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  Date: 2nd September 2009

 Compiled by: M Sathya Kumar  

Personal tax changes in the Code

The Code proposes to moderate the tax rate for individuals by raising the slabs and abolishing surcharge and education cess.

The Finance Minister, Mr Pranab Mukerjhee, has unveiled the Direct Tax Code with an objective to bring all direct taxes, such as income-tax, dividend distribution tax, etc., under a single code. The Code proposes to moderate the tax rate for individuals by raising the slabs and abolishing surcharge and education cess. Some key changes with respect to individuals are as follows:

Tax Rates

With the challenges being faced in the world economy, largely impacting everyone’s disposable income, there is always an aspiration for liberal tax slabs and rates. In India, the maximum individual tax rate of 30 per cent is currently triggered at a very low level of Rs 5,00,000.

Globally, the peak rate is attracted at a significantly higher slab, as also the threshold limits are much more. The Code proposes to fulfil this dream of every individual taxpayer. Under the existing regime, an individual earning Rs 1,60,000 to Rs 3,00,000 per annum is taxed at 10 per cent. Under the Code, the tax rate of 10 per cent is proposed to be extended to earnings up to Rs 10,00,000.

Income between Rs 10,00,000 and Rs 25,00,000 is proposed to be taxed at 20 per cent and thereafter the tax rate would be 30 per cent. Hence, the peak rate actually triggers at a much higher threshold vis-À-vis the existing Rs 5,00,000. This is certainly appealing and more aligned to tax trends prevailing globally. There is also no surcharge or education cess proposed.

The change in slab translates into an annual benefit of Rs 1,26,120 for an individual earning Rs 10,00,000. Interestingly, the saving increases with the increase in income level. For example, disposable income will increase by Rs 2,35,120 for an individual earning Rs 20,00,000. This should encourage more taxpayers to voluntary declare their income and thereby serve the purpose of increasing the tax-GDP ratio.

The Code proposes a simple calculation of salary income. It will be gross salary as reduced by total permissible deductions. Hence all types of perquisites are proposed to be included in salary income. The valuation is not prescribed and it will depend on the rules introduced.

It is also proposed to do away with popular exemptions such as house rent allowance, leave travel concession, leave encashment, medical reimbursements, etc. There are limited deductions proposed to be reduced from the gross salary and most of these are towards eligible retiral schemes.

The biggest radical change impacting individuals is the proposed introduction of the EET (Exempt-Exempt Tax) regime. Investments made in long term savings schemes such as provident fund, life insurance, superannuation, etc., is proposed to be taxable on withdrawal while the contributions and the accretions remain exempt. This is different from the existing Exempt-Exempt-Exempt Mechanism. The EET regime shall apply only for new contributions made after the commencement of the Code.

The Code proposes to increase the tax break on such savings from Rs 1,00,000 to Rs 3,00,000 per annum.

Income from house property

Rental value for property is now proposed to be at higher of contractual rent or 6 per cent of rateable value fixed by any local authority or cost of construction/acquisition. Deduction for repairs and maintenance is proposed to be reduced from 30 per cent to 20 per cent. Deduction of Rs 1,50,000 towards interest on housing loan for self occupied property will no longer be available. The Code proposes to remove the distinction between short-term and long-term gains or losses and all gains would be taxable at normal rates. It is proposed to remove the Security Transaction Tax (STT) though the tax schedules in the Code still refer to it. Accordingly, any gains on sale of shares of listed companies which is currently exempt will become taxable.

Wealth Tax

The welcome news is that wealth tax is proposed to be levied at 0.25 per cent if the net wealth exceeds Rs 50 crore vis-À-vis the existing threshold of Rs 30,00,000 per annum. However, it is proposed to broaden the net wealth base by including even financial assets such as shares. This will largely impact most of the high net worth individuals who hold huge portfolio of financial assets.

While the Code seems to be raining goodies for individual taxpayers and provides a far simpler and liberal tax mechanism, it remains to be seen what final shape it takes over the next two years before it is enacted.

(The authors are Partner and Senior Manager, respectively, BSR and Co.)

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