DTC 2.0

In a major relief to the middle class, the government proposed to drop its earlier suggestions of taxing withdrawals from provident funds, pension funds and pure life insurance schemes and of imposing tax on retirement and in-service perks given by employers.The revisions in the Direct Tax Code (DTC),originally proposed in August 2009, also clarified that the tax exemption on interest up to Rs 1.5 lakh per annum on housing loans will continue. In a major concession to industry, the proposal to impose minimum alternate tax (MAT) on gross assets of a company was also shelved. MAT will continue to be applied on book profits as at present.
Another significant change in the revised proposals is in the manner in which longterm capital gains on assets held for over a year will be treated. In the case of listed securities, where there is now no long-term capital gains tax, the proposal is that a proportion of the gain in the value of the securities will be added to the person’s income, with the proportion declining as the period of investment increases. Revenue secretary Sunil Mitra said the government would entertain suggestions on the revised draft of the DTC till June 30 and a bill would be brought before Parliament in the monsoon session. Once the act is passed by Parliament, the new tax code will replace the 1961 Income Tax Act and will be implemented from April 1, 2011.
The revised DTC said retirement benefits, subject to specified monetary limits, will be exempt, unlike in the Code’s earlier version. These include gratuity, amounts received under voluntary retirement schemes, commutation of pension linked to gratuity received or from encashment of leave at the time of retirement. The revised Direct Tax Code contains a number of significant changes. In what should be particularly good news for government officials, it clarified that the perquisite value of rent-free accommodation would not be calculated at market value.Perks like reimbursement for mediclaim provided by an employer will be valued as per the existing law with “appropriate enhancement of monetary limits’’.

While that’s the good news, there is a catch. Revenue secretary Sunil Mitra said the tax slabs and rates as proposed in the initial draft of the DTC were only illustrative and a final call will be taken when the draft bill is finalised. He said the scope for discussions and changes would remain even after the bill is introduced in Parliament.
The original draft of the DTC had proposed no tax up to incomes of Rs 1.6 lakh per annum and a 10% slab up to Rs 10 lakh, a 20% slab up to Rs 25 lakh and 30% beyond that limit. While these slabs would have meant a major bonanza for individual taxpayers, the government has been apprehensive about the potential revenue implications of such a drastic revision. Mitra’s comments on Tuesday could be seen as an indication that the changes might be moderated.
Among the 11 issues touched upon in the revised draft of the DTC, there is also a major change in taxing FIIs. Capital gains of FIIs will not be treated as business income and hence not subjected to TDS. Instead they will be treated as capital gains.
The new draft proposes to set a basic limit to exempt income of charitable organisations from tax. Any income beyond this limit will be subject to tax. To address the concern that a non-profit organisation (NPO) may not be able to spend its entire receipts during the fiscal itself, it is proposed that up to 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years. But donations by an NPO out of its accumulated surplus to another NPO will not be considered as application for a charitable purpose.