The draft Direct Taxes Code has brought about a paradigm shift vis-a-vis personal taxation.
Enhancement of tax slabs: This proposal, a measure to cheer, would leave more disposable funds with the taxpayer. Consequently, in a country like India having a large youth population, this may translate into higher expenditure. With the Goods and Services Tax (GST) being implemented, there is likely to be a shift from taxation of income to taxation of expenditure. The other benefit would be higher compliance. This would broad base the collection of personal tax to a larger population — a proven fact.
Taxation of employment income: The first impression is that the provision is definitely simpler. There is a significant change in the exemptions or deductions. Qualified severance payments which previously did not form part of income will now be first included in gross salary but then deducted while computing the taxable income from employment. Although this is not likely to impact tax liability, it will be easier for the revenue to keep track of the benefits obtained by the taxpayer and prevent excessive claims.
There is a significant shift in the treatment of deductions. Earlier, qualified severance payments like gratuity, commuted pension, voluntary retirement schemes received during the working life were wholly or partially exempt. The Code requires that the deduction (from gross salary) will be subject to deposit in a retirement benefits account (RBA) like provident fund, life insurance, new pension system, etc. Therefore, the thrust is towards securing the retired life of the taxpayer rather than providing extra funds during the working life. This is reiterated in the provisions made for deduction from total income (the replacement for the present section 80C), where the benefits from deposit in investment schemes like ULIPs have been removed.
The Code also makes valuation of perquisites of government employees uniform with those of non-government employees. It is however, needed to put the items and valuation of perquisites in the Code itself for certainty and better rationality (currently perquisite on accommodation is included in the Code).
Taxation of Retirement Benefits: The tax deferral method (Exempt-Exempt-Taxation) will apply to retirement benefits. Deposits into RBA during the working life will be tax deductible. The accruals during the tenure of the scheme will not be taxable. However, tax will have to be paid on any withdrawal. This brings in the concept of deferral of tax liability for all retirement benefits (currently limited to NPS and some other schemes only). Grandfathering has been allowed for PF accumulations up to March 31, 2011, but there is no clarity on what would be the tax treatment with respect to the withdrawal of interest on such accumulations arising after that date. The shift in this methodology, however, needs to be completed through a robust implementation regime. Appropriate infrastructure will be needed to track withdrawals to prevent tax leakage. Further, systems should be in place to prevent overburdening of the taxpayer from non-reporting of TDS. The NSS experience was not good.
Income from house property: Currently, interest up to Rs 1.5 lakh per annum is allowed as a loss of income from self-occupied house property. The Code proposes to do away with this. The idea is not to allow any loss/deduction if the income per se is not taxable. It would be welcome if the benefit is retained for salaried taxpayers, who pay such interest from their tax-paid income.
Taxation of inbound expatriates: In line with the motto of simplification, the special category of “Non Ordinarily Residents” has been removed. The definition was cumbersome and difficult to explain to the inbound expatriates. The simplification, however, will make the global income of the first-time expatriates subject to Indian tax earlier.
Overall, the shift is in consonance in our country’s climb in the path of growth to the upper quartile of developing economies. However, we need measures for certainty and implementation to make it successful.
(Assisted by Shuddhasattwa Ghosh, Associate Director, PricewaterhouseCoopers)
Kaushik Mukherjee
Executive Director (Tax & Regulatory Services), PwC
