Direct Tax Code tabled: What do experts make of it?

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Aimed at simplifying the country's direct tax laws, the government on Monday introduced the Direct Taxe Code (DTC), which would now be applicable from April 1, 2012, instead of March 1, 2011.

The postponement, according to Krishan Malhotra Executive Director of KPMG, is logical. "It technically was looking very difficult to implement from April 1, next year. The procedure will take time-at least 6 months."

In order to execute the new laws, including the combating financing of terrorism (CFT) introduced in the code, the corporates as well as the government require preparation time, says Ajay Kumar Executive Director of PricewaterhouseCoopers (PwC).

Under the code that offers much lower benefits than in the original proposal, corporate tax will be at the current 30% but without surcharge and cess; with surcharge and cess, the current tax liability on corporates comes to over 33%. Also the minimum alternate tax (MAT) will be applicable at 20% of book profits. Short-term capital gains will be taxed at half of income tax rates.

Commenting on the government's move on MAT, Malhotra says it is a welcome move. "The carried forward credit for the MAT would be available for 15 years which was not very clear initially. Also, book profit is just as per schedule but we will have to see the impact of International Financial Reporting Standard (IFRS) because that's also going to be implemented next year. So it is expected that in case if that regulation will come the book profit will go up. But in case the book profit will go up and the rate is 20% I don't think industry would welcome that so we will have to see the impact of that."

The income tax threshold limit for individuals too has been raised from the present Rs 1.6 lakh to Rs 2 lakh. Senior citizens will get exemption up to Rs 2.5 lakh from the Rs 2.4 lakh at present.

This, Amitabh Singh Tax Partner at E&Y considers to be clear negative. "The bill seems to resemble the current income tax more rather than the original Direct Tax Code which we saw. Some of the language seems to be again reverting back to the earlier or the current tax act."

"Largely it may be that when it went into the law ministry, they clearly didn't have time to grapple with a new set of wordings and the way the whole language was drafted and they would have been more comfortable with a language on which the jurisprudence and the court cases have already deliberated," he reasons.

The code introduces a Rs 50,000 enhanced deduction. This deduction, according to Singh has been carved out purely for health insurance, education and any mediclaim type of policy. "In stead of enhancing medical insurance from the employer's side they have increased this limit. It means that it's the employee who is perhaps supposed to be incurring those expenditures out of his pocket and then claiming a deduction. So either way it gives a benefit to the employee for certain expenditure that he would have normally being spending, it underlines the governments priority on healthcare and education."

In an exclusive interview with CNBC-TV18's Executive Editor Shereen Bhan and News Editor Harsha Subramaniam, Gautam Mehra, ED of PwC, Sudhir Kapadia, Partner at Ernst & Young, V Balakrishnan, CFO of Infosys and Dinesh Kanabar of KPMG gave their perspective on the Direct Taxes Code.

Q: We were talking about this couple of days ago, we were discussing about the fact that these changes were proposed are just incremental nature. Now that these announcements have come would you still hold that view?

Kapadia: I think a very important change which we must all make note of is in the area of capital gains taxation. It is important from the point of view of what was proposed in the original Direct Tax Code. If you remember in the original Direct Tax Code what we were told is that capital gains will be taxed at the regular rates of income, which would be the maximum rates applicable of 30%.

In the revised discussion paper in pursuance of submissions made all around, what we were told is that long term capital gains, if you did the math, effectively would be taxed between 10% to 15%. But there was no change in short term capital gains tax rate would be normal.

I think what we have got seems to be a pleasant surprise and I'll talk a little bit about it because it's important. You see the long term capital gains what we are told again is the same as what we have today which is exempt for listed securities and for equity mutual funds which I think is a welcome move because it encourages long term capital formation and investments in risk capital.

Short term, today we have 15% short term capital gains on listed securities. Now we are told it will be 5%-10%-15% through a formula. The question I have from a policy standpoint is the rationale for bringing back a concessional rate of taxation on short term gains. We just heard the Revenue Secretary dole out some numbers of their revenue sacrifice. I link this up to the other proposal which are a bit beguiling as well, why do we now want 5% tax by way of DDT on dividends declared by equity mutual funds.

Those are the funds they are investing in the market, they are investing in long term capital and then you want to give concession on short term gains. So I think if there was a revenue loss I would have expected not to encourage short term capital gains and not to discourage dividend distribution. So that's a bit of a dampener.

But otherwise on an overall basis capital gains tax is incremental vis-�-vis current provisions, quite substantive vis-�-vis what was proposed in the original DTC, depends how you look at it.

Q: The good news here is now we finally have a date as far as the Direct Tax Code is concerned, albeit a delayed one but April 2012. The finance minister has always expressed his desire to simultaneously roll out the Direct Tax Code and the goods and services tax. Would it now be safe to assume that we are looking at April 2012 roll out for the GST as well on the back of what you have heard today?

Mehra: It is a little difficult to speculate on the GST. Yes the Direct Tax Code is definitely April 2012 and that has two implications. One is obviously it gives taxpayers an additional year to reorganize their affairs to get prepared for what is coming. But also I would think it would give the department of the tax authorities that much more time to run this through their own team and educate the tax officers on the new code.

Q: What about the possibility of more changes because we heard the Revenue Secretary, he didn't quite directly say that but he was perhaps alluding to the fact that when indeed this is going to go through parliament, the standing committee and so on and so forth, we are perhaps going to see more changes, and as we head closer to elections perhaps this could see more changes as well?

Mehra: They say this is the era of change and we have already seen two rounds. Actually this is the third draft of the Direct Tax Code. I would presume there would be another window for taxpayers to make representations and that would probably be if the matter gets referred to a select parliamentary committee. We will just have to wait and watch and depending on the level of lobbying let's see what finally comes out.

Q: What did you make of the changes that have been proposed in the Direct Taxes Code bill, corporate tax at 30%, MAT on book profit at 20%, what did you make of it?

Balakrishnan: I think it was as expected, they have given away something on the personal taxation front. So they maintained corporate tax at 30%. MAT is today 18% but including surcharge, it comes to close to 19.9%. They made it 20%. So there is nothing earth shattering in this new change.

Q: Let me get all of you in as far as special economic zones were concerned because as we had reported there have been concession that have been made for special economic zones both for developers as well as units, your quick comments?

Balakrishnan: On the SEZs front they have given some breathing time because they've said if it is notified before 2012 and it starts production by 2014 you will continue to get the tax benefit. So they have given more breathing space for people to come into the SEZ scheme. To an extent it's a surprising one.

Q: How would you react to the grandfathering that's happened on the special economic zones? This was of course the big bone of contention between the Finance Ministry and the Commerce Ministry and finally the Commerce ministry seems to have had its way.

Mehra: Yes I think it's a welcome move definitely because of the fact that people would have already gone out and at least committed to making investments and then to retract from that position is rather difficult. So that's a welcome move.