PROS AND CONS OF DIRECT TAXES CODE

Direct Tax Code does not have much for common man

Direct Tax Code (DTC) Bill, which aims to replace the existing Income-Tax Act, 1961, has finally been presented in the Parliament and once approved by both Houses, it will be enacted as a law, effective from April 1 2012.

The Direct tax Code Bill 2010 (DTC), , has given relief to the property owners on two major account, firstly, no deemed taxation for House Property and secondly, deduction for interest for self occupied house property.' While, the concept of deemed taxation of more than one house property has been done away with and their expectation of a simple mechanism of taxation of rental income has also been considered to a great extent.

It was supposed to put a lot of money back into the wallet of the common man. However, the Direct Taxes Code Bill, 2010, which was tabled on August 30, did not fulfill that promise. Sure, it will definitely help people save some more on taxes.

The new code will affect the corporate debt restructuring (CDR) activities in India and some experts say that the clause included is vague and could lead to litigations. The CDR solutions may not include loan waivers but could include cases with rescheduled repayment or partial waiver.

Meanwhile, the bill also includes a lot of changes but the experts say it a lot low key than the promises made in the draft version of the bill. The draft bill called for dropping exemptions on provident funds and life insurance at the time of withdrawal and medical insurance.

Salaried taxpayers may have less kitty for holidays from April 2012, with the government proposing to scrap tax incentives on leave travel allowance in the new direct tax regime DTC.

While DTC proposes to retain exemptions such as house rent allowance and leave encashment, it seeks to remove LTC from the list. The exemption limit for medical reimbursements, however, is sought to be increased.

The revised DTC intends to continue tax deduction on the interest paid on home loans up to Rs 1.5 lakhs for purchase or construction. In the original code released last year, it had been proposed to do away with the tax deduction on the interest paid on home loans. The restoration of this exemption facility spells relief to homebuyers, and will encourage them to buy residential properties.

The Government has also proposed only a marginal raise in income tax exemption for investment in approved funds, insurance schemes and tuition fee to Rs 1.5 lakh in a year, from Rs 1.2 lakh currently.
It seeks to provide income tax exemption on investment of up to Rs 1 lakh in approved funds. Besides, it proposes to provide exemption of up to Rs 50,000 on investments made in insurance, including health cover, and tuition fee.
Currently, investment up to Rs 1 lakh in approved funds and insurance schemes is exempt from income tax. For this fiscal, investment up to Rs 20,000 in infrastructure bonds have also been given this benefit.
The exemptions proposed in the DTC bill are much lower than Rs 3 lakh suggested in the first draft.

The DTC Bill has three income tax slabs with a tax rate of10 per cent tax for income between Rs 2-5 lakh, 20 per cent for earnings between Rs 5-10 lakh and 30 per cent on income above Rs 10 lakh. The bill also calls for exemption level of Rs 1.6 lakh to be increased to Rs 2 lakh from April 1, 2012. The bill also includes the tax exemption for senior citizens to Rs 2.5 lakh from Rs 2.40 lakh.

The bill does not present differentiated rates for men and women unlike the present structure. The tax incentives include deduction of up to Rs 1 lakh for approved long- term savings such as provident funds, superannuation funds, gratuity and pension funds.

On the positive note, the new proposal aims to abolish the distinction between the individual and a women tax payer, bringing both of them at par — at least as far as payment of taxes is concerned. But given the rising cost of living with each day, an additional disposable income of about Rs 4,000 and Rs 1,000, respectively, does not sound much appealing.

The revised Direct Tax Code (DTC) has removed a clause that gave wide powers to investigating officers conducting raids on jewellers, thus bringing relief to the industry, said a chartered accountant and a leading trade body.

The Direct Taxes Code, which was recently tabled in the Parliament has as one of its noble objectives, reducing the uncertainty and litigation for the foreign investors. However, the recent version of the Bill may have just done the opposite for the Foreign Institutional Investors (FIIs). One hopes that some of these proposals are unintended and when the Standing Committee reviews the Bill, they will be suitably amended.