Direct Taxes

Assignment
 Direct Taxes
Assignment

What is Direct Tax Code and How does it impact

a common person

There is going to be some really big changes in Taxation laws if “Direct Tax Code” comes
into existence year 2011 . There are some big changes proposed in the Draft , which if
implemented will be the biggest ever change in Tax laws and will impact people in a big
way .Let us see what are the changes Proposed and How they will affect you .
What is Direct Tax code ?

The Finance Ministry has released a new draft direct tax code, which is a document
containing changes in Exemptions , Tax slab . This will be a big change to four-decades old
Income Tax Act . As per the proposal , the new tax slab would be

• 0% : Less than 1.6 lacs

• 10% : 1.6 – 10 Lacs
• 20% : 10 – 25 Lacs
• 30% : 25+ Lacs

This sounds really amazing , almost 98% of Indians will then pay 10% or less tax because
majority of people taxable income is below 10 Lacs

Finance Minister Pranab Mukherjee had declared that he would present a new Direct tax code
which would replace the Income Tax Act of 1961. The code also ensures that we will not
have any confusion over assessment year and financial year and previous year. It will be
about financial year.

Highlights of the Direct Tax Code:

1. No tax on annual income upto Rs.1.60 lakh

2. 10% tax for Rs 10 lakh income; 20% for Rs.25 lakhs and 30% for over Rs.25 lakhs
3. Corporate tax to come down from 30% to 25%
4. Wealth tax on wealth over Rs.50 crore
5. Increase deduction limit for savings upto Rs.3 lakhs
6. Interest on savings to be taxed
7. Security transaction tax (STT) to be abolished
8. To do away with long, short-term capital gains differentiation
9. Base year for calculation of capital gains tax moved to Apr '00
10. Allow indefinite carry forward of business losses
11. No tax deduction on interest payable on any Govt security
12. Rationalization of taxation of all non profit organizations
13. Annual disclosure of profits of non-life insurance business
14. Reintroduction of tax on long term capital gains on securities trading
15. Foreign companies to pay additional tax of 15% as branch profit tax

Though it has so many advantages listed above but since it is just declared the New Tax
System all are finding the Advantages behind this New Tax Code System but as every coin
has two sides there might be some disadvantages too. It was also came to understand that the
tax brackets has changed but the tax limit for housing loan Interest payment is reduced also
for the rented house the tax limit has changed from 30% to 20% and many others.

Since it is just few days have gone declaring the Tax Code system. It is difficult to find the
shortfalls of the system.

The Finance Minister recently announced the proposed Direct Tax Code effective April 2011.
The code aims at a comprehensive reform in the sphere of personal and corporate taxation.
To safe guard the interest of business, industry and workmen there are number of chambers
of commerce and Trade Unions but for common self employed people and retired people
there are none. The Code is open for Public discourse hence it should be debated, discussed
and recommendations need to be sent to finance Ministry.

There is a great difference between" Code" and the "ACT". The government is trying to bring
in Direct Tax Code" instead of present system of "Tax under Finance Act".
The Code would be permanent affairs like "Cr P C" or "I PC". Once tax act is converted into
a code it would generally not be necessary to introduce changes every year along with
budget. This is a reform which the government wants to bring in for the good of the people.
The code has proposed no change in the exemption limit of the personal tax. It remains
1,60000 for men,1,90,000 for women and 2,40,000 for senior citizen. Yet percentage of
taxation has been reduced up to income of Rs.Ten lakh.

Prima facie, the tax liability will reduce significantly as the draft code proposes to tax
incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in
excess of that at 30%. Now people pay 10% tax only if his income is less than Rs Three lakh.
A person drawing Rs 10 lakh now pays Rs 2.11 lakh as tax. If Code is implemented he would
pay tax amounting to Rs 84,000/- only. Is it not really good?

But all deduction now under 80 c will vanish as it is available now except for a few like new
pension schemes, LIC etc! This means death nails on small saving schemes. However
deduction under 80 C will be enhanced from Rs one lakh to Three lakh. This allowance
would surely help generation next. But the exemption on retirement benefits would vanish.
The retirement savings will become taxable on withdrawal, as the draft code has proposed to
usher in exempt-exempt-tax (EET) regime. The PPF and PF will loose all its glamour and tax
benefit.

For younger Home owner there is a bad news too, the deduction of Rs 1.5 lakh allowed on
interest paid on home loans appears set to be scrapped. There is no mention of such a
deduction being allowed in the draft code. Young people will not get tax benefit.

On implementation of the code all perks would considered part of the gross salary for the
purpose of taxation. The impact of that on tax liability of an individual will be known only
when the rules are prescribed by the income-tax department at a later date.

But there would be equity in the tax system both vertically and horizontally across all
sectors.The tax treatment of the perks enjoyed by the government employee and the private
sector employee will be the same. Till now government sector was in advantage!

It has also proposed that benefits such as gratuity payment made to employees on change of
jobs will be allowed tax exemption only if it is invested in a retirement fund.
The most significant reform would be to bring in the EET regime for all approved provident
funds, approved superannuation funds, life insurance and New Pension System trust from
April 1, 2011 . The PF and PPF were under EEE system now. This benefit will vanish. The
amount would be taxed on the year of withdrawal. This would hurt middle class and specially
retired lot.
However, the proposed code provides that the withdrawal of any accumulated balance as on
March 31, 2011 , from the specified instruments such as PPF will not be subject to tax. The
senior citizen should not withdraw amount in a hurry to save tax. Because, where ever they
invest the interest would be taxed. The money in PPF should be kept there itself, if possible,
as the interest earned would be exempted from tax. When ever emergent requirement occurs
then only it should be taken out after paying tax .In that event tax incidence would be much
lower. Of course, the rollover from one exempt fund to another fund will not be subject to
tax. This means from PF or PPF you can transfer it to NSC and NPS without attracting tax...
The code has proposed to continue with other deductions such as medical insurance premium,
medical treatment or maintenance of disabled dependent, treatment for specified diseases for
self and dependents, for the handicapped, interest on loan taken for higher education, rent
paid for residence, donations to certain non-profit organisations and specified institutions and
tuition fees for children.

The long term capital gain tax on equity based instrument was exempt from Taxes till now.
But if code is approved it would be taxed like short term capital gains. This would affect the
sentiments of investors. Now mutual fund investor would prefer to invest in dividend mode
for the dividend would remain exempt from tax.
It appeared that for middle class two things would adversely effect.
The taxation on withdrawal of PPF and PF and withdrawal of long term capital gains tax. The
code was released for Public response. It would not be wise to sleep over it. Posterity would
blame if present generation do not participate in such reform process for common people.

 Advantages of the New Direct tax Code

• As per the new Tax Code, incomes up to Rs 10 lakh will be taxed at 10 per cent,
those between Rs 10 lakh to Rs 25 lakh at 20 per cent, and above Rs 25 lakh at 30 per
cent. The level for tax exemption would remain the same, i.e., at Rs 1.6 lakh, Rs 1.9
lakh and Rs 2.4 lakh for individuals, women and senior citizens, respectively.
 Table : New Proposed Tax Slabs
Tax Rate Existing Income Slab (Rs) Proposed Income Slab (Rs)
Nil Up to Rs 1,60,000* Up to Rs 1,60,000*
Individuals 10% 1,60,001 – 3,00,000 1,60,001-10,00,000
20% 3,00,001 – 5,00,000 10,00,001-25,00,000
30% Over 5,00,000 Over 25,00,000
* Minimum slab changes to Rs 1.9 lakh for women and Rs 2.4 lakh for senior
citizens

• Deductions allowed on investments in specified instruments under Section 80C would be

raised from Rs 1 lakh to Rs 3 lakh, boosting one’s savings further. The investments of Rs 3
lakh will combine all benefits, including the one available on home loan payments.

• Deduction for actual interest on loan taken for higher education would continue.

• Wealth will be calculated on net basis, i.e., asset value less debt, but it will include all assets
including shares. The wealth tax will be applicable on assets worth more than Rs 50 crore, at
0.25 per cent. Presently, wealth tax stands at 1 per cent for assets above Rs 30 lakh.

• Securities Transaction Tax (STT) will be abolished, a move which will spur the volume and
trading among individuals.

 Disadvantages of New Direct tax Code

• Withdrawals from saving schemes such as Employee Provident Fund (EPF), Public
Provident Fund (PPF), Gratuity Provident Fund (GPF), approved superannuation
benefits, and life insurance would follow Exempt, Exempt and Tax (EET) structure,
i.e., it would be included in the individual’s income during the relevant year and taxed
accordingly. The newly-introduced New Pension System (NPS) will continue to be in
EET regime. However, withdrawals from accumulated balance till March 31, 2011
 will not be taxed. Again, the retirement benefits would be exempt from taxes if saved
in the Retirement Benefit Amount (annuity). However, the proceeds from life
insurance policy, including bonus, would be exempt from tax if it is a pure life
insurance policy.

• There will not be any tax deduction available on home loan interest up to Rs 1.5
lakh. The government aims to club this benefit under the saving limit of Rs 3 lakh.

• Employee benefits such as rent-free accommodation, medical reimbursements, leave

travel concessions, etc., would be clubbed together in an individual’s income.
Through this new Tax Code the Finance Minister has envisaged a uniform tax
structure for all, individuals as also corporate. But it is speculated that it will take
2011 to bring the new tax code into reality as the final hearing would take place after
the bill being placed in the parliament during winter session of 2009. It will include a
proper discussion involving all the points mentioned earlier.

What is Direct Tax Code and How does it impact

a common person

There is going to be some really big changes in Taxation laws if “Direct Tax Code” comes
into existence year 2011 . There are some big changes proposed in the Draft , which if
implemented will be the biggest ever change in Tax laws and will impact people in a big
way .Let us see what are the changes Proposed and How they will affect you .

What is Direct Tax code ?

The Finance Ministry has released a new draft direct tax code, which is a document
containing changes in Exemptions , Tax slab . This will be a big change to four-decades old
Income Tax Act . As per the proposal , the new tax slab would be

• 0% : Less than 1.6 lacs

• 10% : 1.6 – 10 Lacs
• 20% : 10 – 25 Lacs
• 30% : 25+ Lacs

This sounds really amazing , almost 98% of Indians will then pay 10% or less tax because
majority of people taxable income is below 10 Lacs

Finance Minister Pranab Mukherjee had declared that he would present a new Direct tax code
which would replace the Income Tax Act of 1961. The code also ensures that we will not
have any confusion over assessment year and financial year and previous year. It will be
about financial year.

Highlights of the Direct Tax Code:

1. No tax on annual income upto Rs.1.60 lakh

2. 10% tax for Rs 10 lakh income; 20% for Rs.25 lakhs and 30% for over Rs.25 lakhs
3. Corporate tax to come down from 30% to 25%
4. Wealth tax on wealth over Rs.50 crore
5. Increase deduction limit for savings upto Rs.3 lakhs
6. Interest on savings to be taxed
7. Security transaction tax (STT) to be abolished
8. To do away with long, short-term capital gains differentiation
9. Base year for calculation of capital gains tax moved to Apr '00
10. Allow indefinite carry forward of business losses
11. No tax deduction on interest payable on any Govt security
12. Rationalization of taxation of all non profit organizations
13. Annual disclosure of profits of non-life insurance business
14. Reintroduction of tax on long term capital gains on securities trading
15. Foreign companies to pay additional tax of 15% as branch profit tax

Though it has so many advantages listed above but since it is just declared the New Tax
System all are finding the Advantages behind this New Tax Code System but as every coin
has two sides there might be some disadvantages too. It was also came to understand that the
tax brackets has changed but the tax limit for housing loan Interest payment is reduced also
for the rented house the tax limit has changed from 30% to 20% and many others.

Since it is just few days have gone declaring the Tax Code system. It is difficult to find the
shortfalls of the system.

The Finance Minister recently announced the proposed Direct Tax Code effective April 2011.
The code aims at a comprehensive reform in the sphere of personal and corporate taxation.
To safe guard the interest of business, industry and workmen there are number of chambers
of commerce and Trade Unions but for common self employed people and retired people
there are none. The Code is open for Public discourse hence it should be debated, discussed
and recommendations need to be sent to finance Ministry.

There is a great difference between" Code" and the "ACT". The government is trying to bring
in Direct Tax Code" instead of present system of "Tax under Finance Act".
The Code would be permanent affairs like "Cr P C" or "I PC". Once tax act is converted into
a code it would generally not be necessary to introduce changes every year along with
budget. This is a reform which the government wants to bring in for the good of the people.
The code has proposed no change in the exemption limit of the personal tax. It remains
1,60000 for men,1,90,000 for women and 2,40,000 for senior citizen. Yet percentage of
taxation has been reduced up to income of Rs.Ten lakh.

Prima facie, the tax liability will reduce significantly as the draft code proposes to tax
incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in
excess of that at 30%. Now people pay 10% tax only if his income is less than Rs Three lakh.
A person drawing Rs 10 lakh now pays Rs 2.11 lakh as tax. If Code is implemented he would
pay tax amounting to Rs 84,000/- only. Is it not really good?

But all deduction now under 80 c will vanish as it is available now except for a few like new
pension schemes, LIC etc! This means death nails on small saving schemes. However
deduction under 80 C will be enhanced from Rs one lakh to Three lakh. This allowance
would surely help generation next. But the exemption on retirement benefits would vanish.
The retirement savings will become taxable on withdrawal, as the draft code has proposed to
usher in exempt-exempt-tax (EET) regime. The PPF and PF will loose all its glamour and tax
benefit.

For younger Home owner there is a bad news too, the deduction of Rs 1.5 lakh allowed on
interest paid on home loans appears set to be scrapped. There is no mention of such a
deduction being allowed in the draft code. Young people will not get tax benefit.

On implementation of the code all perks would considered part of the gross salary for the
purpose of taxation. The impact of that on tax liability of an individual will be known only
when the rules are prescribed by the income-tax department at a later date.

But there would be equity in the tax system both vertically and horizontally across all
sectors.The tax treatment of the perks enjoyed by the government employee and the private
sector employee will be the same. Till now government sector was in advantage!

It has also proposed that benefits such as gratuity payment made to employees on change of
jobs will be allowed tax exemption only if it is invested in a retirement fund.
The most significant reform would be to bring in the EET regime for all approved provident
funds, approved superannuation funds, life insurance and New Pension System trust from
April 1, 2011 . The PF and PPF were under EEE system now. This benefit will vanish. The
amount would be taxed on the year of withdrawal. This would hurt middle class and specially
retired lot.
However, the proposed code provides that the withdrawal of any accumulated balance as on
March 31, 2011 , from the specified instruments such as PPF will not be subject to tax. The
senior citizen should not withdraw amount in a hurry to save tax. Because, where ever they
invest the interest would be taxed. The money in PPF should be kept there itself, if possible,
as the interest earned would be exempted from tax. When ever emergent requirement occurs
then only it should be taken out after paying tax .In that event tax incidence would be much
lower. Of course, the rollover from one exempt fund to another fund will not be subject to
tax. This means from PF or PPF you can transfer it to NSC and NPS without attracting tax...
The code has proposed to continue with other deductions such as medical insurance premium,
medical treatment or maintenance of disabled dependent, treatment for specified diseases for
self and dependents, for the handicapped, interest on loan taken for higher education, rent
paid for residence, donations to certain non-profit organisations and specified institutions and
tuition fees for children.

The long term capital gain tax on equity based instrument was exempt from Taxes till now.
But if code is approved it would be taxed like short term capital gains. This would affect the
sentiments of investors. Now mutual fund investor would prefer to invest in dividend mode
for the dividend would remain exempt from tax.
It appeared that for middle class two things would adversely effect.
The taxation on withdrawal of PPF and PF and withdrawal of long term capital gains tax. The
code was released for Public response. It would not be wise to sleep over it. Posterity would
blame if present generation do not participate in such reform process for common people.

 Advantages of the New Direct tax Code

• As per the new Tax Code, incomes up to Rs 10 lakh will be taxed at 10 per cent,
those between Rs 10 lakh to Rs 25 lakh at 20 per cent, and above Rs 25 lakh at 30 per
cent. The level for tax exemption would remain the same, i.e., at Rs 1.6 lakh, Rs 1.9
lakh and Rs 2.4 lakh for individuals, women and senior citizens, respectively.

Table : New Proposed Tax Slabs

 Tax Rate Existing Income Slab (Rs) Proposed Income Slab (Rs)
Nil Up to Rs 1,60,000* Up to Rs 1,60,000*
Individuals 10% 1,60,001 – 3,00,000 1,60,001-10,00,000
20% 3,00,001 – 5,00,000 10,00,001-25,00,000
30% Over 5,00,000 Over 25,00,000
* Minimum slab changes to Rs 1.9 lakh for women and Rs 2.4 lakh for senior
citizens

• Deductions allowed on investments in specified instruments under Section 80C would be

raised from Rs 1 lakh to Rs 3 lakh, boosting one’s savings further. The investments of Rs 3
lakh will combine all benefits, including the one available on home loan payments.

• Deduction for actual interest on loan taken for higher education would continue.

• Wealth will be calculated on net basis, i.e., asset value less debt, but it will include all assets
including shares. The wealth tax will be applicable on assets worth more than Rs 50 crore, at
0.25 per cent. Presently, wealth tax stands at 1 per cent for assets above Rs 30 lakh.

• Securities Transaction Tax (STT) will be abolished, a move which will spur the volume and
trading among individuals.

 Disadvantages of New Direct tax Code

• Withdrawals from saving schemes such as Employee Provident Fund (EPF), Public
Provident Fund (PPF), Gratuity Provident Fund (GPF), approved superannuation
benefits, and life insurance would follow Exempt, Exempt and Tax (EET) structure,
i.e., it would be included in the individual’s income during the relevant year and taxed
accordingly. The newly-introduced New Pension System (NPS) will continue to be in
EET regime. However, withdrawals from accumulated balance till March 31, 2011
will not be taxed. Again, the retirement benefits would be exempt from taxes if saved
in the Retirement Benefit Amount (annuity). However, the proceeds from life
insurance policy, including bonus, would be exempt from tax if it is a pure life
insurance policy.

• There will not be any tax deduction available on home loan interest up to Rs 1.5
lakh. The government aims to club this benefit under the saving limit of Rs 3 lakh.

• Employee benefits such as rent-free accommodation, medical reimbursements, leave

travel concessions, etc., would be clubbed together in an individual’s income.
Through this new Tax Code the Finance Minister has envisaged a uniform tax
structure for all, individuals as also corporate. But it is speculated that it will take
2011 to bring the new tax code into reality as the final hearing would take place after
the bill being placed in the parliament during winter session of 2009. It will include a
proper discussion involving all the points mentioned earlier.