FORTY-NINTH REPORT - THE DIRECT TAXES CODE BILL, 2010

Income Tax : Highlights of Report of Standing Committee on Finance on Direct Taxes Code Bill, 2010 presented to Speaker on 9-3-2012

   •  Personal Income-Tax exemption limit (i.e. tax slab attracting nil rate or full exemption from income tax limit) be increased from Rs. 2 Lakhs proposed in the DTC Bill to Rs. 3 Lakhs

Income-tax Rates

   •  Recommended revised tax slabs for personal income-tax

   •  Exemption-limit be statutorily linked to changes in Consumer Price Index so that exemption limit will be automatically and periodically adjusted for inflation facilitating tax planning.

Wealth tax Rates

   •  Wealth Tax exemption limit recommended to be increased from Rs.1 crore as proposed in DTC Bill, 2010 to Rs. 5 crores.

   •  Instead of flat 1% wealth tax as proposed in DTC Bill for wealth in excess of Rs. 1crore, wealth tax recommended on slab basis as under:

   •  Onus of proving tax avoidance for GAAR (General Anti Avoidance Rules) provisions should rest with Department, not with taxpayer

   •  Orders of CIT invoking GAAR should be reviewed not by Dispute Resolution Panel (DRP), as proposed by DTC Bill as it is a purely departmental body, but by an independent body

   •  Provisions for enforcing accountability of Assessing Officers recommended - Unreasonable tax demands raised and adjudicated, if finally quashed at higher levels, should be adversely reflected in the career dossier of the concerned officials. Proper disciplinary action should be taken against such officials responsible

   •  Regime for Tax consolidation of group entities at the option of taxpayer recommended (As tax consolidation regime seeks to eliminate multiple levels of taxation of income generated within a group, reduce compliance costs and lower the effect of tax incidence on the competitiveness of corporate groups)

   •  Extensive rule-making powers in the Code criticized some 200 clauses in Code expressly leave scope for rule-making  substantive matters conferring discretionary powers to tax authorities and matters impinging on vital taxpayer-interest recommended to be brought in the Code itself.

   •  To reduce plethora of litigation, setting up special courts comprising of experts to dispose of cases in a "fast track" manner has been recommended.

   •  The period of stay for NRIs to retain their non-resident status recommended to be restored to the existing 182 days as in the 1961 Act instead of 60 days as proposed in DTC Bill, subject to two conditions, namely

(i) each person claiming NRI status should simultaneously indicate the tax jurisdiction in which he is resident and,

(ii) that all cases of fraud should be severely dealt with and nobody is allowed to become a global non-resident.

   •  Proposal in Clause 5(1)(d) read with Clause 5(4)(g) and Clause 5(6) of Code to tax income of a non-resident, arising from indirect transfer of capital asset, situated in India - As regards this, exemption to transfer of small shareholdings and transfer of listed shares outside India recommended to avoid hardship to the non-resident shareholder.

   •  Clause 5(2) of DTC Bill be modified in order to clearly provide that import freight received by non-resident engaged in shipping business outside India is not deemed to accrue in India.

   •  Clause 27 of the DTC Bill be amended to cover unrealized rent, which is the case under the prevailing Income Tax Act.

   •  Quantum of standard deduction permissible in computing Income from House Property be raised to a more reasonable percentage.

   •  Clause 31 "Business when treated distinct and separate" be deleted as this Clause would increase administrative hassles for the assessee with no appreciable benefit to the revenue authorities. Since business losses are fungible, this provision would not serve any useful purpose. The deeming fiction of treating business as distinct and separate based on the capability of maintaining separate accounts would fuel litigation as it is a very subjective criteria. Further, profit linked incentives are proposed to be phased out under the Code, so such separate computation of business profits would not have much of a relevance.

   •  Clause 33(1) of the DTC Bill be modified so that only revenue receipts are taxed as business income and capital receipts are not so taxed.

   •  The Tax-exempt sum assured to premium ratio in case of life insurance policies be increased from 5 times the annual premium (as in existing Income-Tax Act, 1961) to 10 times as against the rather drastic increase of 20 times proposed in DTC Bill, 2011. The increase in ratio should apply only on policies sourced post-implementation of the Code and not to old life policies purchased before effective date of DTC Bill.

   •  Pay-backs of sum assured under money back policies and accrued bonuses should be treated as "sum assured" payable on the happening of certain event of life and should not be taxable under the Code.

   •  Limit for deduction to individuals and HUFs under clauses 70-72 of the DTC Bill ( for tuition fees, life insurance premium and health insurance premium) recommended to be increased from Rs.50,000 proposed in clause 73 of DTC Bill to Rs.1,00,000. Further, additional deduction on account of health insurance premia paid for dependent parents to the tune of Rs. 20,000 may be separately allowed with a view to promoting social security for senior citizens. This may also include dependent grand-parents.

   •  Since higher education, particularly professional education has become extraordinarily expensive for ordinary citizens of the country, similar additional deduction to the tune of Rs. 50,000 recommended for this purpose over and above the deductions suggested above in clauses 70, 71,72,73.

   •  Limit of deduction Rs.1,00,000 proposed in clause 69 of the Bill, which is same as present section 80C, for contributions to approved funds recommended to be increased to Rs.1,50,000.

   •  Exemption for interest on housing loan for self-occupied house property mentioned in clause 74 of the DTC Bill be modified so as to include in its ambit loan taken from all types of employers apart from financial institutions.

   •  Qualifying condition of loan taken for higher education from a financial institution alone as specified in Clause 75(1) may be relaxed so as to facilitate borrowing from other institutions or self-help community groups as well.

   •  Proposed monetary limit of Rs. 2,000 per month for rent paid in clause 80 of the Bill which is same as present section 80GG be increased to Rs. 5,000 per month. The limit be periodically revised in sync with prevailing market conditions.

   •  Existing exemption from taxation of perquisite in the form of premium paid or reimbursed by an employer to keep in force an insurance policy on the health of family members of an employee proposed to be omitted by DTC Bill recommended to be retained to avoid hardships to employees.

   •  ESOPs as a perquisite be taxed only at the time of sale/alienation instead of at the time of vesting as proposed by DTC Bill.

   •  Observation of the committee as to the Basic Structure of the Code :

"As regards the tax law being simple and comprehensible, the Committee find that the bulkiness of the statute has been sought to be reduced by creating large number of Schedules containing detailed provisions similar to the clauses in the main body of the Bill, creating more confusion than clarity, which may also compound the problems for the courts to interpret. The arrangement of chapters and sequence of clauses lack coherence. The Committee observe that the purpose of simplicity is not served by transferring substantive provisions to the Schedules, which may weaken the main clauses and also require frequent cross-referencing. Similarly, the Committee note that some definition provisions like Clause 314 have been sequenced towards the end of the Code, rather than at the very beginning as per established practice. The Committee therefore, desire that the Ministry should have a re-look at this structure and ensure that Chapters/clauses are self-contained and easy to comprehend and make use of. The Committee would like the structure and content of Income Tax law to be more user-friendly.”

Personal income tax exemption expanded and wealth tax restructured; GAAR safeguards and independent review recommended to reduce uncertainty. The Committee recommends raising the personal income tax exemption and restructuring progressive tax slabs with CPI linkage; substantially increasing the wealth tax threshold and adopting slabbed wealth rates; imposing safeguards on GAAR by placing the onus of proof on the Department and requiring independent review of GAAR orders; restoring a longer NRI non residence stay subject to disclosure and anti fraud conditions; and advancing administrative reforms including assessing officer accountability, optional group tax consolidation, limitation of delegated rule making, and targeted technical amendments on indirect transfers, shipping freight, house property, life insurance treatment, ESOP timing, and enhancement of individual deductions.