Direct Tax Code proposal has welcome respite for individuals (Special)

June 20th, 2010 - 12:36 pm ICT by IANS  

KPMG By Vikas Vasal
Many suggestions were made in response to the draft Direct Tax Code on issues impacting individuals. It is quite encouraging many of the suggestions have been incorporated in what the finance ministry calls the revised discussion paper on the code.

Most of the working class individuals make investments in one or more of the long-term saving schemes that include provident fund, superannuation fund, pension and insurance. The code had originally suggested ‘exempt-exempt-tax ‘ model. That is exempt when the investment is made, exempt again when interest accrues, but tax during withdrawal.

Understandably, this proposal did not go down well with the masses. The new discussion paper has proposed to reinstate ‘exempt-exempt-exempt’ method for these schemes. Also, investments made before the commencement of the code in instruments which enjoyed the benefit would continue to do so.

This is surely a reason to smile. India’s social security system is still in developing stages, and any change in this method might have posed significant challenges for tax payers as well as collectors.

On retirement payments, the code had proposed that any benefit received by an individual like those under voluntary retirement schemes, pension, gratuity and leave encashment will not be taxed to the extent the amount is deposited in a benefit account. However, withdrawal from the said account would be taxable. The discussion paper reinstates the current regime. Therefore, any amount received by an employee toward gratuity, pension, voluntary retirement and leave encashment will continue to be exempt up to a limit.

Owning a house is every individual’s dream. Indian psyche is such most individuals start planning the purchase of a house as soon as they start earning. Given that real estate prices in India also tend to be on the upswing, buying a property is thought as a sound investment for the future.

The code had made sweeping changes in income from house property. The most visible of them being the removal of deductions of up to Rs.150,000 on interest paid on housing loan in case of a self-occupied house property. The paper proposes to revert to the earlier position and thus reinstates the deduction.

Another important change proposed is to do away with the concept of presumptive rent, which was earlier proposed under the code. Further, the value of house property not let out will now be considered as nil. But no deduction for taxes or interest on housing loan will be allowed for such house property.

For individuals having investment in stock markets, the changes in the capital gains tax regime will probably lead to more frowns than smiles. Capital gains are to be treated as taxable income for all taxpayers and taxed at the applicable rates.

The revised paper also deals with listed equity shares or units of equity-oriented funds that are held for more than one year from the end of the financial year in which they were acquired. In such cases, capital gains arising from the transfer of an investment asset shall be computed after allowing deduction at a specified percentage of the gains but without any indexation benefit.

The amount so arrived at will then be included in the taxable income of the individual and taxed at applicable tax rates. Similarly, capital losses will be scaled down by the specified percentage. The specified percentage of deduction will be finalised in the context of the overall tax rates.

Other investment assets if held for more than one year then indexation benefit would be available with reference to the amended base date of April 1, 2000, in respect of the cost of acquisition. If assets are held for less than one year, then capital gains will be computed without the benefit of either a specified deduction or indexation.

The discussion paper also proposes to continue with the securities transaction tax. But the rates would be finalised in the context of the overall tax rates.

The discussion paper has also made wealth tax applicable to all taxpayers except non-profit organisations and the same would be levied in line with the existing provisions on specified unproductive assets. The threshold limit and rate of tax will be suitably calibrated in the context of overall tax rates, says the paper.

The above proposals surely give a reason to smile. But there are always two sides of any coin. The flip side here is the loss of revenue to the government due to the concessions being provided and what the finance minister may do to counter that.

It is possible the proposed tax slabs and the tax rates may be calibrated to ensure that the loss of revenue to the exchequer is minimised. As the above proposals are also at the discussion stage, the matter will only be cleared when the revised bill is drafted.

(20.06.2010 - Vikas Vasal is executive director with taxation, audit and corporate consultancy firm KPMG. The views expressed are personal. He can be reached at vvasal@kpmg.com)

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