The draft of New Direct-taxes Code which is intended to replace the Income-tax Act 1961, was released along with discussion papers on12th August, 2009. It was declared that the Code is not an attempt to amend the Income-tax Act, 1961; nor is it an attempt to “improve” upon the present Act. In drafting the Code, the Central Board of Direct Taxes (CBDT) has, to the extent possible, started on a clean drafting slate.
The government took into account the serious problem of complexity of tax legislation in India. Chapter I of the Code states as under:
Tax administrators, chartered accountants and tax payers have raised concerns about the complex structures of the Income Tax Act. In particular the numerous amendments have rendered the Act incomprehensible to the average tax payer. The problem has been further compounded by the courts at different levels.
It was heartening to note that in the true spirit as stated in the Code the draft Code was circulated for discussion and consultations at the numerous forums. Now that the process of consultations is over, the Code will need a redrafting but as reported in the press (see Business Standard of 7th January, 2010) there could be a relook at the proposals on taxation for employees, income from house property, proposals of the minimum alternate tax (MAT), capital gain, tax treaties, taxation for foreign companies, etc.etc.
In the above context, it is important to ascertain the date from which the Direct Tax Code will be applicable. As per section 1(3) of the Code, it shall come into force on the 1st day of April, 2011. Further, section 2(7) provides that “the liability to pay income-tax, or the chargeability thereof, under the foregoing provisions, for any Financial Year, shall be determined in accordance with the provisions of this code as they stand on the 1st day of April immediately succeeding the last day of the Financial Year.”
A combined reading of both the above provisions would lead to an inference that the Code would come into force on 1st April, 2011, and will apply to income earned as from 1st April, 2010.
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In the above background, when the budget for 2010 is presented in the Parliament, the Finance Bill accompanying the budget which contains the income tax rates will have two different schedules for income tax rates.
Part I of the first schedule will contain the income tax rates for Assessment Year 2010-11, and part II will contain rates for deduction of tax at source for income accruing during Financial Year 2010-11. But since the new Direct Tax Code will take effect for income accruing in F.Y. 2010-11,the Budget will need to be synchronised with new Direct Tax Code so that the rates of tax as contained in the new Direct Tax Code are applied for the purpose of deduction of tax at source for FY 2010-11. It is particularly important because the new Code proposes sharply lower tax rates for both individuals and corporates, and it withdraws many incentive and exemptions available under the current tax laws.
Section 282 of the Code provides that Income-tax Act, 1961 will be repealed, but any return of Income filed before commencement of the Code, proceedings for the assessment will be taken and continue under the existing Income-tax Act as if the new Code had not been enacted.
Further, it is also provided that where deductions/exemptions are available under the existing Income-tax Act under section 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE and 80JJA, such deductions shall continue be allowed under the new Code also. The government is also empowered to issue appropriate orders providing for adaptation or modifications where it considers that the repealed Income-tax Act,1961 shall apply in relation to assessment for Assessment Year 2011-12.
Thus, it is possible that there may be practical difficulties in the first intervening assessment i.e A.Y. 2011-12.
In view of the above, it is imperative that the government should clarify in exact terms the date from which the new Direct Tax Code will be applicable.
The author is a Sr. Partner in S S Kothari Mehta & Co