Fourth draft of Chidambaram‘s Direct Taxes Code How long can the country go on discussing such imperfect drafts - T.N. Pandey - Article published in Business Advisor, dated July 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume VIII Part 1 July 10, 2014 3 Business Advisor
Fourth draft of Chidambaram‘s Direct
Taxes Code: How long can the country go
on discussing such imperfect drafts?
T. N. Pandey
The 4th draft of the Chidambaram‘s Direct Taxes Code
(DTC) was released by the Finance Ministry on 1st April,
2014 in pursuance of declaration made at the time of
presentation of Interim Budget in February, 2014 for the
current year, till the regular budget is presented and
passed.
The observations were:-
―We have also got ready a Direct Taxes Code that will
serve us for at least the next 20 years. I intend to place it on the website for
a public discussion without partisanship or acrimony.‖
2. Whether 4th attempt would succeed?
The issue that arises in this context is whether any useful purpose would be
served by discussing this draft, which is the 4th in series of such unfruitful
exercises carried out by Shri Chidambaram since the year 1996 when he
became the Finance Minister (FM) for the first time in UF Govt. New DTC‘s
prospects will depend on the priorities of the next Govt. One should have
waited for the formation of the next Govt. post-general election and when
DTC would be on the agenda of the new Govt. whether the new FM would
like to go ahead with the draft prepared by Shri Chidambaram‘s team of
officers working in the Income Tax Dept. or he would like to start the
process de novo after discarding DTC, 2013 in the same manner as Shri
Chidambaram did in regard to DTC, 2010, prepared during the time Shri
Pranab Mukherjee was the FM in his taking over as FM in the 3rd term.
3. Why earlier attempts failed?
Regretfully, the position is that the exercise of enacting a new simple and
long-lasting consolidated Code for two Direct Taxes namely the Income Tax
Act, 1961 and the Wealth Tax Act, 1957 has been made a mess by Shri
Chidambaram himself by his overbearing self-righteousness attitudes,
approving only such drafts that suited his line of thinking and getting the
Code prepared as per his dictates through a set of officers working in the

2. Volume VIII Part 1 July 10, 2014 4 Business Advisor
I.T. Dept/CBDT under his control. This resulted in one after another draft
getting replaced because of various deficiencies noticed during discussions.
This resulted in three previous drafts titled Income Tax Bill, 1997, DTC,
2009 & DTC, 2010 becoming otiose to be superceded, resulting in 4th draft,
which has now been placed in the Finance Ministry‘s website for discussion
once again.
3.1 Briefly, the reasons for failure of attempts spreading nearly 18 years
could be summarised as under:-
 Hurried and ad hoc approaches;
 Non-clarity regarding what was intended to be achieved;
 Entrusting the work without any terms of reference to so-called expert
bodies;
 Not constituting an independent Commission of experts from different
disciplines, headed by a Judge of Supreme Court, to draft the new
Code, on the lines of Wanchoo Commission in the past or requesting
the Law Commission to do the job on the lines it drafted the present
I.T. Act.
4. The time, efforts and money spent in the previous 3 drafts have become
total waste because of ad hoc-ism and delays in the processes followed. The
same, it is feared, is expected to be the fate of the latest draft – DTC, 2013,
which will have to be re-christened in the year in which it is introduced in
the Parliament – may be year 2014 or 2015.
5. Salient aspects of the new Code – DTC, 2013
These are summarised in later discussion.
[A] Concerning Income Tax Act
[a] The Standing Committee on Finance (SCF), headed by Ex-Finance
Minister, Shri Yashwant Sinha, had recommended that the general initial
exemption limit be raised from Rs 2,00,000 to Rs 3,00,000 with adjustment
in slabs. This suggestion has not been accepted and the 2013 draft
The time, efforts and money spent in the previous 3 drafts
have become total waste because of ad hoc-ism and delays in
the processes followed.

3. Volume VIII Part 1 July 10, 2014 5 Business Advisor
continues with rates and slabs mentioned in draft DTC, 2010 on the ground
that the acceptance of these would lead to revenue loss of Rs 60,000 crore.
Existing slabs
[Rs in lakh]
Rates
Slabs
suggested by
SCF [Rs in
lakh]
Rates
2.5 10% 3-10 10%
5-10 20% 10-20 20%
Over 10 30% Over 20 30%
[b] The suggestion of the SCF to link the exemption limit to the consumer
price index has been rejected on the ground that the change in the base
year and the composition of the index is expected to complicate matters.
According to the FM, indexing the slabs to inflation indeed is not a
comprehensive approach, as the slab structure is dependent on a number of
factors, including other reliefs given to the taxpayer, potential revenue loss
to the Govt., the number of taxpayers, who would go out of tax net, etc.
[c] Suggestion regarding abolition of Security Transaction Tax (STT), as
suggested by the SCF has not been accepted. It has been argued that the
levy is needed to regulate day trading and the burden has been reduced
through as the rate has been reduced significantly.
[d] In 2010 DTC, tax rate for insurance companies was proposed @30% on
the ground that the tax base for a life insurance company is limited to the
surplus generated for the company in the shareholders account, while the
surplus determined in the policyholders‘ account (technical account) is not
taxable. Therefore, rate of tax on such companies is aligned with that
applicable to other companies, i.e. 30%. In the new draft, tax rate for
insurance companies has been retained at 15% instead of 30% as proposed
in the DTC, 2010.
[e] For life insurance products, where premium payable or paid does not
exceed 10% of the capital sum assured, any amount, including bonus, will
not be liable to tax.
[f] The Ministry has rejected the demand for allowing deduction for
corporate social responsibility (CSR) expenditure in backward regions and
districts. According to the Ministry, allowing deduction for CSR expenditure

4. Volume VIII Part 1 July 10, 2014 6 Business Advisor
would imply that the Govt. would be contributing one third of this
expenditure as revenue foregone.
[g] The new DTC proposes to allow tax deduction against interest on loans
taken from employer for self-occupied property in addition to home loans
from banks, a concession that was not offered in the DTC Bill, 2010. The
move follows a suggestion by the Parliamentary Standing Committee on
Finance but comes with a ceiling of Rs 1.5 lakh for purchase or construction
of house property and Rs 50,000 in the case of repairs. The move will come
as a boon for several employees, who can now hope to get additional tax
benefits from loans taken from employers.
[h] Changes concerning income from ‗house property‘
Existing position Proposed in the Bill
[i] Income from
house
property
Property not to include
property used for the
purpose of business or
profession
Property will not include
property used for
business or commercial
purposes.
[ii] Deduction for
interest
As indicated at S.No. [g]
earlier
As indicated at S.No. [g]
earlier
[i] Dividend exceeding Rs 1 crore will be liable to tax @10%
Under the present I.T. Act, as well as in the DTC Bill, 2010, the dividend
distribution tax is to be levied at the rate of 15%. No tax on dividends is
charged. The draft proposes tax at 10% on dividends exceeding Rs 1 crore.
[j] The new Code proposes a 35% tax rate for an individual and a Hindu
Undivided Family (HUF) having income exceeding Rs 10 crore. In the 2013-
14 budget, the FM had imposed a surcharge of 10% on those with taxable
income in excess of Rs 1 crore, pegging the number of such taxpayers at
42,800.
[k] Taxation on indirect transfers (like that in the case of Vodafone) has been
made more explicit. The proposals provide for a threshold of 20% of the
value of global assets to be located in India for triggering a tax incidence in
the country. Actually, the law proposed deviates from the recommendation
of the Shome Committee, which had recommended a 50% threshold limit.
This has been reduced to 20% on the ground that there could be situation
that a company has 33.33% assets in three countries but it will not get
taxed anywhere. Accordingly, the revised Code provides for a threshold of

5. Volume VIII Part 1 July 10, 2014 7 Business Advisor
20% of global assets to be located in India for taxation of income from
indirect transfer in India.
[l] More clarity on tax residency rule has been provided. As of now, a
company is a tax resident of India and subject to tax on worldwide income if
it is registered in India or during a year, the control of its affairs is situated
wholly in India. DTC, 2013 has brought more clarity for determining tax
residency and has retained the place of effective management norm from
DTC, 2010.
[m] Tax provisions concerning non-profit organisations have been
rationalised by taxing their surplus at a concessional rate of 15%, allowing
basic exemption limit of Rs 1 lakh and allowing all capital expenditure as
revenue outgoing. The draft Code also does not provide for specific modes of
investments. An NPO would be free to make its investments, other than the
limited prohibited modes of investments. Consequently, specific deduction
for accumulation and the provision for carry forward of deficit are proposed
to be removed.
[n] Settlement Commission scrapped. The DTC, 2013 has no provisions
relating to Settlement Commission.
[o] Weighted deduction for scientific research
DTC Bill, 2010 provides for weighted deduction of 175% to the donor on any
donation made by it to the specified institutions to be utilised by them in
scientific research. Weighted deduction of 200% is also provided for in-
house scientific research. Since the weighted deduction reduces the actual
expenditure on research and there is significant potential for its misuse, the
revised Code provides for weighted deduction of 150% for in-house scientific
research and 125% to the donor on any donation made by it to the specified
institutions.
[B] Changes concerning Wealth Tax
Significant changes concerning wealth taxation have been made. The
As of now, a company is a tax resident of India and subject to
tax on worldwide income if it is registered in India or during a
year, the control of its affairs is situated wholly in India.

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proposal is to tax financial assets also along with all physical/productive
assets. Wealth tax is proposed to be levied on individuals, HUFs and private
discretionary trusts at the rate of 0.25%. The threshold for levy of wealth-
tax in the case of individual and HUF shall be Rs 50 crore. These were the
rates and exemption limit in the DTC, 2009 also, which were revised in
DTC, 2010 as under during Shri Pranab Mukherjee‘s regime.
 Initial exemption limit: Rs 1 crore
 Rate of tax : 1% exceeding Rs 1 crore
No grounds have been given as to why the proposal concerning rate of tax
and threshold limit as contained in DTC, 2009, have been revised. Such low
rate of tax and fixing of exemption limit at Rs 50 crore neutralises the
expansion of tax base. Prima-facie also, the limit of Rs 50 crore is on the
high side and tax rate on the low side, for which no justification has been
given in the explanatory note appended to the DTC, 2013.
Summary of the article
The author, in this write-up, has discussed salient aspects of DTC, 2013 –
the 4th in the series presented by Shri Chidambaram as FM in his 3 tenures
in the GOI in a period of 18 years since his first tenure in the year
1996/1997. The exercises done in regard to first three drafts ended as futile
exercise because of the reasons stated, as no DTC could be enacted on the
basis of these drafts.
The same may be the fate of the 4th draft (DTC, 2013) because of change in
Govt. consequent to elections in May, 2014. The new changes in DTC, 2013
vis-à-vis DTC, 2010 have been highlighted. The author has expressed
surprise for keeping the exemption limit for wealth tax at Rs 50 crore (from
Rs 1 crore in DTC, 2010) and reducing the rate to 00.25% (from 1% in DTC,
2010) without mention of any pressing reasons. Such changes neutralise
the impact of expansion of tax base for wealth-tax levy.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)
Wealth tax is proposed to be levied on individuals, HUFs and
private discretionary trusts at the rate of 0.25%. The
threshold for levy of wealth-tax in the case of individual and
HUF shall be Rs 50 crore.