Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: form 3cd :: list of goods taxed at 4% :: ACCOUNTING STANDARD :: ACCOUNTING STANDARDS :: Central Excise rule to resale the machines to a new company :: articles on VAT and GST in India :: empanelment :: cpt :: VAT Audit :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: TDS :: VAT RATES :: TAX RATES - GOODS TAXABLE @ 4% :: due date for vat payment :: ARTICLES ON INPUT TAX CREDIT IN VAT
 
 
General »
  Withdrawal of Legal Tender Character of the existing Bank Notes in the denominations of ₹ 500/- and ₹ 1000/- (Updated as on November 30, 2016)
 Cases for tax scrutiny will be selected by machines
 Time to revisit 1997 direct tax rates, says P Chidambaram
 Lok Sabha passes Bill to tax black money deposits post demonetisation
 Last day to pay property tax with old notes
 Income tax department asks IDS declarants to pay tax by 30 November
 Why PM Narendra Modi must beware of the breathtaking Arthakranti tax
 Japanese firms seek easing of restrictions on funding in India
 Tax on black money: How the cookie will crumble
 Income tax officials say raids on jewellers based on 'credible intelligence' proving fruitful
 Exchange window being misused, government forced to reduce limit to Rs 2000, says Arun Jaitley

Under new code, pay your tax upfront
October, 21st 2009

Readers would be aware that the new direct tax code proposes to adopt the Exempt-Exempt-Taxed (EET) regime.

The first leg (representing the first E) is covered by Section 66 of the code, which allows an individual or an HUF a deduction of up to Rs 3 lakh in aggregate in respect of any sums paid to, or deposited in, any account maintained with any permitted savings intermediary during the financial year.

The accretions to the deposits will remain untaxed till such time as they are allowed to accumulate in the account. This is the second leg representing the second E.

Finally, Section 56(2r) of the code states that the gross residuary income shall "include any amount received, or withdrawn, under any circumstances" from any account maintained with any permitted savings intermediaries representing the principal amount of the savings; or interest, dividend, bonus, capital appreciation or any other form of return on the investment, by whatever name called.

This is the third leg representing the last T. Accordingly, it will be subject to tax at the then existing personal marginal rate applicable to the assessee.

Analysis
The interesting thing about EET is that it is the same as TEE (Taxed-Exempt-Exempt). In other words, it makes no difference (financially) whether you claim the tax deduction or alternatively pay tax and invest the difference! To put it differently: TEE = EET since: (1-t)(1+i)n =(1+i)n(1-t) where t = Tax rate,i = Interest rate per annum, n = Number of years after which the amount is withdrawn The table (Upfront vs trailing tax) illustrates this point.

In the table, the amount of gross income is taken to be Rs 10,000. The left hand side illustrates the closing balance where tax is paid and the net amount is invested @ 9% pa. The right hand side illustrates what happens when tax deduction is claimed upfront, but the maturity amount is subjected to tax at the end of the term of five years. Of course, the interest rate is kept constant under both scenarios @ 9% pa.

Have a look at the last column which represents the after-tax closing balance of the EET System. You will notice that this column is the same as the closing balance of TEE system for each year. The conclusion is EET = TEE in respect of the take home of the taxpayer.

Note that this would be true only if the tax rate at the start of the deposit is the same as or lower than that at the end. The taxpayer will benefit if he finds himself in a lower tax zone at the time of withdrawal. On the other hand, there will be a colossal loss if the tax slab is higher at the time of maturity.

Now, on account of the structure of EET, the chances of the tax slab being higher are greater.

Let us take the instance of an employee in the 20% tax bracket with 30 years left for retirement. If he deposits only Rs 20,000 every year in any retirement benefits account maintained with any permitted savings intermediary, he will find that @ 9% pa, his retirement amount would grown to Rs 27.26 lakh. Now, if he were to withdraw this amount, he would migrate into the higher 30% tax slab since his income would be above Rs 25 lakh. In other words, his tax rate would be higher after he has retired than when he was working!

In view of this, the conclusion is that, unless the code is amended suitably, a taxpayer will do well by paying upfront taxes every year, rather than investing in any permitted savings intermediary.

Yet another anomaly
The sixth schedule of the code lists income not to be included in the total income.

Item-11 exempts the accumulated balance in the account of an employee participating in an approved provident fund as on the March 3, 2011, but more importantly, also exempts any accretion thereto. Note carefully that this means the interest earned and consequently any withdrawal made even after April 1, 2011 of this amount will not be taxable. EET would only be applicable to fresh contributions made and the accretions only on such fresh contributions. Unfortunately, the same is not true for other provident funds and PPF.

Item-17 exempts any payment from a provident fund to which the Provident Funds Act, 1925 applies, or from any other provident fund set up by the central government and notified by it in this behalf in the official gazette (i.e. PPF), so far as these payments relate to accumulated balances as on March 31, 2011. Consequently, contributions made from April 1, 2011 and the entire interest earned on the old balances as well as the fresh contributions are chargeable to tax! Life insurance premia also suffer similar, though not the same fate.

The authorities would have done well by applying unified rules to all balances as on March 31, 2011, thereby avoiding complexity. After all, this is the declared objective of the code.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Software Development Software Programming Software Engineering Custom Software Development Requirement Based Software Development Software Solutions Software Serv

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions