Decoding The Direct Tax Code

The Direct Tax Code (DTC) is supposed to replace the archaic Income Tax Act (ITA) which has been levied since 1961 in India. By executing the new code, the Government of India intends to streamline and simplify legislation, as well as iron out many ambiguities in the current system. It is a blend of major tax relief and removal of most tax-exempted benefits and is likely to usher in a new tax regime of greater compliance and transparency. The proposed bill comprises of 319 sections and 22 Schedules.

Almost all salaried people in India will agree that personal income tax is one of the biggest burdens in the country. The current system compensates for dishonesty and non-disclosure of income with lesser tax. The DTC will try to address these issues by radically lowering income tax and by restricting all tax-free perks.

As per the DTC, the general threshold income tax limit for women is proposed to be raised to Rs. 2 lakhs per annum. People with an annual income between Rs. 2-5 lakhs will bear 10% tax, 20% for people who earn Rs. 5-10 lakhs per annum, and 30% for an income of above Rs. 10 lakhs per annum. Moreover, the tax burden at the uppermost strata will come down by Rs. 41,040 per annum. This in turn will produce some more disposable income for the people who fall under different tax slabs. It also proposes to raise the tax exemption limit for senior citizens from the current Rs. 2.4 lakhs to Rs. 2.5 lakhs per annum.

Surcharge and cess are abolished unaffecting the corporate tax, which will remain the same. Minimum Alternate Tax (MAT) is supposed to be increased from 18.5% to 20% of book profit. Exemption for investment in approved funds and insurance schemes which is Rs. 1.2 lakhs currently is proposed to be raised till Rs. 1.5 lakhs.

DTC will eliminate most of the categories of exempted income. Equity Mutual Funds (ELSS), term deposits, NSC (National Savings Certificates), Unit Linked Insurance Plans (ULIPs), long term infrastructure bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits.

According to the proposed tax code, merely half of the short-term capital gains will be taxed. Moreover, tax exemption on education loans will continue and tax exemption for leave travel allowance is abolished. Also, maximum limit for medical reimbursements has been improved to Rs. 50,000 per year from current limit of Rs.15, 000 per year.

Deductions for rent and maintenance of housing property would be reduced from 30% to 20% of the gross rent. Also, all the interest paid on house loan for a rented house is deductible from the rent. Taxation of capital gains on planned securities held for more than a year will not be taxed, it will be taxed at 5%, 10% or 15% if detained for less than a year. Tax on dividends will draw 5% tax.

One of the major aims of this tax code is to provide a system which considers increased cross border mergers and acquisition by Indian corporates. It is also expected to streamline the tax rates and administration for foreign institutional investors. It also aims at strengthening taxation provisions for international transactions.

While the aim of the DTC is to promote future economic growth, in the short term, its provisions may serve to suppress investment opportunities. Although India is one of the fastest growing economies in the world, it still needs considerable investment before it becomes a fully developed economic power. The government will need to ensure the provisions of the DTC are implemented effectively and successfully to safeguard the country’s long term ambitions.

By Udyog Software Marketing Team

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