By S Sivakumar, CA
The Finance Minister has taken a bold step by announcing the new Direct Tax Code, which is
expected to be made applicable from April 1, 2011. We must heartily congratulate the FM and
his team for bringing out this new Code, which would definitely make life simpler for the tax
payer. To attempt to change a law which has been in vogue for over 100 years, in indeed a bold
attempt.
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In a lighter vein, I must admit, that the new Code would substantially reduce the
professional opportunities for tax consultants and would also significantly reduce the very
process of tax collection by the Department, as the whole law would look much much simpler.
The main basis for taxation under the Code would be based on the residential status of the
assessee and would not depend on the sources of his income. Thus, there is a proposed shift to
residence based taxation from source based taxation.
There is a generic shift to lower tax rates and individuals would be the largest
beneficiaries. Profit based incentives available to corporates are proposed to be systematically
eliminated in the new Code, which has proposed a shift to an expenditure based incentive
scheme. Large infrastructure projects including developers of Special Economic Zones will now
move away from a deduction /exemption based on their profits, to a deduction based on
revenue and capital expenditure from gross receipts.
It would look like, its curtains for the tax holiday for 100% Export Oriented Units including the
STP Units, beyond April 1, 2011.An initial reading of the Code suggests that the existing
provisions contained in Section 10AA for SEZ Developers and Units, might either be
discontinued or may included in the ‘grandfathering’ proposals which are yet to be specified.
One indeed hopes that the existing SEZ Developers and Units, who have
set up their facilities on the basis of the availability of tax holiday under the existing Section
10AA of the Income tax Act, are not penalized under the new Direct Tax Code.
The individual taxpayers would move to a “Exempt-Exempt-Taxable” model, where the
tax exemptions would be available at the time of contributions and accruals, but would be
taxable at the time of withdrawals.
Some of the other welcome proposals contained in the Code include the rationalisation of
wealth taxprovisions, benefit of indefinite carry forward of losses and the introduction of
Advance Pricing Agreements (APAs) under Transfer Pricing Rules.
However, the proposal to override the provisions of the Double Tax Avoidance Agreements
could spell a lot of trouble for corporates having international transactions.
Here are some of the specific proposals contained in the Direct Tax Code Bill with our specific
comments:
• Tax law in simple and easy to understand language.
• The new Income Taxes Code to be applicable from 1st April, 2011.
• Personal Income tax rates slashed substantially.
o Upto 10 lacs (less existing basic exemption limit) : 10%
o Next 15 lacs : 20%
o Over 25 lacs : 30%
(Our comments : A lot of exemptions and deductions available for individuals have been
streamlined.
However, individuals would pay significantly lesser taxes, which is highly welcome. At last,
some tangible benefit is being proposed for individual tax payers and the salaries employees
would stand to gain the most)
• All Companies to pay tax @ 25%.
(Our comments : This signals a significant reduction in the corporate tax rate, which is presently
at 33%, inclusive of surcharge). • MAT @ 2% of gross assets. Even loss making companies to pay
MAT.
(Our comments : This would distinguish between services companies and
manufacturing/realty companies, where, investments in fixed assets are significantly higher.
Even loss making companies would be required to pay MAT, which defies logic. The services
sector, which employees much lesser gross assets to generate revenues, would stand to gain, as
contrasted to the manufacturing and realty sectors, which employ assets to a very large extent.
The step to levy MAT even on companies which do not make profits, is highly retrograde).• No
provision for MAT credit.
(Our comments : This is highly retrograde given the fact that even loss making companies would
now be paying MAT and would never be able to adjust the MAT paid).
• Dividend distribution tax to continue @ 15% of dividend. Foreign companies also to pay
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