Direct Tax Code Bill deferred by a year

PrintPDF

The Direct Tax Code Bill has been delayed by a year in Parliament. The Bill will come into effect from April 2012.

The government tabled the Bill in the Lok Sabha. The Bill proposed to raise the exemption limit on income tax from the current Rs 1,60,000 to Rs 200,000.

The Bill, introduced by Finance Minister Pranab Mukherjee , seeks to widen income tax slabs to levy 10 per cent rate on income between Rs 200,000 and Rs 500,000, 20 per cent on between Rs 500,000-10 lakh and 30 per cent above Rs 10 lakh (Rs 1 million).

For senior citizens, tax exemption is sought to be raised to Rs 2,50,000 from Rs 2,40,000.

Currently, income between Rs 1,60,000-500,000 attracts 10 per cent tax; between Rs 500,000-800,000, 20 per cent and beyond Rs 800,000, 30 per cent.

The proposed tax slabs are much lower than originally suggested in the draft DTC Bill — 10 per cent for Rs 1,60,000 to Rs 10 lakh, 20 per cent between Rs 10-25 lakh (Rs 2.5 million) and 30 per cent for income above Rs 30 lakh (Rs 3 million).

The Bill seeks to fix corporate tax at the current 30 per cent but without surcharge and cess.

With surcharge and cess, the current tax liability on corporates comes to over 33 per cent.

The legislation also proposes to increase MAT from 18 per cent to 20 per cent of book profit of a company.

It seeks to levy dividend distribution tax at 15 per cent.

Income on non-profit organisations, exceeding Rs 100,000, is proposed to be taxed at 15 per cent.

When enacted, DTC will replace archaic Income Tax Act.

Govt to extend DEPB policy by six months

PrintPDF

In a move that would be certainly be welcomed by the country’s exporters and importers, the government has decided to extend the interest subvention plan on certain sectors while extending the Duty Entitlement Pass Book (DEPB) policy by another six months.

The Commerce and Industry Minister Anand Sharma, while reviewing the foreign trade policy 2009-14, announced that the interest subvention plan of two per cent for leather, jute and textile has been extended. The minister also said that bonus schemes for handicrafts and leather would also be introduced.

The DEPB scheme is an export incentive given by the way of grant of duty credit against the export product to promote diversification in exports.

The minister had earlier said that the government would not hesitate in assisting sectors that employed huge amount of people if they failed to achieve growth. Some of those sectors were handicrafts, textiles, leather, engineering goods, rice and carpets.

The other salient features of the review, include extension of zero duty Export Promotion Capital Goods (EPCG) scheme by one year.

The minister, however, noted that the recovery in exports so far has been fragile and that they are still facing challenge in the global markets.

Exports during the first four months of the financial year through July rose 30.1 per cent to $68.6 billion, whereas imports grew 33.3 per cent to $112.2 billion, resulting in a cumulative trade deficit of $43.6 billion. According to Commerce Secretary Rahul Khullar, it is not time to celebrate yet, as exports have not reached the pre-crisis level, when the average growth hovered between 18 per cent and 25 per cent.

In 2009-10, the estimated revenue loss on account of various export promotion schemes, including FMS, FPS, DEPB Scheme and SEZ, among others, was Rs 43,622 crore, compared to Rs 49,053 crore (provisional) in 2008-09.

India’s merchandise exports for the entire financial year 2009-10 fell 4.7 per cent to $176.5 billion, compared to $185.3 billion in 2008-09. The government has set a target of $200-billion exports for 2010-2011.

DTC: Companies foreign income may not be taxed

PrintPDF

If one takes out the 20% minimum alternate tax blow, the gist of the amended Direct Taxes Code maintains status quo. But, sources said, there are also some goodies penciled into the Bill for companies.

One of the moves unlikely to be implemented pertains to the anti-tax-avoidance measure adopted by the Ministry of Finance in thesecond draft of DTC.

In particular, to taxing foreign income of companies controlled by residents of India as dividend.

“The Controlled Foreign Corporation provisions will not be implemented, which is good for Indian companies,” said the source.

The second draft of the DTC had proposed to introduce Controlled Foreign Corporation provisions so as to provide that passive income earned by a foreign company, which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed.

“Consequently, it would be taxable in India in the hands of resident shareholders as dividend received from the foreign company,” the revised DTC draft had stated in June 2010.

But the view from North Block sources is that the proposal may not find its way into the final draft of DTC to be tabled in the Parliament

Meanwhile, speaking after the Cabinet cleared the amended DTC, finance minister Pranab Mukherjee said it corporation tax is sought to be retained at the present level of 30%, but there will not be any surcharge or cesses over and above it.

The bill, approved by Cabinet, also seeks to impose minimum alternate tax(MAT) at 20% of the book profit, compared with 18% at present.

The first draft had proposed to impose MAT on assets, which drew strong criticism from the industry. The MAT on book profit has been maintained in the revised draft as well.

The first draft had also proposed to tax long-term savings like provident funds at the time of withdrawal. However, the revised draft exempted them, after the first draft drew flak. “Concerns were expressed for shifting from EEE (exempt, exempt, exempt) to EET (exempt, exempt, tax),” the finance minister said.

Proposed DTC may make tax payers richer by Rs 41,040 annually

PrintPDF

People earning more than Rs 10 lakh a year may save up to Rs 41,040 in income tax, if slabs proposed by the Direct Taxes Code (DTC) bill come into effect, experts said.

Similarly, tax burden would reduce by Rs 21,540 for those earning annual income

According to the bill presented in the Lok Sabha, income from Rs 2-5 lakh is likely to attract tax rate of 10 per cent; 20 per cent in the Rs 5-10 lakh bracket and 30 per cent above Rs 10 lakh.

At present, income between Rs 1.60 lakh and Rs 5 lakh attracts 10 per cent tax, while the rate is 20 per cent for the Rs 5-8 lakh bracket and 30 per cent for above Rs 8 lakh.

The bill proposes to raise income tax exemption limit to Rs 2 lakh from the current Rs 1.60 lakh.

“For the individuals, DTC tax slabs are certainly beneficial. Their tax liabilities will go down,”. For senior citizens,exemption limit is proposed to be raised to Rs 2.5 lakh from Rs 2.40 lakh.

Individuals over 65 years, or senior citizens, could see tax burden lessen by Rs 4,420, if they earn Rs 5 lakh a year, while those earning Rs 10 lakh will save Rs 18,300 tax.

Senior citizens earning Rs 15 lakh annually could save Rs 37,800 in case the billis enacted.between Rs 5 lakh and Rs 10 lakh, while those making Rs 2 lakh to 5 lakh could be richer by Rs 7,660

Tax benefits on ELSS investments are expected to go by next April in new DTC

PrintPDF

Good things don’t last forever, goes the saying. Ask investors in equity-linked savings schemes.

For years, first-time investors tip-toed into stock markets through ELSS, earning handsome gains and pocketing the tax-savings. The mandatory three-year lock-in period was fine with them, since other similar tax-saving products had longer lock-in periods.

As investors poured into these schemes, dozens of schemes blossomed and the industry boomed.

Those days may be over. With the Union Cabinet clearing the new Direct Taxes Code (DTC) on Thursday, tax benefits on ELSS investments up to Rs 1 lakh are expected to go by next April. And investors looking for greener investment pastures are retreating from ELSS.

The numbers speak for themselves. In the financial year ended March 2010, there were at least 48 ELSS products, and the industry sold ELSS units worth Rs 3,600 crore, 8% more than the investments in the previous fiscal.

However, with the approaching tax-break sunset, there is a virtual stampede to exit these schemes, despite the fact that tax benefits continue for investments made in 2010-11. During April-July, ELSS investors redeemed Rs 340 crore, as against Rs 117 crore they invested during the same period last year. In July alone, investors have redeemed ELSS investments worth Rs 139 crore.

ELSS has served investors and the equity market well. For many investors, ELSS was the stepping stone to the stock market, which helped expand the equity culture.

Apart from the tax benefit, ELSS attracted investors because they were rather ‘liquid’ schemes. You could receive regular dividends throughout the lock-in period, if you opted for the dividend option.

In fact, ELSS is the only investment option under Section 80CC of Income Tax Act which provides interim cash flow during the lock-in period. Besides, while PPF, NSC and tax-free bank FD have a five-year lock-in period, ELSS is tax-free with a three-year lock-in. Mutual funds usually offer two types of ELSS: Open-ended and closed-ended.

The latest DTC paper mentions only six tax-free schemes enjoying the EEE (exempt-exempt-exempt) status. These are government provident fund, PPF, NPS, recognised PFs approved life insurance products and annuity schemes. Investments enjoying EEE status are tax-exempt during the three stages of investment, accrual and withdrawal.

DTC has also suggested that the rules for contribution and withdrawal be harmonised and made uniform so that savings are made by the taxpayer for the long term. There have been some voices of support for tax-minded investors, but there doesn’t seem to be many listeners. The Association of Mutual Funds of India (Amfi) has written to the Central Board of Direct Taxes (CBDT) to reconsider the case. “For retail investors, ELSS is a popular scheme as they get income tax deduction benefits,” says AP Kurian, chairman, Amfi.

Capital markets regulator Securities and Exchange Board of India (Sebi) too has asked CBDT to retain the tax benefits. However, experts do not have much hope on this: The revised discussion paper on DTC has not even touched upon this issue.

Srikanth Meenakshi, director, FundsIndia.com, an online investment service platform, says that the end of tax benefit will sound the death-knell for ELSS. “Without the tax benefit, it would be hard to make the case for a separate class of funds that looks and invests like any other broadly diversified equity fund,” Meenakshi underlines.

As ELSS tax benefits vanish, investors looking to save taxes would have to parktheir money up to Rs 1 lakh a year in employees provident fund, public provident fund, unit-linked insurance plans, pension plan premiums, life insurance premiums, National Savings Certificates, New Pension Scheme and five-year fixed deposits with banks and post offices. These investments are exempt from tax on annual income under Section 80CC of Income Tax Act.

In 2009, when Sebi banned entry load on mutual fund schemes, distributors stopped selling MF schemes and there were large redemptions. However, ELSS continued to clock steady inflows through the turmoil, ensuring long-term funds for the industry.

For years, from January to March, taxpayers flocked to mutual fund houses to purchase ELSS. Next year will be different.

DTC’s corp tax proposal to bring relief

PrintPDF

Tax experts said the government proposal to remove surcharge and cess from corporate tax to bring it down by 3 percentage points to 30 per cent will provide much needed relief to the industry and bring the levy on par with global standards.

However, they wanted the corporatetax rate to be even lower at 25 per cent, as was proposed in the draft of the Direct Tax Code bill.

After the Cabinet approved the Direct Taxes Code Bill, Finance Minister Pranab Mukherjee had said the corporate tax rate is sought to be retained at the present level of 30 per cent, but there will not be any surcharge or cesses on it.

The current tax rate for domestic companies, including surcharge and cesses, comes to about 33.22 per cent, while foreign companies pay over 40 per cent.

The bill sought to levy the same corporate tax rate on domestic and foreign companies.

The DTC Bill proposes to bring the taxability of Indian corporates at par with global standards . Indian is now going down towards a low tax country,

He said the government will gradually bring down the corporate tax rate to 25 per cent, as it needs some time to bridge the transition from a high tax country to a low tax one.

However, Ficci Taxation Advisor S B Gupta said, “The tax burden of corporates would come down. It would have been better if it was 25 per cent.”

In addition, the DTC also proposed to increase the minimum alternate tax rate to 20 per cent of book profit, from the current 18 per cent. However, under the current Income Tax Act, adding up the surcharge and cess would take the current MAT to 19.93 per cent.

The government has removed the concept of gross asset tax and has rounded off the MAT rate to 20 per cent to factor in surcharge and cess

MAT is a levy imposed on profit-earning companies that do not fall under the tax net due to various exemptions. MAT is creditable in the accounts of corporates as in the year they shift from MAT to corporate tax, the MAT paid can be carried forward for seven years. In a way, it acts like advance tax.

However, some experts said the increase in MAT will act as a dampener for corporates.

While the 30 per cent corporate taxis good keeping in mind that the government has to maintain its revenue collection, the MAT rate at 20 per cent is a kind of dampener, as the difference between the corporate tax and MAT is now getting narrower.

In the original draft of the DTC, the government had proposed to levy MAT on gross assets, which had evoked much criticism from companies.

As such, the second draft of DTC switched back to levying MAT on book profits