Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

DUMP THE DIRECT TAX CODE!

DTC virtually beyond repair, present Income-tax Act should be revised to achieve the underlying objectives!

The Direct Taxes Code (DTC) Bill, 2010, was presented in the Lok Sabha on the 30th August, 2010, to replace the existing Income tax, 1961 and Wealth tax Act, 1957 with effect from 1.4.2012.

Tax law, which has been subject to extensive review by the Indian Parliament every year and in-depth scrutiny of the Supreme Court, High Courts and Tribunals, for nearly five decades, is now proposed to be crucified by a legislation, the draft of which has been prepared by a bunch of North Block officials with a bureaucratic mindset.

Though the preamble to the draft claims to have accommodated public opinion raised within a span of only three months, it is a mere eyewash, since the public could hardly have figured out, leave aside digest or comprehend several grave implications. Moreover, no debate was ever sought on whether there was at all a need for a fresh legislation and if there should be one, what should be its shape and frame. To a wrong question, answer could never possibly be right. “You can’t depend on your judgment when your imagination is out of focus”- Mark Twain.

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Looking at London, Talking to Tokyo!

The Code boasts of incorporating simplicity, well accepted principles  & best international practices.’

Does it achieve or deceive on this count?

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Tax Axe To Chop Charities Too!

Religion & Politics Sheltered As Taxman’s Holy Cow!

Complex Provisions To Perplex Charities

New Jargon – Fresh Norms

  •  Charitable trust to bear the new identity of ‘Non-Profit Organisation (NPO).’  
  • Charitable purpose replaced by the new phrase ‘permitted welfare activity (PWA).’ 
  • Fresh procedure for NPO registration to be undertaken by all charities. 
  • Different & elaborate norms for computing gross receipts and outgoings. 
  • Current benefits of accumulation of income, upto 15% for an indefinite period, and upto any amount for five years, not available under DTC. 
  • Deduction at specified rates (mostly 50%) to be allowed to donors of eligible NPOs. 

15% Tax on eligible NPOs – 30% Tax on other Charities

  • No more tax exemption for income of charities. Even current basic exemption upto Rs.1,60,000 not applicable under DTC. 
  • Taxable surplus of all eligible NPOs (fulfilling as many as 14 prescribed conditions) to be taxed at flat 15%.  
  • All other trusts, though doing charitable work, to attract flat 30% tax on their income as an AOP. 

Several Current Charities may not qualify as eligible NPOs

  • Specific community trusts and associations for benefit of their members, though currently eligible for exemptions as charities, not eligible to be registered as NPOs under DTC. 
  • Where any business (not incidental to PWA) is held under the charity, even though its business income is applied only for PWA.

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Minimum Tax brings Maximum Woes!

MAT At 2% On Value Of Gross Assets Can Spell Corporate Doom!

Companies floored on MAT by hard tax punch!

  • Minimum Alternate Tax (MAT), to be paid at 2% on the gross value of assets of a company, presumes 8% average rate of return on assets, an impractical economic assumption in several cases. 
  • While Code aims at encouraging investment-linked tax incentives, the proposed MAT will be a huge disincentive for capital investment. 
  • Capital intensive projects, infrastructure ventures, undertakings in gestation period, loss making concerns, sick units, investment companies and even companies under liquidation, to be hit hard by levy of MAT. 
  • No scheme for grant of MAT credit, both harsh and iniquitous. 
  • No developed country in the world today (last being Mexico, who also scrapped it in 2007) levies such a naughty tax. 
  • No room for MAT in the new tax regime abolishing all profit-linked incentives.

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Now no Capital Gain without Tax Pain!

End Of Tax Honeymoon For Market Investors!

Understanding The New Capital Gains Regime

New Rules for Computation

  • Present distinction between long term and short term gains to be eliminated.
  • Current exemption for capital gains arising from transfer of personal effects and agricultural land beyond specified urban limits to continue.
  • Base date for computing cost of acquisition shifted from 1st April, 1981 to  1st April, 2000. 
  • Indexation benefits can be availed for all assets held for atleast one year.  

No More Tax Concessions

  •  Zero tax on STT paid long term capital market gains and 15% concessional rate for short term market gains to end on 31st March, 2011. 
  • No more concessional rates of 10%/20% for taxing specified long term gains. 
  • All capital gains to be taxed at the taxpayer’s applicable marginal rate. Securities Transaction Tax (STT) to be simultaneously eliminated.

 Exemptions Abolished & Redesigned

  • Present exemption u/s. 54EC via investment in specified bonds abolished. 
  • Current exemptions u/s. 54, 54B and 54F attempted to be redesigned under a new scheme of relief for roll over on the basis of a given formula.  (more…)

Minus Social Security : EET=Inequity

Hard Hit Small Salaried Deserve Lower Starting Tax Rates!

Both Employment & Retirement Made More Taxing!

  • Allowances & Perks – no longer exempt: House rent allowance (HRA), leave travel concession (LTC), medical reimbursement, value of free or concessional medical treatment and children’s education & hostel allowance.
  • Puny deductions that will still continue: Professional tax paid, transport allowance to the extent prescribed and prescribed special allowances to meet expenses incurred for official duties.
  • Retirement may not be as relaxing: Leave encashment on retirement, to be fully taxable.
  • VRS compensation, death or retirement gratuity and commutation of pension to be exempt, only if deposited in a Retirement Benefit Account (RBA).
  • However, any amount drawn from RBA (including PF contributions and accretions after 1st April, 2011) under any circumstances to be treated as taxable in the year withdrawal. (more…)

Prepare for the TDS Nightmare!

No Respite From The TDS Bite Even For Non-Taxpayers!

TDS Blows That Will Hit You Hard!

  • No provision for furnishing any declaration (as in current Form 15G/15H) for non deduction of TDS from interest in cases of non-taxable income will hit hard senior citizens, widows, agriculturists and several other small interest earners.
  • No provision for obtaining any certificate for TDS at a lower rate will create hardships for the business community.
  • Harsh and bizarre consequences to arise on account of the new provision prescribing 10% TDS in respect of payments of ‘any other income’.
  • Even personal and commercial transactions, such as receipt of any consideration for sale of goods or services or transfer of any movable or immovable property, to attract TDS, which in several cases could work out much higher than the actual profit earned from the transaction. (more…)

Roti, Kapda but No Makaan!

Analyzing Tax Gain & Pain In The New EET Regime

  • Tax Incentives for Housing Scrapped: Current deductions in respect of interest & repayment of housing loan abolished under the new Code.
  • Higher Deduction For Savings & Children’s Education: Individual & HUF entitled to an aggregate deduction of upto Rs.3 lakhs in respect of permitted savings & children’s tuition fees payment, as compared to current ceiling of Rs.1 lakh.
  • Accretions Exempt but Withdrawal Taxable: No tax on accretions to the permitted savings. However, any withdrawal from permitted savings to be taxed.
  • Tax Shelter for Old PF/PPF Accumulations: Future withdrawals out of accumulated balance of PF & PPF as on 31stMarch, 2011 to enjoy special exemption. (more…)

Tax Bombshell hangs on Insurance!

Code Has Not Visualized Many Dreadful Consequences!

Many Insurance Products under Severe Tax Threat

  • Any sum received under a life insurance policy including any bonus thereon will be exempt, only if the premium does not exceed 5% of the capital sum assured and such sum is received only upon completion of the original period of contract or upon the death of the insured.
  • All existing ULIPs, Money Back & Guaranteed Return Plans of Insurance Companies, including surrender values of insurance drawn before maturity to take the tax hit.
  • Even the return of premium payments out of the investor’s own tax-paid capital, would again attract tax in all such cases. (more…)

A Tryst with Your Tax Destiny!

Participate in Shaping the Final Contours of The Direct Tax Code

“To qualify being literate in the 21st century, you must be one who can learn, unlearn and relearn.” This quote of Alvin Toffler should inspire taxpayers and professionals of India to get oriented with the new philosophy of the proposed Direct Tax Code (DTC), after their near 50 year old acquaintance with the Income Tax Act of 1961. (more…)

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