New Direct Taxes Code will alter investment behaviour in India

Tuesday, September 29, 2009, 8:42 by Business Editor

The proposed new Direct Taxes Code (DTC) is widely expected to transform the savings and investment behaviour in India.

The new tax code is to be put into operation from April 1, 2011.

The new DTC will lead to actual taxation only when the money is finally withdrawn for consumption or when money is switched to some other type of investment.

According to experts, with the widespread use of computers, PAN numbers and central information repositories, the accounting should not pose any major problem.

In fact, the concept already exists in one form or the other in many countries. In fact, India’s New Pension System (NPS) follows the same system.

Members of the New Pension System can now switch between different asset mixes and investment managers that are provided by the Pension Fund Regulatory and Development Authority (PFRDA), and this switch is not treated as a withdrawal. If such a system becomes applicable to for non-pension savings as well, the new Direct Tax Code will not turn out to be a hurdle to one’s investments.

Even as all the changes proposed are meant to usher in a change for the better, experts say, the new Code curbs the mobility of one’s investments by rendering them not only less manageable but also less profitable. In other words, in the new scheme of things, these savings will continue to be represented as individual investments and not as an investment account.

Meanwhile, a section of the senior officers of the revenue service have opposed the draft of the Direct Taxes Code, alleging that it is an attempt at making the Central Board of Direct Taxes (CBDT) “toothless.”

According to reports, these revenue officers – a majority of them from the Income Tax Department in Mumbai – are of the opinion that the DTC has recommended that CBDT’s powers to issue circulars or notifications or even make amendments be taken away.

Also, these officers – who included Chief Commissioners and Commissioners of the Income Tax Department – reportedly charged those who drafted the new Direct Taxes Code with having “ulterior motives” in diluting the powers of the Central Board of Direct Taxes. Besides, these officers are sore that the CBDT, which has been responsible for dealing with direct-tax revenue, was not involved in the task of preparing the new Direct Taxes Code.

The proposals in the Direct Taxes Code for Personal Taxation and Income from House Property are as follows:

PERSONAL TAXATION

Moderation of tax rates and increase in tax slabs proposed; new beneficial tax slabs are to be introduced (which will reduce the tax burden for individuals); and peak rate of 30% applicable on income exceeding Rs 25 lakh.

Definition of residency and scope of income

The definition of residence is to be changed. A separate category of ‘Not Ordinarily Resident’ and additional condition of 729 days to ascertain residency will be abolished. There will be only 2 categories of taxpayers proposed, namely, ‘Residents’ and ‘Non-residents.’ Residents are to be taxed only on India-sourced income for an initial period of 2 two years, provided they qualify as a ‘non-resident’ in the preceding 9 financial years.

INCOME FROM HOUSE PROPERTY

Gross rent is proposed to be calculated as higher of contractual rent or a presumptive rate of 6% of ratable value/construction/acquisition cost.

Deduction towards interest on housing loan on self-occupied property is not available. Deduction for repairs and maintenance is to be reduced to 20% of the gross rent.

Service tax deductible on payment basis

Exempt-Exempt-Tax (EET) regime proposed for savings scheme. All long-term retrial savings schemes are to be moved to the EET regime. Contributions (both by employee and employer) of up to Rs 3 lakh to any account with permitted savings intermediaries are proposed to be deductible. Accretion of income will take place till withdrawal is exempt. Any withdrawal made under any circumstances is taxable. Withdrawals pertaining to approved Employee Provident Fund-accumulated balance as on March 31, 2011, and accretions thereon are not taxable.

Savings from one eligible savings scheme to another are not to be treated as a withdrawal. Permitted savings intermediaries will include approved Provident and Superannuation funds, life insurer and New Pension System Trust.

Other deductions

Aggregate deductions for the long-term eligible savings referred above, along with tuition fees paid, are to be raised from Rs 1 lakh to Rs 3 lakh. No further investments are eligible.

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