The Direct Taxes Code Bill presented in Parliament on Monday by and large shows a balanced approach adopted by the government. There are several features of the Code; perhaps the most pragmatic of those being the decision to defer its implementation to the 2012-13 financial year. It is undoubted that writing a new law based on learning from the experience of half a century is a Herculean task and the taxpayer and tax collector alike require time to acclimatise with a new code. It is laudable that the government realised this and decided not to unduly hasten the implementation of the Code to 2011, as was originally contemplated.
Individual taxpayers under the Code should not have much to complain about, though they cannot afford to be ecstatic either, comparing the Code with its 2009 version. There are modest raises in the exemption limit from Rs 1.6 lakh to Rs 2 lakh. In addition, there are increased deductions granted for medical reimbursements and an additional Rs 50,000 for certain pure insurance products, tuition fees, etc. The corporate sector lands up with a modest reduction in tax rate from the present.
The SEZ (special economic zone) entrepreneur has a lot to cheer, as any unit set up in the SEZ units till March 31, 2014, will continue to enjoy profit-linked incentive and, hence the SEZ continues to retain its fiscal attraction in the same form. SEZ developers have the benefit of enjoying profit-based incentives if their SEZs are notified by March 31, 2012. In both cases, some breathing time has been made available prior to the change to investment-based incentivising.
Assessees enjoying profit-based deductions under certain sections of the existing law (such as infrastructure sector) have the chance to continue to enjoy profit-based deduction if their projects are eligible for such deduction for the assessment year 2012-13.
On the capital gains front, reinstating the tax exempt status of long-term gain from sale of listed shares is a welcome move. Short-term gain from the sale of listed shares will be taxed after deduction of 50 per cent. Anyone in the 30 per cent tax rate bracket would be neutral. Anyone in lower slabs will be benefited.
The Minimum Alternate Tax (MAT) applicable to companies is to be levied at 20 per cent, which is as good as the current rate. The proposed asset-based levy of MAT caused apprehensions among companies that had heavy investments in assets and long gestation periods.
The government abandoning its original plan to bring about asset-based levy of MAT is a welcome relief. However, Dividend Distribution Tax (DDT) at a lower rate will be levied on dividend to be distributed by pass – through entities (such as mutual funds), which is perhaps not a step in the right direction, given that retail investors increasingly look to mutual funds and any fresh levy on them does not augur well for the investing community at large.
Two specific concepts — General Anti-Avoidance Rules (GAAR) and Controlled Foreign Companies (CFC) — introduced in the Code will require to be studied carefully. While there may be scope to contend that it was not that necessary to bring in GAAR, given that the existing law has sufficient anti-avoidance provisions that needed efficient implementation, now that it has been brought in, the government would do well to present an exhaustive list of conditions under which GAAR may be invoked. This will prevent taxpayers from being caught unawares after having proceeded half-way through a transaction. It would be better to have these clarified now and not be left for the Central Board of Direct Taxes to decide. The CFC provisions, also, in our view, are premature, given that Indian business has only very recently become out-bound and attempt to tax profits accumulated abroad definitely shows some overzealousness on the part of the government.
Overall, it is a Code to which taxpayers will react with ‘cautious optimism’.
Shyamal Mukherjee Executive Director and joint leader of the tax practice, PricewaterhouseCoopers
