The revised Direct Tax Code: How it impacts the individual taxpayers
April, 04th 2014
By Girish Vanvari, co-head of Tax, KPMG, India
First mooted in 2008 to overhaul the five decade old direct tax regime with an effective and equitable direct tax system that facilitates voluntary compliance and reduces disputes, the Direct Taxes Code, 2013 (DTC) is making headlines again. The Indian government has recently released a revised version of the DTC on the website of the Income-tax (IT) department for public comments.
In the revised draft, the government has been guided by the overarching principle of progressively taxing higher income, bringing greater clarity on applicability of tax provisions and improving the tax administration. The new version has also included material changes impacting the individual taxpayer.
The rising inflation and the objective to leave more disposable income with the individual taxpayer had prompted the Parliamentary Standing Committee on Finance (SCF) to recommend rationalization of tax brackets applicable to individuals and HUF - no tax levy on income up to Rs.3 lakhs and the highest tax rate of 30% to apply to taxable income over Rs.20 lakhs. The underlying rationale was to provide relief to the small taxpayers and moderately increase the tax rates for higher income group. It would have also led to reduction in transaction cost of the IT Department and enable it to focus its much needed attention to the areas prone to tax evasion.
However, the recommendation on increasing the slab rate has not been accepted on account of huge loss of tax revenues. The tax rates under the proposed DTC 2013 have therefore, been kept unchanged. Additionally, the 2013 draft has introduced the higher tax rate of 35% to tax the 'super-rich' with taxable income in excess of Rs.10 crores.
The SCF had further recommended that the tax slabs be linked to the Consumer Price Index (CPI) so that they are automatically adjusted to inflationary trends. However, this recommendation has not been considered on account of practical challenges.
On the other hand, the suggestion of SCF to lower the age eligibility to claim higher slab benefit from 65 years to 60 years has been accepted.
Income from House Property
The earlier draft of 2010 had proposed to tax rental income from commercially and non-commercial letting out of property as 'income from house property'. The SCF had recommended for a distinction between commercial and non-commercial letting out of property which has found place in the revised draft of 2013. The rental income from commercially letting out of property is proposed to be now taxable as business income, eligible for allowance of expenses and depreciation.
The SCF had also recommended that the deduction for repairs and maintenance of house property be restored to 30% of the annual rent in order to make the deduction commensurate to the prevailing costs. But this has not gained acceptance in the revised draft where a deduction of only 20% of the annual rent has been proposed to be allowed.
In a paradigm shift, the distinction between unproductive physical assets and productive financial assets for applicability of wealth tax has been done away with. Wealth tax is proposed to be levied on all assets, except the ones held as stock in trade. To compensate for the sweeping change, the limit of maximum net wealth not subject to tax has been drastically increased from the existing Rs.30 lakhs to Rs.50 crores. This move is to widen the wealth tax net and to avoid discrimination against conservative investors who invest primarily in physical assets.
The rate of wealth tax is proposed to be 0.25%. The assets chargeable to wealth tax do not include assets used for charitable activities, agricultural land, one house up to 500 square meters and foreign assets of non-resident Indians.
The Road Ahead
With India's image as an attractive investment destination taking a hit in the past couple of years contributing to the economic slowdown, the government has lately undertaken a series of measures to restore investor's faith in the Indian economy. While the release of draft DTC 2013 is a step in the right direction, the DTC will finally become a reality only with the passing of the Code into a law through legislative process. No specific timeline has been set out for providing comments from the public which will require further deliberations before the DTC sees the light of the day. With the general elections round the corner, any change in the government will prolong the wait for the law and the new Direct Taxes Code may still remain elusive.