The document summarizes key aspects of India's proposed Direct Tax Code (DTC) which intends to replace the country's 50-year old Income Tax Act. Some key changes proposed in the DTC include removing most tax saving schemes, introducing a new EET system for taxing retirement savings instead of the current EEE system, modifying income tax slabs, and reducing the corporate tax rate from 34% to 30%. The DTC has faced criticism for potentially resulting in increased tax liability and litigation as well as not introducing significant simplifications to the tax system.

1. DIRECT TAX CODE FILMA VARGHESE TRADEMARK Department

3. DIRECT TAX CODE (DTC) Direct Taxes Code Bill, 2010 is intended to replace the 50 year old Income Tax Act of 1961. The current Income Tax Act, enacted in 1961, had replaced the pre-independence Income Tax Act of 1922. The government had announced its intension to introduce a revised and simplified Income Tax Bill while presenting the Union Budget for 2005-2006. In a surprise move and to the disappointment of tax payers, the government has fixed the implementation of the DTC to April 1, 2012. DTC bill was tabled in parliament on 3oth August, 2010. Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act Once enacted, DTC will replace archaic Income Tax Act and will change the tax structure of the country. However, many provisions in Income Tax Act will be a part of DTC as well.

4. SALIENT FEATURES OF THE DIRECT TAXES CODE BILL Removal of most of the tax saving schemes - DTC removes most of the categories of exempted income. Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits. New tax saving schemes: Tax saving based investment limit remains 1,00,000 but another 50,000 has been added just for pure life insurance (Sum insured is at least 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension scheme (NPS).

5. Tax slabs: The income tax rates and slabs have been modified. The proposed rates and slabs are as follows: Men and women are treated same now. Annual Income Tax Slab Up-to INR 200,000 (for senior citizens 250,000) Nil Between INR 200,000 to 500,000 10% Between INR 500,000 to 1,000,000 20%

6. EEE and EET: The Direct Tax Code (DTC), meant to replace the existing Income Tax Act, proposes to introduce the exempt-exempt-taxation (EET) regime for all retirement corpuses. In the current EEE regime, savings are exempt from tax in all the three stages: contribution, accretion and withdrawal. The EET method, which is considered to be the best global practice for taxation of savings, allows exemption at the first two stages, but provides for a tax on withdrawals at the personal marginal rate. Under the EET regime, all the long-term savings instruments such as EPF, PPF and superannuation funds will be taxed on withdrawal or maturity – a stark difference from the exempt-exempt-exempt or EEE regime, where one gets a tax exemption at all the three stages (savings, accretions and withdrawals). It has also been proposed that all types of insurance policies will come under the purview of EET, except the term policies. For an investor in these traditional instruments, if the EET regime is implemented, there could be a significant change for his/her final corpus because of the tax incidence. If taxed at existing rates, it could hurt finances quite significantly.

7. There is some small relief. If the individual reinvests this retirement corpus in a government-approved provident or superannuation funds, life insurance policies and the new pension scheme, and withdraws in parts, the tax liability will be only on the amount withdrawn. In other words, instead of paying a tax on the entire amount, smaller withdrawals will ensure lower tax liability. In addition, since these instruments will pay interest on the corpus, some of the liability will get offset. In the original DTC, the finance ministry had proposed to levy tax at the time of withdrawa l of savings, making it exempt-exempt-tax (EET). As a large number of people protested against EET method, in the bill, the government has proposed not to tax withdrawal of any amount of accumulated balance as on March 31, 2011, in provident funds and Public Provident Fund. In other words, only new contributions on or after the commencement of this Code will be subject to the EET method of taxation. However, for individuals, the bill has proposed to continue with exempt-exempt-exempt (EEE) method of taxation on investments up to Rs 3 lakh in a fiscal year in provident fund, pension fund and pure life insurance products.

8. 5. Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-occupied property. This also did not figure in the original discussion paper circulated in August 2009. But in the revised discussion paper in June 2010, the finance ministry proposed to continue with the tax benefit on home loan, accepting the request of the construction sector. The repayment of principal of your home loan will not be eligible for tax deduction under the DTC. 6. Short and long term gains: Only half of Short-term capital gains will be taxed. E.g. if you gain 50,000, add 25,000 to your taxable income. 7 . Long term capital gains: (From equities and equity mutual funds, on which STT has been paid) are still exempted from income tax.

9. Education Cess: Surcharge and education cess are abolished. 9. For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent. 10. Leave Travel Allowance: Tax exemption on LTA (leave travel allowance) is abolished. 11. Medical reimbursement: Max limit for medical reimbursements has been increased to rupees 50,000 per year from current rupees 15,000 limit. 12. Tax on dividends: Dividends will attract 5% tax. 13. Taxation of Capital gains from property sale: For sale within one year, gain is to be added to taxable salary.

10. 14. Educational Loan: Tax exemption on Education loan to continue. 15. Corporate Tax: Corporate tax reduced from 34% to 30% including education cess and surcharge. 16. MAT: For companies paying MAT, there is relief in the form of a continuation of the system of assessment on book profits. While MAT credit can be carried forward for 15 years, the rate is being increased to 20 per cent from 19.93 per cent, including cess and surcharge.

11. 14. Educational Loan: Tax exemption on Education loan to continue. 15. Corporate Tax: Corporate tax reduced from 34% to 30% including education cess and surcharge. 16. MAT: For companies paying MAT, there is relief in the form of a continuation of the system of assessment on book profits. While MAT credit can be carried forward for 15 years, the rate is being increased to 20 per cent from 19.93 per cent, including cess and surcharge.

12. It may be inadvisable to disturb settled concepts. Otherwise, the DTC could result in large scale litigation that would take few decades to settle and ultimately, will meet the same fate as the Income-tax Act. The DTC also has to be fair, equitable and clear. People may need lump sum funds on retirement for various family obligations. Requests have, therefore, been made for continuation of EEE method of tax treatment of investments. Alternatively, the application of EET should be restricted to new savings instruments after the date from which the DTC comes into effect, and it should not apply to existing saving instruments. Investment in Senior Citizens Savings Scheme may also be brought within the scope of EEE, since this scheme is for the benefit of the senior citizens, who are eligible for deduction in respect of investment in this scheme as per the present provisions of the Income-tax Act, 1961. The inclusion of this scheme under EEE would also be in line with the overall objective of the Government to promote welfare schemes for senior citizens (like Reverse Mortgage Scheme, higher basic exemption limit, higher rate of interest on deposits etc.). SUGGESTIONS

13. The Government has given a special additional deduction of up to Rs.20, 000 for investment in infrastructure bonds during the F.Y.2010-11, as a measure for promoting infrastructure development. Therefore, to achieve this objective, the Government may consider inclusion of infrastructure bonds under the instruments qualifying for EEE. An exemption may be introduced in respect of leave travel concession as well in line with the provisions of the Income-tax Act, 1961. This is necessary since a large number of people move from their native towns and villages to big cities for earning a living. Their regular income would be sufficient for their re-settlement (housing), and other day to day expenditure and savings. Therefore, in order to satisfy the social need of people to meet their family at least one a year, an exemption may be introduced for reimbursement of travel expenditure to home town. An exemption for leave travel concession in general would also, inter alia, serve to promote the tourism industry.

14. The set pattern of tax laws – of first defining the chargeability, then classifying, computing, aggregating and quantifying income is not followed under the new direct tax code. Under the code all rights and obligations of the tax payer and the tax administration will be in reference to ‘financial year’. The law remains as complex as before as it is only an amalgamation of the Income Tax Act, 1961 and the Wealth Tax Act, 1957. The code does not introduce any new concepts and litigations will continue unabated under it. CONCLUSIONS

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