Changes Proposed to be Brought by The Direct Tax Code Bill, 2010

The Direct Tax Code is proposed to be brought in to consolidate and amend the regime relating to Direct Taxes in India so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Also the secondary purpose of the Code is to reduce disputes and minimize litigation. The Code proposes to bring all forms of Direct Taxes under a single code. A Discussion Paper was released in August 2009; subsequently a revised discussion paper was brought out in June 2010 which incorporated certain suggestion made with regard to the Discussion Paper. Finally, the Bill was tabled in the Parliament on 30th August, 2010. The post highlights certain changes which are to be brought by the Direct Tax Code Bill, 2010.

• Tax Rates

The tax slabs have been widened (First Schedule Paragraph A). The lowest tax rate of 10% is applicable to salary income of Rs2-5 lakh, 20% on income of Rs5-10 lakh and 30% on income above Rs10 lakh.

• Residential Status of Individuals

Residential Status of Individual under the Direct Tax Code has undergone a significant change. The requirement of being present in India for 730 days in the preceding seven years, essential for qualifying as an ordinary resident and the categorization of Resident but not ordinary Resident has been done away with (Clause 4).

• Residence of Companies

Under the Direct Tax Code a company would be treated as a Resident if it is an Indian Company or if its place of ”effective management” at any time of the year is in India (Clause 4) in contrast to the requirement of being “wholly” situated in India under the Income Tax Act. 'Place of effective management' under Clause 314(192) is defined as either the place where the Board/Executive directors of a company make their decisions or, in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company or the place where such executive directors or officers of the company perform their functions. This has been done to enlarge the scope of taxability of companies by bringing in more number or Companies under the banner or Resident Companies.

• Income from Salary

The broad head of Income from Salary under the Income Tax Act has been renamed to “Income from Employment” under the Direct Tax Code. Clause 23 (e) has removed the cap of 1 lakh towards the Employer’s contribution towards approved Superannuation fund.

• House Property

No taxation on deemed income basis. The concept of fair market value (S.23) for calculation of income from house property has been done away with primarily because computation of notional rent has been a predominant cause of litigation. Income from the letting of house property will be computed on the basis of contractual rent (Clause 26), i.e. the amount of rent received or receivable, directly or indirectly for the financial year less specified deductions (Clause 27). Standard deduction on account of repairs and maintenance has been reduced from 30% to 20% [Clause 27 (1) (b)].

• Branch Profit Tax

The Direct Tax Code introduces a Branch Profit Tax (BPT) on branch profits of foreign companies in addition to the income tax on income attributable to a Permanent Establishment (PE) or an immovable property in India, as reduced by the income tax payable on such attributable income. The Rate of Tax as proposed in the Second Schedule Para D (4) is 15%.

• DTAA

The Direct Tax Code in Clause 291(8) lays down that between the Code and a DTAA the provisions of the Code will apply to the extent that the provisions of the Code are more favorable to the assessee.

• Wealth Tax

The existing exemption limit (30 lakh) for the chargeability of Wealth Tax under the Act has been increased to 1 Crore. (Second Schedule Para E).

• Minimum Alternate Tax

The Direct Tax Code has brought in the concept of Minimum Alternate Tax so as to overcome the problem of excessive tax incentives. Where the normal income-tax payable for a financial year by a company is less than the tax on book profit, the book profit shall be deemed to be the total income of the company for such financial year and it shall be liable to income-tax on such total income (Clause 104 Direct Tax Code).