How is income proposed to be taxed under Direct Taxes Code?
October, 05th 2009
Separate books of account are required to be kept for each unit of business, if there is no inter-lacing or inter-dependence or unity embarrassing the two businesses.
Computation of business income will continue to be even more complex, though it is claimed in the discussion paper, that it has rationalised the provisions relating to computation of income from business in the light of the fact that it is the most important head of income having profound implications for the revenue. Items which are not income but deemed as income are 25 in number. Items listed for deduction are 43 with a view to providing an exhaustive list of allowable expenditure. There is a long list of disallowable items.
Application of accounting standards with modifications wherever desired would have made the law simpler. One item of deductible expenditure is festival celebration expenses. Another item is Family Planning expenses as under the present law with the addition of a new item HIV/ AID related expenses. Since these cover only employees already covered in welfare of workman and staff, these are unnecessary redundancies, especially when the residual item under any other expenditure is the 43rd item in Sec. 33, subject to the condition that it should be laid out or expended, wholly and exclusively for the purposes of business under Sec. 33(5) of the Code, making the listing of 42 earlier items unnecessary.
Separate books of account are required to be kept for each unit of business, if there is no inter-lacing or inter-dependence or unity embarrassing the two businesses. The artificial denial of legitimate deductions incurred by mode other than account payee cheque beyond the specified limit under Sec. 40A(3) of the present Act will continue. So is the denial of certain classified expenses to be allowed on cash basis under Sec. 43B of the present Act with royalty added making accrual system extremely one-sided by substituting cash basis for mercantile basis only for expenditure.
Any amount received as loan or deposit or any repayment of loan or deposit either received or repaid otherwise than by account payee cheque where the amount exceeds Rs. 20,000 would be treated as residuary income in place of present penalty, so that businessmen would find it extremely difficult either to transact business or in funding the business in an emergency. Income computed for business will be as different from real income as the proverbial hawk from a horse.
Treatment of capital gains
The language of law pertaining to taxation on capital gains has undergone material changes. With proposed abolition of securities transaction tax, capital gains tax will be leviable in respect of sale of shares on investors.
Asset, capital asset, business trading assets, business capital asset and investment asset are all defined in sub-sections (27), (46), (45), (42) and (151) respectively in Sec. 284. Transfer is defined in Sec. 284(287)(a) to (p) to cover not only sale, exchange, relinquishment and extinguishment as under the present Sec. 2(47), but also deemed transfer under Sec. 45 and 47. Sec. 44 gives the method of computation.
Sec. 45 lists exemption. The market value on which it could be adopted as cost is proposed to be shifted from April 1, 1981 to April 1, 2000 under Sec. 50 as inflation adjustment for assets held for more than a year, dispensing with difference between long-term and short-term assets. This would greatly benefit the owner of immovable properties acquired long ago or received by way of inheritance much earlier to the specified date.
One has also to look into the Seventeenth Schedule to have a complete picture of capital gains tax. It prescribes the manner of determination of cost of acquisition for different categories, 12 in number, as for amalgamation, demergers, transaction as between holding company and subsidiary company, allotment of debentures, share or any other security, sweat equity shares, and trading or clearing rights in a stock exchange.
Reinvestment benefits, now characterised as roll-over of investment asset, are severely curtailed. Investment in residential house from sale of any asset held for more than a year will be permitted by combining present Sec. 54 and 54F narrowing the benefit down only to a person who does not own a house.
Pending use of moneys within the permitted period, sale proceeds will have to be kept in Capital Gains Account Scheme, which will be monitored only by post-office under a scheme to be framed. Capital Gains Savings Scheme will replace specified bonds. Exemption for reinvestment of sale proceeds of agricultural lands in other agricultural lands will, however, continue.
Since there is no special rate of tax for capital gains in the schedule, it is clear that capital gains will now be taxable at the normal rate applicable for an assessee, while for purposes of tax deduction at source for capital gains paid to a non-resident, tax will be deductible at 30 per cent of such gains.
The loss under the head capital gains will not be allowed to be set off against other heads of income as under the present law. It will only be carried forward. It will have the effect of distorting real income of the assessee, if gains are taxed and losses are only allowed to be carried forward.
The Fourteenth Schedule in the Code lists out the sources of income eligible for presumptive taxation for transport of goods and income from specified sources of income of non-residents as under the present law. In addition, all businesses other than these will be eligible for presumptive tax at 8 per cent of the total turnover or gross receipts, if they do not exceed Rs. 1 crore as against the present limit of Rs. 40 lakh.
Those who do not maintain regular books and avail themselves of the benefit of this provision can avoid rigours of disallowance of payment for expenditure, including purchases above Rs. 20,000 or addition of amounts of loans or deposits received exceeding Rs. 20,000 by modes other than account payee cheques deemed as income. So is the disallowance of amount from which tax is not deducted at source.
A large number of assessees may be expected to choose to come under this umbrella. If books are maintained disclosing a larger income, such larger income is, however, bound to be disclosed, so that non-maintenance of books will be a better choice for this class of taxpayers. These artificial disallowances would now make even lesser sense, when confined to those who keep proper accounts.
Though gross receipts are referred, profession will not be able to avail the benefit of presumptive tax, as it is specifically excluded from the purview of presumptive tax.