Reform or a raw deal?

Simple tax code is good news for all
As a step towards simplifying, consolidating and bringing about structural changes in direct taxes, the finance minister tabled the new Direct Tax Code in Parliament on August 30 to be effective from April 1, 2012.
On the personal taxation front, the tax slabs have be­en encouragingly incre­a­sed. The 30 per cent slab begins at a cheerful `1,000,001, as against the current `800,001. The bas­ic threshold limit is proposed to be increased to `250,000 for resident seni­or citizens and to `200,000 for other individuals, including resident wo­men. For instance, if an in­dividual earns `10,00,000, he would pay basic tax of `130,000 under the provisions of the DTC Bill as against the considerably higher `154,000 under the present taxation regime. This would enable him/her to effectively fight inflation, and add something extra to his/her disposable income at the same time.
Although the new DTC has removed most of the exemptions for the corporate sector, it has retained certain exemptions for the salaried taxpayers, such as house rent allowance and leave encashment. There is also good news for those who fall ill. There is an exemption for medical reimbursement, and it has been increased to `50,000.
The new DTC also provides for an allowance to meet personal expenses. Employer contributions to approved provident and superannuation funds or any other approved fund will be deductible to the extent of prescribed limits as against the aggregate cap of `300,000 prescribed earlier.
Another very good thing for those with property is with regard to income earned from a house property rented out. It had been proposed in the earlier discussion paper that gross rent will be calculated on the basis of the higher of the two between contractual rent or presumptive rate of six per cent of rateable value/construction/acquisi­tion cost. It is now to be calculated on the basis of the actual rent received or re­ceivable. This ensures th­at one only bears the tax bu­rden on the actual rent earned.
The DTC also provides for 100 per cent deduction in respect of capital gains on transfer of equity shares of a listed company or units of an equity-oriented fund which are held for more than one year where such transfers are chargeable to Securities Transaction Tax, and 50 per cent deduction if they are held for one year or less. This puts capital ga­i­ns on transfer of securities at par with the taxability un­der the Income Tax Act, 1961. This will greatly bo­ost share market and equity-oriented mutual funds.

Tax liability will hardly reduce
The Direct Tax Code (DTC) has been a roller coaster ride for individual taxpayers. The original version, presented in August 2009, had indicated very high slabs for taxation of individuals. Also, there were proposals to tax income which are currently not taxed. Examples are taxation of benefits like life insurance receipts and PF receipts at the time of withdrawal or at maturity; and taxation of gratuity, compensation on voluntary retirement. In effect, taxability was getting shifted to people’s “sunset” days. In case of property owners (other than one property used for self-occupation), it was proposed that the higher of the contractual rent or a presumptive rate of six per cent of the ratable value would be considered as income. This again meant that the individual would have to pay a tax on an income which he may not earn at all.
The government invited comments on this draft code and took cognisance of the apprehensions expressed. A revised discussion paper was introduced in June 2010 rolling back most of the steep proposals and retaining the current method of exempting receipts from PF, gratuity etc. The proposed presumptive mode of taxation of income from house property was also withdrawn. However there was a subtle assertion that the tax thresholds in the original code were indicative, and would undergo calibration to accommodate reversals.
The final bill, presented to Parliament in August 2010, confers no new benefits on the individual taxpayer as compared to the existing legislation. Of course, certain steep proposals concerning individuals in the original code a year ago have been withdrawn. The proposed tax threshold limits now stand marginally above the present slabs. Thus, individuals earning `10,00,000 would pay about `25,000 less under the proposed DTC than what they pay now. However, under the original version of DTC, they would have paid about `71,000 less.
It should be noted that in certain cases the provisions of DTC are less beneficial than the current legislation. For example, tax benefits like leave travel assistance or higher threshold for resident women taxpayers are now not available. Also, dividend di­stribution tax is introdu­c­ed on equity-oriented mut­ual funds. In effect, this would result in lower dividends in the hands of the individual investor. Also, dividends from non-equity mutual funds will now be taxed. In sum, co­m­pared to the present tax le­gislation the individual’s tax liability will hardly re­d­uce under the proposed DTC.