Direct Taxes Code: revised discussion paper is more an apologia for the earlier proposals

by S. RAJARATNAM

Pranab Mukherjee releases the “Direct Taxes Code” for public discussion, in New Delhi.

The draft Direct Taxes Code (DTC) released in August 2009 is now subject matter of revised discussion paper on hand on June 16, 2010 with the last date for reaction set at June 30. What is your comment relating to the proposals as regards assessment of income from salary, property and capital gains?

While the discussion paper along with the draft Direct Taxes Code had listed 24 subjects with each subject covering a number of proposals chosen for discussion, the revised paper deals with only 11 subjects.

It is more an apologia for the earlier proposals, the only major change being the dropping of the proposal for tax on gross assets but that too only because of “practical difficulties” and “unintended consequences particularly in the case of loss making companies and companies having long gestation period”.

It is for this reason it is stated that Minimum Alternate Tax (MAT) will be continued to be computed on the basis of book profits with no other better reason for its continuance. The revised discussion paper stands committed to the EET scheme, which was generally unwelcome.

But the clarification that the proposed EET scheme will be only prospective and that contributions only after the Direct Taxes Code comes into force are re-assuring.

In respect of salary taxation, there is hardly any change from the Code, except for the assurance that the annual value of rent-free accommodation need not be on the basis of market value for the reason that it will create “high tax burden in the case of government employees, if market rent is adopted”(!). Such consideration could have probably been extended for the claim for total exemption for such concessions as for medical reimbursements and in taxation of other perquisites such as interest-free loans. But the assurance is that where a ceiling is prescribed for exemption in respect of some perquisites, there will be appropriate enhancement of monetary limits. The revised discussion paper has little to enthuse the salary sector.

In the computation of property income, there is assurance of continuation of deduction of interest, subject to a ceiling of Rs. 1.50 lakh against nil income from one self-occupied property.

The changes that are proposed for capital gains, especially in respect of transactions in listed securities through a stock exchange now exempt, but for Securities Transaction Tax, sends alarming signal for long-term investors in listed shares.

Surprisingly, Securities Transaction Tax is also to be continued at the rate to be “calibrated” with reference to flow of funds to the capital market.

The proposals relating to capital gains for allowing “specified percentage” deduction to arrive at the amount of surplus to be taxable at the normal rate is not reassuring since the “specified rate of deduction for computing adjusted capital gains” will be “finalised in the context of overall tax rates”.

On charities

For non-profit organisations, there is hardly any material change from the treatment in the draft Code. Loss of exemption for income of those trusts and institutions with income from source, which is construed as business, even where it is incidental to the objects of general public utility in the present law from assessment year 2009-10, will continue. For other trusts and institutions, capital expenditure will be treated as utilised only if it is for acquiring a business capital asset incidental to its charitable objects.

Amount applied for charities through any other institutions will not be treated as utilised. Unutilised income subject to 15 per cent tolerance limit will be taxed at 15 per cent.

In the bargain, even voluntary contributions other than the permissible amounts treated as utilised, may become taxable though such contributions would not have even otherwise the character of income under the income tax law. The cash system of accounting proposed in the draft Code would be mandatory so that the denial of capital expenditure, other than what is permitted in such computation of income, will be anomalous.

There is some clarity as regards wholly religious charities, which will be exempt, subject only to the additional condition of requirement of registration under State legislation, if any. Requirement of utilisation as for charitable institutions, it would appear, would have no application for them.

For those institutions, which are partly religious and partly charitable, where there is specification of ratio of utilisation of income as between charities and religion, liability would get split up on the basis of same ratio. As otherwise, it would appear that they will be treated on a par with a charitable institution.

Non-resident taxation

Non-resident taxation in the two chapters in the revised Discussion Paper indicates that there is no sign of any better clarity in law, which will continue to be uncertain.

One of the criticisms against branch profits tax was that it would make even profits of a non-resident purchasing agency in India taxable, though such levy would be against the universally adopted practice of exempting purchase activity and will be against the interest of economy, but the proposal would be implemented without any exception according to the revised discussion paper.

This impact of Double Tax Avoidance Agreement on tax on branches of non-residents has also not received attention. There are only some cosmetic changes as in respect of classification of investments of foreign institutional investors (FII).

Other proposals

Wealth tax will remain but the threshold limit will be suitably calibrated.

The General Anti-Avoidance Rule (GAAR) is sought to be justified with promised remedy against its indiscriminate application by way of guidelines, prior approval, minimum exemptions limit and hearing before Dispute Resolution Panel (DRP).

There are many other matters not covered by the revised discussion paper like those relating to the proposals in the procedural law in Direct Taxes Code for the protection of taxpayers against bad assessments.

Pre-assessment reference to Joint Commissioner and revision petition to Commissioner are proposed in the Code to be withdrawn, while limitation is proposed on the period of condonation of delay in appeals.

Administrative approval by higher authorities for additions without opportunity to the taxpayer now in practice will apparently continue. Lack of accountability for abuse of powers under the statute under the present law will also continue in the Code. Representation in matters of procedural law on this and other problems such as TDS are not subjects considered worthy of mention in the revised Discussion Paper.

The most welcome aspect of the draft Direct Taxes Code proposing reduction in tax rate and revision of slabs, which was bait for accepting the proposed changes, would now take a backseat.

The preamble to the revised discussion paper clearly states that there could be reduction of tax base as a result of revision of the proposals apparently because of dropping of the proposal of gross assets tax so that it would be necessary that tax slabs, tax rates and monetary limits for exemption would all required to be “calibrated accordingly while finalising the legislation”.

It means that such “calibration” will be done with the sole object of ensuring that there is no fall in immediate revenue collection. Such a policy objective is inconsistent not only with any long-term fiscal policy but also with the tenets of taxation and more so with principles of public finance, which would consider taxation as an instrument of growth, a far cry from the professed objectives of the new Code now made explicit in the revised discussion paper.