The draft Direct Taxes Code Bill seeks to consolidate and amend the law relating to all direct taxes and will replace the Income Tax Act, 1961. The draft Bill, along with a discussion paper, was released for public comments in August 2009.[1] Following inputs received, the government proposed revisions to the draft Bill in June 2010. The table below summarises these revisions. The government has not released the changes proposed in the form of a revised draft bill however, but as a new discussion paper. The note is based on this discussion paper.[2] The Code had proposed a number changes in the current direct tax regime, such as a minimum alternate tax (MAT) on companies’ assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor. Under the new amendments, some of these changes, such as MAT, have been reversed. Personal savings in specified instruments (such as a public provident fund) will now continue to remain tax-free at all times. The tax deduction on home loan interest payments, which was done away with by the Code, has now been restored. However, the discussion paper has not specified whether certain other changes proposed by the Code (such as a broadening of personal income tax slabs), will continue to apply.
| Issue | Income Tax Act, 1961 | Draft Direct Taxes Code (August 09) | Revisions Proposed (June 2010) |
| Minimum Alternate Tax (MAT) | MAT currently imposed at 18% of profits declared by companies to shareholders. | To be imposed on assets rather than profits of companies. Tax rate proposed at 2% (0.25% for banks) | MAT to be imposed on book profit as is the case currently. Rate not specified. |
| Personal Saving / retirement benefits | Certain personal savings, such as public provident funds, are not taxed at all. | Such savings to be taxed at the time of withdrawal by the investor. | Such savings to remain tax-exempt at all stages, as is the case currently. |
| Income from House Property | Taxable rent is higher of actual rent or ‘reasonable’ rent set by municipality(less specified deductions). Rent is nil for one self-occupied property. | Taxable rent is higher of actual rent or 6% of cost /value set by municipality (less specified deductions). Rent is nil for one self-occupied property. | Taxable rent is no longer presumed to be 6% in case of non-let out property. Tax deductions allowed on interest on loans taken to fund such property. |
| Interest on Home loans | Interest on home loans is tax deductible | Tax deductions on home loan interest not allowed. | Tax deductions for interest on loans allowed, as is currently the case. |
| Capital Gains | Long term and short term gains taxed at different rates. | Distinction between long and short term capital gains removed and taxed at the applicable rate; Securities Transaction Tax done away with. | Equity shares/mutual funds held for more than a year to be taxed at an applicable rate, after deduction of specified percentage of capital gains. No deductions allowed for investment assets held for less than a year. Securities Transaction tax to be ‘calibrated’ based on new regime. Income on securities trading of FIIs to be classified as capital gains and not business income. |
| Non-profit Organisations | Applies to organizations set up for ‘charitable purposes’. Taxed (at 15% of surplus) only if expenditure is less than 85% of income. | To apply to organizations carrying on ‘permitted welfare activities’. To be taxed at 15% of income which remains unspent at the end of the year. This surplus is to be calculated on the basis of cash accounting principles. | Definition of ‘charitable purpose’ to be retained, as is the case currently. Exemption limit to be given and surplus in excess of this will be taxed. Up to 15% of surplus / 10% of gross receipts can be carried forward; to be used within 3 years. |
| Units in Special Economic Zones | Tax breaks allowed for developers of Special Economic Zones and units in such zones. | Tax breaks to be done away with; developers currently availing of such benefits allowed to enjoy benefits for the term promised (‘grandfathering’). | Grandfathering of exemptions allowed for units in SEZs as well as developers. |
| Non-resident Companies | Companies are residents if they are Indian companies or are controlled and managed wholly out of India. | Companies are resident if their place of control and management is situated wholly or partly in India, at any time in the year. The Bill does not define ‘partly’ | Companies are resident if ‘place of effective management’ is in India i.e. place where board make their decisions/ where officers or executives perform their functions. |
| Double Taxation Avoidance Agreements | In case of conflict between provisions of the Act, and those in a tax agreement with another country, provisions which are more beneficial to the taxpayer shall apply | The provision which comes into force at a later date shall prevail. Thus provisions of the Code would override those of existing tax agreements. | Provisions which more beneficial shall apply, as is the case currently. However, tax agreements will not prevail if anti-avoidance rule is used, or in case of certain provisions which apply to foreign companies. |
| General Anti-Avoidance Rule | No provision | Commissioner of Income Tax can declare any arrangement by a taxpayer as ‘impermissible’, if in his judgement, its main purpose was to have obtained a tax benefit. | CBDT to issue guidelines as to when GAAR can be invoked; GAAR to be invoked only in cases of tax avoidance beyond a specified limit; disputes can be taken to Dispute Resolution Panel. |
| Wealth Tax | Charged at 1% of net wealth above Rs 15 lakh | To be charged at 0.25% on net wealth above Rs 50 crore; scope of taxable wealth widened to cover financial assets. | Wealth tax to be levied ‘broadly on same lines’ as Wealth Tax Act, 1957. Specified unproductive assets to be subject to wealth tax; nonprofit organizations to be exempt. Tax rate and exemption limit not specified. |
| Source: Income Tax Act, 1961, Draft Direct Taxes Code Bill (August 2009), New Discussion Paper (June 2010), PRS | |||
[1] See PRS Legislative Brief on Draft Direct Taxes Code (version of August 2009) at http://prsindia.org/index.php?name=Sections&id=6 [2] Available at http://finmin.nic.in/Dtcode/index.html
The first batch of B.Tech students will pass out in the next couple of months from six new IITs but they will not get their degrees unless Parliament passes an Amendment Bill. M.Tech students who completed their course in IIT Hyderabad last year have not yet been awarded their degrees. The Institute of Technology (Amendment) Bill, 2010 is listed for consideration and passing in the Rajya Sabha on April 30, 2012 along with the National Institutes of Technology (Amendment) Bill, 2010. Both Bills were passed in the Lok Sabha in 2011. Both Bills confer the status of institutions of national importance to a number of new institutions, which implies that they have the power to award degrees (other technical institutions have to be affiliated with a university to be able to award degrees). These institutions cannot award degrees until Rajya Sabha also passes the Bill, the President gives assent and the central government brings it into effect through a notification. Power to grant degrees The Ministry of HRD established six new Indian Institutes Technology (IITs) in 2008 and two in 2009. It also established five new Indian Institutes of Science Education and Research (IISERs). However, they are still awaiting for the power to be recognised as degree granting institutions. Entry 64 of the Union List states that only Parliament can declare an institution to be an institution of national importance (see here and here). Also, the University Grants Commission Act, 1956 states that the right to confer degrees can be exercised only by a university, deemed university or any institution specially empowered by an Act of Parliament to do so. According to news reports, students of the new IISERs who passed out in 2011 have not received their degrees because of the legislative delay. Similar problems were reported by students in IIT-Benaras Hindu University. The students of the new IITs, which were set up in 2008 would be passing out this year. It is likely that they would face similar problems. In fact, IIT-Hyderabad is already in the news for not being able to award degree to its Masters students. Highlights of the Bills The Institute of Technology (Amendment) Bill, 2010 amends the Institutes of Technology Act, 1961, which declares certain Institutes of Technology to be institutions of national importance by adding eight new Indian Institutes of Technology (IITs) in Bhubaneshwar, Gandhinagar, Hyderabad, Indore, Jodhpur, Mandi, Patna, Ropar. It also seeks to integrate the Institute of Technology, Banaras Hindu University (BHU) within the ambit of the Act. All these institutions shall be declared as institutions of national importance (see here for a Bill Summary). The Bill was referred to the Standing Committee on HRD, which raised a few issues with regard to lack of clarity about the zone in which IIT-BHU shall be operating, the need to preserve the autonomy of the IITs and the need to fulfil qualitative parameters before the new IITs could transform into institutes of national importance (see here for the Standing Committee Report and a Summary). The National Institutes of Technology (Amendment) Bill, 2010 amends the National Institutes of Technology Act, 2007 to add a schedule of five Indian Institutes of Science Education and Research (IISER) (established in Kolkata, Pune, Mohali, Bhopal and Thiruvananthapuram). These institutions shall be declared to be institutions of national importance. Currently, there are 20 institutions listed as institutions of national importance under the 2007 Act (see here for a Bill Summary). The Standing Committee Report on the Bill made a few recommendations: (a) the composition of the Board of Governors should be made more expert specific in with the mandate of IISERs; (b) IISER Council should have less number of Secretaries, and (c) details of the inter-disciplinary knowledge regime should strive toward flexibility and freedom in research (see here for the Standing Committee Report and a Summary).
