Column: What will the final DTC look like?

Why is the direct taxes code (DTC) required?

It is being felt for quite some time that the Income-tax Act, 1961, has become voluminous and is too technical to be understood by the taxpayers. There is a need to simplify the provisions and also put in place a system that can work without any major changes for a longer period of time so that the law is easy to comprehend and it can be used effectively to curb evasion. The DTC essentially has been perceived to address these issues. In effect, it would do away with all the tax exemptions and make the tax statute stable and simple to handle for both the taxpayers and the tax administrators.

Who thought about it first and when?

The DTC framework was actually perceived by P Chidambaram during his previous tenure as the finance minister in 2008. The idea resulted in concretisation of the DTC Draft Code, 2009, which was released in August that year for discussion.

Why has it not been implemented as yet?

Some of the provisions of the draft Bill, including the one on imposition of minimum alternate tax (MAT) on gross assets, came under severe criticism from the industry. With this, the government wanted discussion on other critical changes like removal of all exemptions and new provisions such as General Anti-Avoidance Rules (GAAR). In the meantime, Pranab Mukherjee took over as the finance minster in January 2009 and decided to make changes in the draft code based on deliberations with various stakeholders in due course. The DTC Bill, 2010, was then introduced in the Lok Sabha on August 31, 2010, which overturned many of the important changes that draft code 2009 had proposed. The Bill was then referred to the Standing Committee which has already submitted its report.

What was the basic structure of initial DTC that is draft code of 2009?

In personal income tax, it proposed removal of several deductions, including those on investments in life insurance, provident funds and interest paid on housing loans and restructured tax slabs. Chidambaram?s idea, reflected in the 2009 draft code, was to tax annual income of R1.6 lakh to R10 lakh at 10%; R10 lakh to R25 lakh at 20%; and income above R25 lakh at 30%. In case of corporates, the draft code talked of taxing business income at 25% and impose MAT at 2% on the asset of the companies, tax dividend distribution of the domestic companies at 15% and garner additional branch profit tax of 15% from foreign companies, with no tax exemption.

How is the DTC Bill, 2010, different from the draft code 2009?

The DTC Bill, 2010, however, proposed 10% rate for R2 lakh to R5 lakh income bracket; 20% for R5 lakh to R10 lakh annual income; and 30% for income above R10 lakh, and also continuance of tax exemptions. The DTC Bill, 2010, has fixed corporate income tax rate at 30%, MAT at 20%, and here also it retains several tax exemptions. Take the case of deductions in personal savings, under the Income-tax Act, these are exempt at all levels (EEE); DTC 2009 proposed to tax them at the time of withdrawal (EET); but DTC Bill, 2010, has retained EEE discounting the premise that it lead to early withdrawals. Then, DTC 2009 pressed for withdrawal of deductions for both SEZ developers and the units but the 2010 Bill has inserted grandfathering of these deductions in the statute and replacement of profit-linked benefits by investment-linked ones. Similarly, 2009 code pitched for removal of STT and separate treatment of short-term and long-term capital assets but the 2010 Bill retains STT for listed securities and different treatment to short-term and long-term capital assets. In case of MAT also, the 2009 Bill imposed it on gross assets but the 2010 Bill has imposed it on book profits as it is done now.

What are the main recommendations of the Standing Committee on DTC 2010 Bill provisions?

The Standing Committee wants the exemption level in the personal income tax to be raised from R2 lakh to R3 lakh and imposition of 30% rate for income above R20 lakh.

What is the government doing now with the DTC?

P Chidambaram returned to the finance ministry in August last year. He has made it clear that the DTC Bill, 2010, would be reworked to bring it as closer to the original framework of the DTC conceptualised by him. The finance ministry is currently working hard to complete this exercise so that the Bill can be brought to Parliament for passage. The finance minister has indicated he would like to get this done in the monsoon session itself.

When can DTC come at the earliest?

It would be a difficult task for the government to bring the DTC from April 2014 as there would not be a full Budget next year in February because Lok Sabha elections are due in 2014. Though the timing would depend on the outcome of the elections, the DTC would be easier to implement for any government than the goods and services tax (GST).