TAXATION

DIRECT TAX CODE

ASSIGNMENT 2

SUBMITTED TO: Mrs. Ranjani Matta

SUBMITTED BY: Shalini Mahawar
 PG20095103
DIRECT TAX CODE

The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961
in India. It is expected to be passed in the monsoon session of 2010 and is expected to be
enforced from 2012. During the budget 2010 presentation, the finance minister Mr. Pranab
Mukherjee reiterated his commitment to bringing into fore the new direct tax code (DTC) into
force from 1stof April, 2011, but same could not be fulfilled and now it will be applicable
from 1st April, 2012.

SALIENT FEATURES & HIGHLIGHTS OF THE DTC:

 DTC removes most of the categories of exempted income. Unit

Linked Insurance Plans (ULIPs),Equity Mutual Funds (ELLS), Term deposits, NSC
(National Savings certificates), Long term infrastructures bonds, house loan principal
repayment, stamp duty and registration fees on purchase of house property will loose tax
benefits.

 Tax saving based investment limit remains 100,000 but another 50,000 has been added
just for pure life insurance (Sum insured is at least 20 times the premium paid) ,
health insurance, mediclaims policies and tuition fees of children. But the one lakh
investment can now only be done in provident fund, superannuation fund, gratuity fund
and new pension fund.

 The tax rates and slabs have been modified. The proposed rates and slabs are as follows:
Annual Income Tax Slab
Up-to INR  200,000 (for senior citizens 250,000) Nil
Between INR 200,000 to 500,000 10%
Between INR 500,000 to 1,000,000 20%
Above INR 1,000,000 30%
Men and women are treated same now.

 Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-
occupied property.

 Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000
to your taxable income. Long term capital gains (From equities and equity mutual
funds, on which STT has been paid) are still exempted from income tax.

 As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) —savings,
accretions and withdrawals—to be allowed for provident funds (GPF, EPF and PPF),
NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave
encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to
tax withdrawals.
 Surcharge and education cess are abolished.
 For incomes arising of House Property: Deductions for Rent and Maintenance would
be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a
rented house is deductible from rent. Before DTC, if you own more than one property,
there was provision for taxing notional rent even if the second house was not put to rent.
But, under the Direct Tax Code 2010, such a concept has been abolished.

 Tax exemption on LTA (leave travel allowance) is abolished.

 Tax exemption on Education loan to continue.

 Corporate tax reduced from 34% to 30% including education cess and surcharge.

 Taxation of Capital gains from property sale: For sale within one year, gain is to be
added to taxable salary. For long term gain (after one year of purchase), instead of flat
rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain
after indexation will be added to taxable income and taxed at per the tax slab.
Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st
April, 1981.

 Medical reimbursement: Max limit for medical reimbursements has been increased to

50,000 per year from current 15,000 limits.

 Tax on dividends: Dividends will attract 5% tax.

 Bad news for NRIs: As per the current laws, a NRI is liable to pay tax on global income
if he is in India for a period more than 182 days in a financial year. But in new bill, this
duration has been changed to just 60 days. This is very unfair to Seafarers. To avoid any
income tax, an Indian sailor employed with a foreign ship will have to stay for a
maximum period of 60 days in India.
 DIFFERENCE BETWEEN DIRECT TAX CODE & INCOME TAX
ACT

BASIS INCOME TAX ACT DIRECT TAX ACT

Residence of U/s 6(3), a company is treated as Under cl. 4(3) of the Bill, a
company a resident, if it is an Indian company is treated as resident if
company, or if its control and it is an Indian company, or if its
management is situated 'wholly' place of 'effective management'
in India. at any time of the year is in
India. 
Indian company U/s 6(4), other legal persons are Under cl. 4(4), every other legal
treated as residents in India in any person is to be treated as a
previous year in every case, resident in any financial year, if
except where the control and the place of control and
management of his affairs is management of its affairs, at any
situated wholly outside India. time in the year, is situated
wholly, or partly, in India. The
language seems to have changed,
but the test seems same – if any
part of management is carried
out in India, the person is a
resident.
Scope of total Residents are taxed on worldwide Essentially the same model, but
income income; non-residents on a 'source' has been widened.
source-based model.
Deemed accrual Section 9(1) (i): Through or from Cl. 5(1): The same four
in India any business connection, categories apply – it is clarified
property, or asset/source in India, that income arising 'through or
or through the transfer of a capitalfrom' all the 4 would be covered
asset situate in India. Where (as opposed to the present
operations are not carried on Section, where 'through or from'
entirely in India, only that income qualifies the other 3 categories
which is reasonably attributed to but the provision only read
operations in India is deemed to 'through' the transfer of a capital
accrue in India. asset). Business connection has
been defined in cl. 314(40) to
include a permanent
establishment.
Deemed accrual Section 9(1)(v), (vi) and (vii): Cl. 5(2): The interest income is
of income from The income is deemed to accrue deemed to accrue or arise in
interest, in India if it is: India if it is:
royalties and
fees for (a) payable by the Government; (a)According to cl.5(2)(d)/(f)/(h),
technical
accrued from or payable by the
services
 Government or any resident; 

(b) payable by a resident except (b)According to cl.5(2)(e)/(g)/(i),

where it is payable in respect of accrued from or payable by a
any: non-resident if it is in respect of /
debt/right/property/information/ for the purposes of a business
services utilized for the purposes carried on in India or for the
of a business or profession carried purpose of earning any income in
on by such person outside India India.
or for the purposes of making or
earning any income from any The royalty provision has been
source outside India. broadened. Any royalty payable
by a resident is now covered,
(c) payable by a non-resident even if that royalty was entirely
where the royalty is payable in in respect of a business carried
respect of any right, property or out outside India. To my mind,
information used or services this looks as if nexus
utilized for the purposes of a requirements have been removed
business or profession carried on in respect of taxing a non-
by such person in India or for the resident.
purposes of making or earning
any income from any source in
India.

Calculation of It is arguable that when there is a Cl. 5(6) provides that where the
income in case transfer of a share / interest income of a non-resident, in
of indirect outside India, there is no transfer respect of transfer, outside India,
transfers of a capital asset in India; and no of any share or interest in a
part of the consideration foreign company, is deemed to
whatsoever is chargeable in India. accrue in India under the 'transfer
of a capital asset situate in India'
provision [thereby implying that
such an accrual is possible under
the wordings of the Bill], the
income shall be calculated by the
formula Income = 'A' multiplied
by 'B' divided by 'C'.