How the Direct Tax Code will affect you

By Suresh V Swamy – Executive Director and Amee Gala – Manager PricewaterhouseCoopers (PwC)

Is today a taxing Monday? The Direct Tax Code (DTC) bill has been introduced in Parliament on Monday. If you wonder whether that concerns you, then yes, as effective from April 1, 2012, it is likely to replace the Income-tax Act of 1961 under which you currently pay tax.

The fine print of the revised DTC bill which is eagerly awaited will be the third update of the Government’s proposal on the DTC (after its introduction in August 2009 and the release of the revised discussion paper in June 2010). There have been enormous discussions around what this bill will offer against its earlier versions and the existing Act.

As an individual tax payer, the key watch-out areas, include –

-Income tax slabs

-Capital gains tax regime

-Tax implications on withdrawal of retirement savings

-Wealth tax

There have been considerate amount of discussions on a favourable change in the income tax slabs as against the current slabs, though not as beneficial as the original DTC. This includes - increase in the income-tax threshold for exemption and no additional levy of surcharge and education cess. It will be very interesting to wait and watch what the bill contains finally and whether individual tax payers get any substantial relief from tax.

If the capital gains tax regime introduced in the bill is in line with the revised discussion paper on the DTC, there will be adverse tax implications mainly on sale of listed securities on the exchange.

Currently under the Act, no tax is required to be paid on securities held for more than a year from the date of acquisition and sold on the stock exchange on which securities transaction tax is paid. In addition to this, for securities held for less than one year, the tax liability is restricted to 15 per cent. However, under the DTC, there has been some relief granted to the tax payers by providing for a specified percentage deduction from income / indexation benefit depending on the nature of security on assets held for long term. However, in case of short term assets, there is no relaxation to the tax payer and tax will be required to paid as in case of any other ordinary income.

Also, as per the revised discussion paper on the DTC, the security will be required to be held for a period of one year from the end of the financial year in which it is acquired to be construed as long term. This could lead to a scenario, wherein a security acquired in the beginning of the financial year may be required to be held for almost 24 months to consider the gains arising from sale of such securities as long term capital gains. This may also, result in an overall preference to acquire securities towards the end of a financial year.

There were also certain news reports that indicate that the Government had decided to maintain status quo on capital gains taxes. It is unclear whether the status quo is with respect to the current law or with respect to the proposals contained in the revised discussion paper.

The Government has also proposed to restore back the taxation of retirement savings, in the nature of provident fund contributions and pure life insurance and annuity products, to the Exempt-Exempt-Exempt (EEE) scheme from the earlier proposition of Exempt-Exempt-Tax (EET) scheme under the revised discussion paper in the DTC. This will be a good relief for the retired individuals given that the Indian economy does not have a social security system in place and also considering the inflationary pressures on the economy. It is pertinent to note that the EEE scheme does not seem to be extended to ULIPS, ELSS, etc. which may still be governed by the EET scheme of taxation from a prospective basis unless the Government includes these also under the EEE net in the bill.

Wealth tax under the provisions of initial DTC, was required to be paid only on wealth in excess of Rs 50 crores at a tax rate of 0.25 per cent but on all assets including financial assets, i.e., investments in shares. Under the current tax regime, wealth tax is required to be paid @ one per cent on wealth in excess of Rs 30 lakhs. The Government, however, under the revised discussion paper has stated that the exemption limit from wealth tax is substantially high and that unproductive assets may not be subject to wealth. It will be interesting to know finally how much wealth the government exempts from tax under the bill and whether investments in shares and other securities will be included for wealth tax purposes.

Considering that the revised discussion paper had addressed the major concerns that the industry at large had placed before the Government, it will be very interesting to read and analyse the DTC bill to know whether the UPA Government achieves in reducing the aam aadmi’s tax burden and its proposition to make the DTC a simple and predictable one.

Source: Moneycontrol.com