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. 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. 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assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor.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|
On October 18, it was reported in the news that the central government has been given more time for framing rules under the Citizenship (Amendment) Act, 2019. The President had given assent to this Act in December 2019 and the Act came into force in January 2020. Similarly, about two years have passed since the new labour codes were passed by Parliament, and the final Rules are yet to be published. This raises the question how long the government can take to frame Rules and what is the procedure guiding this. In this blog, we discuss the same.
Under the Constitution, the Legislature has the power to make laws and the Executive is responsible for implementing them. Often, the Legislature enacts a law covering the general principles and policies, and delegates the power to the Executive for specifying certain details for the implementation of a law. For example, the Citizenship Amendment Act provides who will be eligible for citizenship. The certificate of registration or naturalization to a person will be issued, subject to conditions, restrictions, and manner as may be prescribed by the central government through Rules. Delay in framing Rules results in delay in implementing the law, since the necessary details are not available. For example, new labour codes provide a social security scheme for gig economy workers such as Swiggy and Zomato delivery persons and Uber and Ola drivers. These benefits as per these Codes are yet to be rolled out as the Rules are yet to be notified.
Timelines and checks and balances for adherence
Each House of Parliament has a Committee of Members to examine Rules, Regulations, and government orders in detail called the Committee on Subordinate Legislation. Over the years, the recommendations of these Committees have shaped the evolution of the procedure and timelines for framing subordinate legislation. These are reflected in the Manual of Parliamentary Procedures issued by the Ministry of Parliamentary Affairs, which provides detailed guidelines.
Ordinarily, Rules, Regulations, and bye-laws are to be framed within six months from the date on which the concerned Act came into force. Post that, the concerned Ministry is required to seek an extension from the Parliamentary Committees on Subordinate Legislation. The reason for the extension needs to be stated. Such extensions may be granted for a maximum period of three months at a time. For example, in case of Rules under the Citizenship Amendment Act, 2019, at an earlier instance, an extension was granted on account of the onset of the COVID-19 pandemic.
To ensure monitoring, every Ministry is required to prepare a quarterly report on the status of subordinate legislation not framed and share it with the Ministry of Law and Justice. These reports are not available in the public domain.
Recommendations to address delays
Over the years, the Subordinate Legislation Committees in both Houses have observed multiple instances of non-adherence to the above timelines by various Ministries. To address this, they have made the following key recommendations:
Are all Rules under an Act required to be framed?
Usually, the expressions used in an Act are “The Central Government may, by notification, make rules for carrying out the provisions of this Act.”, or “as may be prescribed”. Hence, it may appear that the laws aim to enable rule-making instead of mandate rule-making. However, certain provisions of an Act cannot be brought into force if the required details have not been prescribed under the Rules. This makes the implementation of the Act consequent to the publication of respective Rules. For example, the Criminal Procedure (Identification) Act, 2022 enables the police and certain other persons to collect identity-related information about certain persons. It provides that the manner of collection of such information may be specified by the central government. Unless the manner is prescribed, such collection cannot take place.
That said, some other rule-making powers may be enabling in nature and subject to discretion by the concerned Ministry. In 2016, Rajya Sabha Committee on Subordinate Legislation examined the status of Rules and Regulations to be framed under the Energy Conservation Act, 2001. It observed that the Ministry of Power had held that two Rules and three Regulations under this Act were not necessary. The Ministry of Law and Justice had opined that those deemed not necessary were enabling provisions meant for unforeseen circumstances. The Rajya Sabha Committee (2016) had recommended that where the Ministry does not feel the need for framing subordinate legislation, the Minister should table a statement in Parliament, stating reasons for such a conclusion.
Some key issues related to subordinate legislation
The Legislature delegates the power to specify details for the implementation of a law to the Executive through powers for framing subordinate legislation. Hence, it is important to ensure these are well-scrutinised so that they are within the limits envisaged in the law.
See here for our recently published analysis of the Criminal Procedure (Identification) Rules, 2022, notified in September 2022. Also, check out PRS analysis of: