code becomes law, an assessee can no longer claim deduction in respect of housing loan interest, should he choose to live in the house that he built. Repayment of housing loan also does not qualify for deduction under the investment bracket. So he should choose to live as a tenant rather than go through the arduous process of building a house, committing himself to EMIs and still end up paying more tax.

Of course, the tax slabs will be enhanced and income upto Rs 10 lakhs attracts only 10% as per the new Code. But factor in the taxable perquisites, denial of exemption in respect of HRA, medical reimbursement and EET regime - his gains are negligible. Again the Code is not clear on treatment of capital gains on sale of residential property. One can only claim residual exemption by investing in the Capital Gains Deposit Scheme.

Firing at elderly with 'Cannon' of Equity

In pursuit of “all being equal before law”, everyone has been placed at equal disadvantage. Retirement benefits have been skillfully deprived of any benefit in the new Code. All new payments into various Provident funds will be taxable on withdrawal. The only relief is if the same is used as a rollover - to buy annuity or invest in the same account or other account with the permitted intermediaries namely

(a) approved provident fund;
(b) approved superannuation fund;
(c) life insurer; and
(d) New Pension System Trust;

All other instruments like the NSCs, bank fixed deposits and equity-linked schemes have been closed out. So everyone, be from public or private sector, who plans for his life after superannuation has few options but to trust the New Pension Scheme or buy whole life policies which are exempt from tax on receipt of money at the end of contract period. In effect, though retirees may enjoy higher threshold limit, they can hardly bank on the money saved in working life to see them though the autumn.

The only way to enjoy your money seems to be to keep it as far from you as possible!

Children with new toys

Exempt-exempt-taxable (EET) was the long-time slogan of the finance ministers. It does have a stylish ring about it. It has no intrinsic merit so as take the pride of place in income tax law.
Withdrawal fails to satisfy the definition of income. The money has been saved from tax-paid or taxable income. It is not an additional income. One may agree with taxing appreciation in value or interest. But principal is not income. It would be better to classify the aggregated savings and withdrawals under wealth. Then most assesses would benefit under the Rs.50 crore umbrella.
Let us be clear. Either something is exempt or taxable. We need not bring in temporal dimension and postpone the pain.

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