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Revised Direct Taxes Code 2010-A Critique On Revised Discussion Paper-VRK100-21062010
Revised Direct Taxes Code 2010-A Critique On Revised Discussion Paper-VRK100-21062010
Revised Direct Taxes Code 2010-A Critique On Revised Discussion Paper-VRK100-21062010
She
starts to build a castle in the sand. She collects sand and arranges it into a big
heap. She tries to mould it as per her imagination. After sometime, she
completes the sand castle and she goes around the castle merrily – laughing,
cheering and shouting.
This attracts some other people loitering on the beach. They come and start
inspecting the castle. Some applaud it and some suggest little changes to the
castle to make it more beautiful. First the child is confused about making the
changes. At last, she obliges the onlookers’ advice and makes alterations with
some tinkering to the minarets here and to the windows there.
Now, more onlookers start giving advice on making it look more wonderful. The
child listens patiently to them and makes more alterations with her tender hands.
Then a disaster strikes. The castle suddenly collapses due to too many
alterations. Disappointed by it, the child walks home with a heavy heart.
Some of you may be wondering what this is all about! The above story sums up
the predicament of the Government of India in bringing about several
amendments to the Direct Taxes Code (DTC). It may be recalled that the
Government had brought out a Revised Discussion Paper (RDP) on 15th of June
2010 making certain changes to the draft DTC Bill which was released in August
2009. The Government has apparently messed up the whole issue of bringing a
transparent DTC, which could have been understandable easily by ordinary
persons; providing stability, equality and clarity; and without any distortions. This
article provides a critical analysis of important issues in the DTC proposals.
Please read the author’s disclaimer given at the end of this article.
Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
The following important annexures are given at the end of this article:
(A must-read for all investors, taxpayeers and market players)
Abbreviations Used:
DDT-Dividend Distribution Tax PFRDA-Pension Fund Regulatory and
DTC 2009-Direct Taxes Code August 2009 Development Authority
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
Concept of DTC:
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
Unfortunately, STT stays!: When the tax on long-term capital gain was
abolished by the then Finance Minister while presenting the Union Budget 2004-
05, the FM introduced STT to fill the tax revenue gap caused by the abolition of
LTCG. Unfortunately, the RDP says that STT will be revised suitably. Now, equity
investors will have to pay both the STT and LTCG once DTC comes into force,
which was not the case prior to the introduction of STT in 2004.
http://www.scribd.com/doc/33282656
(In fact, the RDP does not use the words, short-term capital gain or long-term capital
gain. For the sake of simplicity and better understanding, the words STCG and LTCG
are used as they have been in existence for more than five decades.)
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
The Revised Discussion Paper is a kind of mixed bag for individuals and salaried
class. The Government has now decided to provide tax exemption at the time of
withdrawal (EEE method), even though for six types of investments only.
To know about the difference between EEE method, EET method and such
eligible investments, see Annexures I to IV given at the end of this article.
Everything has a price. Take for example, the Indian public are very happy with
the subsidy on petrol, diesel, LPG & kerosene. But, ultimately, the entire
economy is paying the price for the subsidy as the subsidies are paid through the
Union Budget! The cost of everything has to be paid by someone, i.e., the public.
In the original DTC, the Government had proposed to remove exemptions; while
simultaneously reducing tax rates and increasing tax slabs. But due to public
outcry, Government has now said it would restore certain tax exemptions. As the
tax base comes down, the Government will not be in a position to reduce tax
rates and increase tax slabs as proposed in the original DTC in August 2009.
The net effect will be the same for public! (It may be recalled that it was
proposed, in the draft DTC of August 2009, to increase the present exemption of
Rs one lakh under Section 80C of the Income Tax Act to Rs three lakh and
increase the tax slabs – up to Rs 10 lakh at 10 per cent; above Rs 10 lakh to Rs
25 lakh at 20 per cent; and above Rs 25 lakh at 30 per cent.)
To know about the proposals of original draft DTC released in August 2009, just
click: http://www.scribd.com/doc/19542987
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
It is very sad to read the contents of Revised Discussion Paper (RDP) released a
week back. The Government has failed to provide clarity on many issues, like:
The refrain now is that the legislature is the ultimate authority for deciding tax
rates! It may be recalled that the original DTC 2009 had provided rates & slabs.
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
There are various methods to protect our interests, in a legal manner, in relation
to tax exemptions and liabilities. We need to show a little ingenuity and look for
ways to protect our interests under the existing laws.
Let us hope that the Government would provide a reasonable transition period for
investors and more clarity would exist when the real DTC Bill is presented in
Parliament in the next few months.
Any direct taxes regime that is transparent, clear and simple to understand is
very good for the economy as a whole. As taxpayers, we need to encourage any
sincere attempts by the Government to clean up the existing messy laws. We
shall be able to see the broader picture which will benefit the entire economy
rather than a few individuals or smaller groups. Tax laws have to be amended
keeping the ever changing economic and social environment in mind.
We need to look at the new Code with fresh eyes without any old baggage.
Theoretically, the concept of EET, removal of all kinds of tax
incentives/concessions, and clubbing all sums under taxable income, are sound
and beneficial in the long-term. However, India is beset with its own set of
peculiarities, lack of social security system, contradictions and problems as far as
increasing tax base and administering taxes is concerned. We need to change
our mindset – not only taxpayers, but also those in the tax administration and
implementation.
http://www.scribd.com/doc/23804443
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
To sum up:
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www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
Annexure I
The present system is called ‘EEE’ meaning investments enjoy benefits in three
stages: 1). Exemption allowed at the time initial contribution, 2). Exemption
through out the accumulation period, and 3). Exemption at the time of withdrawal.
(EEE stands for Exempt, Exempt and Exempt).
It was proposed in the DTC 2009 that the EET method will apply for new
contributions made after the commencement of the DTC. The DTC 2009 had
proposed to shift to a new system called ‘EET’ whereby exemption would be
allowed at the time of initial investment and accumulation period only; but the
withdrawals will be included in the taxable income and taxed according to one’s
tax slabs. (EET stands for Exempt, Exempt and Tax).
Annexure II
* There is a lot of confusion as the Government has not defined what an ‘approved pure life
insurance product’ is. Some experts believe that it refers to pure term insurance policies.
# At present NPS is under EET method; after DTC it would be under EEE method
The above mentioned six instruments will continue to attract the current
favourable tax treatment at all the three stages: 1. at the time of investment, 2.
during the accumulation period, and 3. at the time of withdrawal. The investors
can continue investments in the above six even after the DTC comes into force.
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Annexure III
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Dividends will not attract tax in the hands of the recipient if such dividend
distributed by companies has suffered Dividend Distribution Tax (DDT) at
the applicable rate. (The DTC 2009 has proposed to levy 15 per cent DDT.)
In the light of the overall tax exemptions, tax rates and tax slabs, the Government
may change any of the above tax incentives/exemptions mentioned in part A and
B above while presenting the DTC Bill 2009 in Parliament in the next few months.
As per Section 80C of IT Act, an individual or HUF is eligible to get tax exemption
up to Rs one lakh per annum in certain notified savings instruments. The draft
DTC Bill 2009 proposed to increase this limit to Rs three lakh per annum.
However, the context has completely changed with the Government agreeing to
continue with certain existing tax exemptions as per the Revised Discussion
Paper. Now, one can safely assume that the Government will definitely not be in
a position to provide a limit of Rs three lakh tax exemption.
Annexure IV
A careful reading of the provisions and the RDP and DTC 2009 indicate that the
Government is most likely to withdraw the following existing tax exemptions
being enjoyed by the taxpayers. One is forced to come to this conclusion
because the Government has maintained a strange silence on these issues and
these issues have not been mentioned either in the DTC 2009 or the RDP
released on June 15, 2010. So, the important deductions that are most likely to
be disallowed in future under proposed DTC could be:
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Rama Krishna Vadlamudi, BOMBAY June 21, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
References:
Author’s Disclaimer: The author’s views are personal. The above article is
written for information purpose only. Every care has been taken to provide
authentic information as far as possible; however, the author is not responsible
for any inadvertent discrepancies that may have crept in. Readers should consult
their own certified tax consultants or experts to correctly interpret the provisions
of tax laws or other matters.
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