HIGHLIGHTS OF NEW DIRECT TAX CODE

• MAT will be calculated on the basis on Book Profit
• Investment in tax Savings Scheme will be continue as Exempt Exempt Exempt (EEE)
• For Exemption for the retirement benefits, it is proposed not to introduce the Retirement Benefits Account Scheme.
• Employer Contribution to retirement benefits schemes within a prescribed limit shall not be considered as salary in the hands of employee.
• The method of perquisites will provide in rules. It is also clarified that the DTC does not propose to compute perquisite value of rent free accommodation based on market value. Perquisites in relation to medical facilities/reimbursement provided by an employer to its employees shall be valued as per the existing law with appropriate enhancement of monetary limits

INCOME FROM HOUSE PROPERTY

• In case of let out house property, gross rent will be the amount of rent received or receivable for the financial year.
• Gross rent will not be computed at a presumptive rate of six per cent of the rateable value or cost of construction/acquisition.
• In case of house property which is not let out, the gross rent will be nil. As the gross rent will be taken as nil, no deduction for taxes or interest etc., will be allowed. However, in case of any one house property, which has not been let out, an individual or HUF will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.

 INCOME FROM CAPITAL GAIN

•  Income under the head „Capital Gains‟ will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer
• Capital gains arising from transfer of an investment asset, being equity shares of a company listed on a recognized stock exchange or units of an equity oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified percentage of capital gains without any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be taxed at the applicable rate. The loss arising on transfer of such asset held for more than one year will be scaled down in a similar manner.
• For taxation of capital gains arising from transfer of investment assets held for more than one year (other than listed equity shares or units of equity oriented funds), the base date for determining the cost of acquisition will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains on such assets between 1.4.1981 and 31.3.2000 will not be liable to tax. The capital gains will be computed after allowing indexation on this raised base. The capital gains on such assets will be included in the total income of the taxpayer and will be taxed at the applicable rate
• The complexity of maintaining a permitted savings account and retirement benefits account scheme has been discussed in detail in context of EET method of taxation and taxation of Income from Employment. For the same reasons it is proposed not to introduce the Capital Gains Savings Scheme.
• The capital gain arising from transfer of any investment asset held for less than one year from the end of the financial year in which it is acquired will be computed without any specified deduction or indexation. It will be included in the total income and will be charged to tax at the rate applicable to taxpayer.
• Income arising on purchase and sale of securities by an FII shall be deemed to be income chargeable under the head „capital gains‟
• The capital gains arising to FIIs shall not be subjected to TDS and they will be required to pay tax by way of advance tax on such gains as is the existing practice.                                            

Non Profit Organisation (NPO)

• NPOs already registered under the Income-tax Act, 1961 and holding valid registration on the date on which DTC comes into effect, would not be required to apply for fresh registration under the DTC. However, they would be required to provide additional information to facilitate the administration of the new provisions.

         The income of a public religious institutions will be exempt subject to fulfillment of all the following conditions:

• It shall be registered under the Code.

• the trust/institution shall apply its income wholly for public religious  purposes;
•  it shall be registered under the state law, if any;
•  it is established for the benefit of the general public;
•  the trust / institution shall file the return of tax bases before the due date;
•  it shall maintain books of account and obtain an audit report from a qualified accountant in case its gross receipts exceed a prescribed limit;
• the funds or the assets of the trust / institution shall be invested or held, at any time during the financial year, in specified permitted forms or modes; and
• the funds or the assets of the trust / institution shall not be used or applied or deemed to have been used or applied, directly or indirectly, for the benefit of interested person.

         Donations to these institutions will not be eligible for any deduction in the hands of the donor.

        Partly religious and partly charitable institutions will also be treated as NPOs if they are registered under the Code. Their income from public religious activity will be exempt subject to the fulfillment of the following conditions-

•  the trust deed / memorandum of the institution shall contain a clause specifying the application of its gross receipts in a pre-determined ratio between charitable and religious activities;
• it shall maintain separate books of account and separate financial statements in respect of religious and charitable activities;
• it shall fulfil the conditions stipulated in clause (b) above.
• In respect of income from charitable activities, the income of the trust / institution will be liable to tax in the manner provided for NPOs if they fulfill the conditions prescribed in the Code. Donations to such trust / institution will not be eligible for deduction in the hands of the donor.

        To address the concern that an NPO would not be able to spend the entire receipts during the financial year itself, it is proposed that upto 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years from the end of the relevant financial year.

•         Donations by an NPO out of its accumulated surplus to another NPO will not be considered as application for the charitable purpose.
•         The definition of the phrase „permitted welfare activity‟ is on the same lines as what is currently used for the phrase „charitable purpose‟. Accordingly, to maintain continuity and minimise litigation, the phrase „charitable purpose‟ will be retained in place of „permitted welfare activity‟.
•         A basic exemption limit will be provided and the surplus in excess of such limit will be subject to tax.
•         It is proposed to retain the cash system of accounting since it is simple to follow and easy to administer.
•         It is also proposed that the Central Government shall be empowered to notify any non-profit organization of public importance as an exempt entity.

 COMPANY INCORPORATED OUTSIDE INDIA

•         It is therefore proposed that a company incorporated outside India will be treated as resident in India if its „place of effective management‟ is situated in India. The term will have the same meaning as currently laid down in the Tenth Schedule to the Code as under:

place of effective management of the company‟ means-

•  
  • the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or
  • in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.”

 WEALTH TAX

•         It will be payable by all taxpayers except non-profit organizations. The threshold limit and rate of tax will be suitably calibrated in the context of overall tax rates.

Editor