Govt drafts new, simpler direct tax code; experts cheer

Published on Wed, Aug 12, 2009 at 16:24 | Source : CNBC-TV18

Updated at Thu, Aug 13, 2009 at 12:17

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Finance Minister Pranab Mukherjee on August 12 released the New Draft Direct Tax Code. The draft, which is expected to radically change the tax structure, will now be open for discussion after which it will take the form of law. The finance minister had in his budget promised to deliver a new code within 45 days and has kept to his promise.

Unveiling the new code, Home Minister P Chidambaram, with the finance minister by his side, said he was confident that new code, when passed by the Parliament, will be a huge improvement on the existing law. "It is a brand new code written from scratch. It is not an amendment but a replacement of the Income Tax, 1961," he said, adding that it would promote entrepreneurship and the thrust would be on "regulated free markets".

Hailing the government's move, HP Ranina, Advocate, Supreme Court, said, "This is a path-breaking legislation if what they say is implemented in the Direct Taxes Code." It would be very useful for the government as well as taxpayers, he added. Some clarity in the taxation of capital gains or in the taxation of pensions that are received will be welcomed, he said.

Sudhir Kapadia, Partner, Ernst & Young, said that the New Draft Direct Tax Code was a very positive move. "This will help to simplify complicated tax law prevailing in India today." The language of code was simple and thus, would be helpful, he added. "we should commend this objective and we should look at it with an open mind and give constructive views to the government."

Ketan Dalal, Executive Director, PwC, believes the new tax code to be a significant departure from the Income Tax of 1961. However, he said, it was too premature to go through any details. The new tax rate is applied to a base of income, he said, adding, "It appears to me that the base of income has been completely changed."

Pranav Satya, Partner at E&Y, said, "In terms of all the established jurisprudence under the existing Income Tax Act, of course, a lot of it may not be available now. So probably we are left to reinvent the wheel on some aspects." However, he hopes a lot of the ironing out to be done before it becomes a law.

The key message that came from the FM is that the new code is a step forward to reduce litigation, said, Rajashree Sabnavis, Partner, BMR Advisors. "He is going to change the fundamentals of taxation for foreign companies wherein the way foreign companies will now be taxed is even if they are partly managed from India they would be taxed as residents or they would be treated as residents in India," she added.

Mukesh Butani, Partner, BMR & Associates, said, "Applying the maximum marginal rate of tax of 30% on individuals about Rs 25 lakhs of income is clearly going to result in greater level of compliance because the incentive for individuals to evade taxes has completely been done away with. That will increase the overall tax to GDP ratio and certainly increase the overall tax collection and the cost of compliance will go down."

Proposed changes

The draft proposes to bring all direct tax laws under one umbrella, the finance minister said, adding that it would eliminate the scope of litigation. "The new draft code has simplified capital tax gains and laws on for non-profit organisations, savings instrument," he said. The new code was aimed at removing distortions in the tax structure, he added.

Highlights:

Key proposals for investors:
- Rates of tax to be uniform
- Security transaction tax to be abolished
- Business losses can be carried forward indefinitely
- Effective corporate tax rate at 25%
- To scrap long, short-term capital gains distinction
- To abolish Securities Transaction Tax
- No tax deduction on interest payable on any government security
- Base year for calculation of capital gains tax moved to April '00
- Tax deduction limit on savings to be hiked to Rs 3 lakh
- Wealth tax liability to be discharged by payment of pre-paid taxes
- Income from certain transfers not be treated as capital gains

- Income tax slabs proposed to be changed; highest tax rate of 30% for individuals to be applicable for income over Rs 25 lakh

Key proposals for businesses:
- Taxation of all non profit organisations rationalised
- Profits of non-life insurance business to be disclosed annually
- Government may enter overseas agreements for double taxation avoidance
- No tax deduction on interest payable to banking companies, insurers

Market Impact

- FMCG, metals to benefit from 25% corporate tax rate

- No distinction between long- and short-term capital gains welcome

- No incentive for long-term investor anymore

- No DDT on payment of divided to pass-through entities

- Tax on interest on overseas borrowing a negative

- May discourage leveraging and reduce investment

- Significant increase on slab rates for individual taxation welcome

- Will lead to disposable income and more investment

- STT to be abolished

- May have sentimental impact

To read the New Draft Direct Tax Code, click on attached PDF