DTC Bill may slap 35% new tax on super rich: Sources

The Cabinet is all set to consider the revised Direct Tax Code (DTC) Bill on Thursday. It is likely that there will be no changes in the tax exemption limit. But the Bill proposes a new 35-percent tax slab for people with incomes exceeding Rs 10 crore per annum, reports CNBC-TV18's Siddharth Zarabi and Anshu Sharma, quoting sources.

Authored by noted tax expert and finance ministry advisor Parthasarathi Shome and finance minister P Chidambaram, the new DTC Bill is a serious revision of the original Bill of 2010 submitted in the tenure of former finance minister Pranab Mukherjee. Around 153 of 190 recommendations of  the Standing Committee on Finance have beeb accepted. After the Cabinet’s nod, the DTC Bill will be introduced in the Lok Sabha.
Currently, the peak rate of income tax stands at 30 percent. The additional surcharge takes the total tax for income more than Rs 10 crore to 33.33 percent. This ‘super rich’ tax may be the fourth new tax slab. Also read: Vodafone in multi-million tax settlement in Britain: Report As per the last figures provided by the finance minister in the Budget, 42,800 people have taxable income exceeding Rs 1 crore. The new slab will have a direct impact on this group. The other key proposal in the bill seeks to define a threshold of 20 percent for indirect transfer. However, there will be an exemption provided for transfer of small shareholdings upto five percent outside India. This comes after finance ministry feared of erosion of tax base as per clause 5 (4)(g) of the original Bill. Companies undertaking indirect transfers of asset, a subject of massive litigation and controversy, will have an impact of this move. The intent is to leave smaller overseas transactions, mergers and acquisitions (M&A) untouched. It provides for a small window of relief. The Bill also proposes not to provide for settlement commission. This will serve as a deterrent against tax evasion. There will be hike in weighted deduction at 150 percent for scientific research from its current 100 percent. The securities transaction tax (STT) may not face the axe too. The Standing Committee of Finance had made 190 recommendations, of which 153 have been accepted fully or partially. Also, The Rs 2 lakh exemption limit is not going to be linked to the consumer price index (CPI). The Finance Ministry has said that income distribution tax is proposed to be levied on equity-linked insurance products on the lines of equity-oriented mutual funds, will remain. Ring-fencing of losses from businesses availing investment-linked incentives are required. This is being done to prevent tax base erosion by manipulation of losses, the ministry sources say. With regard to income from house property, the original bill did not have a provision for taxing this income, which is not rented.  To plug this loophole, the government proposed that rental value is to be taken as the higher of contractual rent or six percent annum of ratable value fixed by the local authority, vacancy allowance would be allowed. The Bill is likely to come up on the agenda for the cabinet. If the Bill is accepted by the Cabinet, within the next three-four days, it could also be placed in the Parliament. Here Are Some Of The Key Details: 1. Super Rich To Be Taxed More:  The new Bill proposes a 35 percent rate for income above Rs 10 crore and has set up a fourth slab of tax rate for individuals, HUFs and artificial judicial persons. There has been no relaxation and the Standing Committee suggestion in this regard was turned down. The Standing Committee’s suggestion for removal of cess has also been turned down. The Standing Committee had proposed revised tax slabs of : Rs 0-3 lakh - Nil, Rs 3-10 lakh – 10 percent, Rs 10-20 lakh-20 percent, beyond Rs 20 lakh-30 percent. The suggestion was rejected on fears of an estimated revenue loss of Rs 60,000 crore. The suggestion to link exemption to CPI was also rejected. The revised DTC Bill has not abolished the STT and it will be used to regulate day trading.  The DDT on equity-linked insurance has also been included. 2. Wealth Tax Provisions Tightened: All assets, physical and financial, will be included under the wealth tax. The wealth tax is to be levied on individuals, HUFs and private discretionary trusts. The threshold of wealth tax is at Rs 50 crore and the rate has been set at 0.25 percent. There is no threshold for private discretionary trusts. The Bill also calls for the settlement commission mechanism to be abolished. 3. The proposed Bill also has other provisions including the tax on dividend distribution, capital gains as well as taxation of indirect transfers of assets. According to sources, the additional tax has been set at 10 percent on dividend exceeding Rs 1 crore. The Bill also hikes the tax liability of capital market investments by HNIs. 4. The Bill also aims to create parity between insurance products and mutual funds. A premium at less-than 10 percent of the sum assured will not be taxed. Pure life insurance is to remain outside tax net. The tax on life insurance companies to remain at 30 percent and the Standing Commission suggestion for a 15-percent rate has been rejected. 5. Taxation of Indirect Transfers Of Assets: The proposal for a 50-percent threshold of global assets has been considered too high and a new threshold has been set at 20 percent. Indirect transfers with 20 percent of assets in India are to be taxed and exemption has been provided for transfer of small shareholding of up to 5 percent. 6. Taxation Of House Property: A few anomalies have been removed and a specific provision has been introduced. The rental value as higher of contractual rent or 6 percent per annum of ratable value will be taxed and the vacancy allowance has been permitted. 7. Deductions For Research: The weighted deduction has been reduced to 150 percent for in-house scientific research. The weighted deduction has been reduced to 125 percent for research donations. Losses from specified businesses are to be ring-fenced, losses from capital gains are to be carried forward, losses from speculation and horse races to be carried forward. Items can be carried forward only for seven years and not indefinitely. 8. The provisions related to non-profit organisations have been rationalised and the condition of specific modes of investment have been removed. Provisions of Finance Acts 2011, 2012 and 2013 are to be added to the DTC and provisions consistent with DTC to be incorporated.