36447518 ey ppt on direct tax code dtc aug 2010
TRANSCRIPT
Direct Tax Code-
Personal Tax ImplicationsErnst & Young Webcast
Held on 9 August 2010 at 03:00 p.m. IST
Contents
► Background
► Residential Status
► Income from Employment
► Income from House Property
► Capital Gains
► Tax Incentives
► Wealth Tax
► Rates of Personal Tax
Background
Direct Tax Code- Personal Tax Implications9 August 2010
Background
► 12th August 2009 : Direct Tax Code (‘DTC’) Bill, 2009 and Discussion Paper released
► Inputs received from large number of organizations and individuals
► News reports: Over 10,000 responses from stakeholders
► Key areas of concern identified
► 15 June 2010: Revised Discussion Paper (‘RDP’) released
► RDP addresses 11 major issues arising from draft DTC
► Responses solicited upto 30 June 2010
► Other issues to be considered while finalizing the DTC Bill
► DTC proposed to be effective from 1 April 2011
4
Residential Status
Direct Tax Code- Personal Tax Implications9 August 2010
Particulars Existing provisions Proposed provisions Impact
► Residential
Status
► The residential status
is classified as:
► Ordinarily
Resident
► Non Resident
► Not Ordinarily
Resident
► An individual will be
resident in India if his
stay in India is:
► 182 days or
more during
the Financial
Year (‘FY’), or
► 60 days or
more in that FY
and 365 days
in last four FYs.
► DTC has done away
with the concept of
Not Ordinarily
Resident
► The way residential status
is determined is revamped
► The term ‘Not Ordinarily
Resident’ has been done
away with but the concept
still remains.
Residential Status
Direct Tax Code- Personal Tax Implications9 August 2010
Residential Status
► Under the DTC, the concept of residential status and the taxability of income
has been revamped.
► The term ‘Not Ordinarily Resident’ has been done away with but the concept
remains.
► Resident would normally be taxable on his worldwide income except in
specified circumstances.
► Income accrued, deemed to accrue or received outside India is not
considered taxable in the year the individual ceases to be a Non Resident
and the immediately succeeding year provided the individual was a Non
Resident in 9 immediately preceding years.
► The current 730 days for Ordinary Resident test has been done away with
which protected the first time expatriates into India from becoming Ordinary
Residents upto 3-4 years of assignment.
Residential Status
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Direct Tax Code- Personal Tax Implications9 August 2010
Example
► If John, a US citizen comes to India for the first time in FY 2011-12 and his
presence in India is as under:
► Under the Act, he retains the status of ‘Not Ordinarily Resident’ in all these
years since his presence in India for last seven years does not exceed 729
days.
► However, under DTC, he will lose the exemption from FY 2013-14
onwards since he will not fulfill the condition of being Non Resident for nine
out of ten immediately preceding FYs. He will be subject to worldwide
taxation from FY 2013-14.
Residential Status
FY 2011-12 2012-13 2013-14 2014-15
No. of days
in India
200 200 200 200
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Income from Employment
Direct Tax Code- Personal Tax Implications9 August 2010
Concept of Economic Employer
► It is a welcome move that the concept of economic employer has been recognized and
‘employer’ has been defined in the DTC.
► Under DTC, ‘employer' has been defined to mean:
► an entity which controls and directs the individual under express or implied employment
contract and
► is obligated to pay compensation to such individual.
► However, this definition is rigid and is likely to create challenges when looking at cross
border movement of employees as envisaged in the following situations:
► Where a group company may second its employee to work under the control and
direction of another group company without cross-charge/ partial cross-charge of salary.
► Where payroll is maintained with more than one entity while the individual works for and
under the control and direction of only one entity.
► Where deputation is for a fixed period under which the individual works under the
directions of the entity to which he is deputed and which is also obligated to bear the
salary costs, but the individual remains on the payroll of the parent entity (the legal
employer) and is supposed to repatriate to his parent job post-deputation.
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from Employment
► Income from employment is to be computed as ‘Gross Salary’ reduced by aggregate of
permissible deductions.
► Gross Salary includes:
► Value of perquisites
► Profits in lieu of salary
► Leave travel concession
► Medical reimbursement
► Free or concessional medical treatment paid for, or provided by the employer
► Permissible deductions include:
► Professional tax
► Transport allowance
► Prescribed special allowances or benefit granted to meet official expenses to the
extent of expenses actually incurred
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from Employment
► Perquisites defined as:
► Value of any accommodation
► Payment for life insurance or annuity
► Employer’s contribution to Approved Superannuation Fund, Approved Provident
Fund or New Pension Scheme above the prescribed limits
► Value of sweat equity shares
► Discharge of any obligation of the employee
► Any other amenity, facility etc.
► DTC proposes to exempt the following, subject to the specified limits:
► Gratuity received
► Amount received under Voluntary Retirement Scheme
► Commuted pension linked to gratuity
► Leave encashment
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from Employment
Component Existing provisions
► Medical reimbursements ► Exempt upto Rs.15,000 p.a.
► Motor car ► Taxed at notional value of Rs.1800 p.m. / Rs.2400 p.m.
(plus Rs.800 p.m. for driver) if the motor car is used for
both official and personal purposes and expenses for
running and maintenance are met or reimbursed by the
employer (motor car owned by the employer)
► Domestic Servant ► Actual cost
► Gas/electricity/ water ► Actual cost
► Educational facilities ► Actual cost except when educational institution is
maintained by the employer
Rules for valuation to be prescribed for:
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from Employment
Existing provisions Proposed provisions
► House Rent Allowance (‘HRA)’ is exempt
under provisions of the Income tax Act,
1961 (‘Act’) to the extent prescribed under
Income tax Rules, 1961 (‘Rules’)
► No deduction from gross salary in respect
of such allowance
► Transport Allowance granted to meet
expenditure for the purpose of commuting
between the place of residence and place
of duty is exempt upto Rs. 800 per month
► Amount received from employer for journey
by the person between his residence and
office or any other place of work, is
deductible from gross salary to the extent
prescribed.
Special Allowances are exempt under Section
10(14) of the Act read with Rule 2BB :
Rule 2BB(1)
► Prescribed allowances to meet official
expenses to the extent actually incurred.
► Deductible from gross salary, as
prescribed, to the extent actually incurred.
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from Employment
Existing provisions Proposed provisions
Rule 2BB(2)
► Prescribed allowances to meet personal
expenses at place of employment or
residence
► Only transport allowance will be deductible
from gross salary, to the extent prescribed
► Prescribed allowance to compensate for
increased cost of living
► Taxable
► Personal allowance (prescribed) for
performing duties of special nature, related
to place of posting or residence
► Taxable
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Direct Tax Code- Personal Tax Implications9 August 2010
Issues
► No exemption was proposed for HRA under DTC. Initial discussion paper, is
understood to have slipped on HRA but RDP has also not addressed this.
► What does this means for an individual staying in rented accommodation?
► May result in inequity vis-à-vis value of company leased accommodation.
► RDP clarified that perquisite value of rent free accommodation would not be based
on market value.
► Leave Travel Concession has been proposed to be made fully taxable.
► Special allowance or benefit granted to meet expenses wholly and exclusively incurred
in the performance of duties to the extent actually incurred, as may be prescribed is
deductible from the taxable income. This provision is similar to Section 10(14) of the
Act.
► Whether the employees will need to submit proof of expenditure / documentation
for per diems paid for official tour to claim deduction from tax since the character of
tax benefit is now changing from ‘exemption’ to ‘deduction’?
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Direct Tax Code- Personal Tax Implications9 August 2010
Issues
► Will the Supreme Court’s decision in case of Larsen & Toubro hold relevance which
says that the employer is under no statutory obligation to collect evidence to show
that employees had actually utilized the leave travel concession / conveyance
allowance?
► Whether the employer would be required to report the amount of allowance which
is deductible?
► Impact will be clear once rules are prescribed.
► Tax borne by the employer on non monetary perquisites presently exempt u/s
10(10CC) of the Act has been done away with under DTC.
► Taxation of employee share plans need to be more comprehensively stated, taking into
consideration the cross border movement of employees and various types of plans.
Clarity is required on the pro-ration of gains arising to non-resident globally mobile
employees.
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Direct Tax Code- Personal Tax Implications9 August 2010
Retirement Benefits
Particulars Existing provisions Proposed provisions Impact
► Gratuity ► Exempt up to Rs.10 lakh ► DTC proposed to
provide for exemption
in respect of gratuity
received, subject to
monetary limits. The
present exemption
limit of Rs.10 lakhs is
expected to continue.
► No impact
► VRS
Compensation
► Exempt up to Rs.5 lakh ► DTC proposed to
provide for exemption
in respect of VRS
compensation
received, subject to
monetary limits. The
present exemption
limit of Rs.5 lakhs is
expected to continue.
► No impact
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Direct Tax Code- Personal Tax Implications9 August 2010
Retirement Benefits
Particulars Existing provisions Proposed provisions Impact
► Pension ► Pension commuted
exempt up to certain limit
► Uncomuted pension fully
taxable
► DTC proposed to
provide exemption in
respect of commuted
pension linked to
gratuity received,
subject to monetary
limits.
► No change
► To be analyzed once
limits are prescribed
► No impact
The Retirement Benefits Account Scheme which was proposed to be introduced in original
draft of DTC has been withdrawn in RDP.
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Income from House Property
Direct Tax Code- Personal Tax Implications9 August 2010
Income from House Property
Particulars Existing provisions Proposed provisions Impact
Tax base ► Annual value is the
basis for taxation
► Rent realized and
Fair Market Value
form the basis for
determining Annual
Value
► Gross Rent is the basis for
taxation
► Gross Rent will be
contractual rent i.e. the
amount of rent received or
receivable for the FY
► Concept of Fair Market
Value done away with to
simplify and reduce
litigation
► RDP removed
calculation of gross rent
at a presumptive rate of
6%
Standard
deduction
► 30% of Annual
Value
► 20% of Gross Rent ► May increase the tax
liability
Interest on
borrowed
capital
► Allowed upto Rs.
150,000 for self
occupied property.
► Allowed without limit
for let-out
properties.
► Deduction upto Rs. 150,000
available for self occupied
property
► Allowed without limit for let-
out property
► RDP restored deduction
of Rs.150,000 on
account of interest on
borrowed capital for self
occupied property
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Direct Tax Code- Personal Tax Implications9 August 2010
Income from House Property
Particulars Existing provisions Proposed provisions Impact
Deduction for
interest paid on
loan during the
pre-construction
or pre-
acquisition
period
► Allowable in 5
installments
► Not allowed ► Such interest may be
sunk cost
Deduction for
service tax
► Ambiguous ► Specific provision
included
Doing away with taxation of house property income on deemed rent basis is a welcome
move and is in line with international best practices.
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Direct Tax Code- Personal Tax Implications9 August 2010
Case Study - Let out House Property
Income from House Property Existing provisions Proposed provisions
Rent received/ receivable 1,00,000 1,00,000
Less: Municipal Tax 10,000 10,000
Less: Standard Deduction 27,000 (ie.30% of 90,000) 20,000 (ie.20% of 100,000)
Less: 1/5 of pre- construction
period interest
3,000 0
Less: Interest paid on loan
during the financial year
8,000 8,000
Income from House property 52,000 62,000
(all figures in Rs.)
23
Capital Gains
Direct Tax Code- Personal Tax Implications9 August 2010
Capital Gains
Particulars Existing
provisions
Proposed provisions Impact
Distinction between
short-term and long-
term capital asset
► Distinct tax
treatment and
rate
► Prima-facie no
distinction
► All capital gains will be
taxed at normal rates
except LTCG on sale of
listed equity shares or
units of equity oriented
fund which will be taxed
after giving specified
deduction
Base date for
indexation and
substitution of FMV to
determine cost of
acquisition
► 1 April 1981 ► 1 April 2000 ► Appreciation upto 1
April 2000 will not get
taxed. Increased cost
of acquisition and thus
reduced taxes.
Set-off and carry
forward of short term
and long term capital
gains
► Subject to
restrictions
► All capital gains can be
set-off against each
other and resultant loss
can be carried forward
► Will reduce overall tax
liability as LTCL can be
set off against STCG
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Direct Tax Code- Personal Tax Implications9 August 2010
Capital Gains
Particulars Existing
provisions
Proposed provisions Impact
Capital assets eligible
for indexation
► Any capital
asset held for
more than 36
months (12
months in
certain cases)
immediately
preceding date
of its transfer
► Any capital asset other
than listed equity
shares or units of
equity oriented fund
transferred after one
year from the end of FY
in which it is acquired
Sale of listed equity
shares or units of equity
oriented fund
► LTCG arising on
sale of shares
or units held for
more than 12
months are
exempt from tax
u/s 10(38) of
the Act
► For shares/units held
for at least one year
from the end of FY,
gain will be computed
after allowing deduction
at a specified
percentage
► Will increase the overall
tax liability
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Direct Tax Code- Personal Tax Implications9 August 2010
Capital Gains
Particulars Existing Provisions Proposed provisions Impact
► STCG arising on
shares or units
(STT paid) held for
12 months or less
are taxed at special
rate of 15%
► For shares/units held
for less than one year
from the end FY, gain
shall be computed
without any specified
deduction
► Will increase the tax
liability for higher
income groups as
STCG will be taxed at
30% instead of 15%.
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Direct Tax Code- Personal Tax Implications9 August 2010
Case Study - Capital gain on sale of long term
listed shares
On transfer of listed shares/ units
of equity oriented mutual fund
Existing provisions Proposed provisions
Sale Consideration 1,000 1,000
Less: Expenses on transfer 100 100
Less: Cost of acquisition
of listed shares / units of equity
oriented mutual fund for Rs. 600 on
April 1, 2008
600 600
Capital Gain 300 300
Less: Deduction @ 60% 0 180
Tax liability 0 [exempt u/s 10(38) of
the Act ]
36
[@ 30% of (300-180)]
(all figures are in Rs.)
Substantial increase in tax liability as exemption similar to existing provisions is not available under
DTC
28
Direct Tax Code- Personal Tax Implications9 August 2010
Case Study - Capital gain on sale of short term
listed shares
On transfer of listed shares/
units of equity oriented mutual
fund
Existing provisions Proposed provisions
Sale Consideration 1,000 1,000
Less: Expenses on transfer 100 100
Less: Cost of acquisition
of listed shares / units of equity
oriented mutual fund for Rs. 600
600 600
Capital Gain 300 300
Tax liability 45 (@ 15%) 90 (@ 30%)
(all figures are in Rs.)
Tax liability doubles for higher income groups as benefit of lower rate is not available under DTC
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Direct Tax Code- Personal Tax Implications9 August 2010
Issues
► Roll over benefit on sale of a residential house currently available under the Act
irrespective of the number of houses owned, is sought to be restricted in DTC.
► Avenue for deposit of capital gains to get exemption from tax needs to be specified as
Capital Gains Savings Scheme (‘CGSS’) is not to be introduced.
► STT proposed to be re-calibrated.
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Tax Incentives
Direct Tax Code- Personal Tax Implications9 August 2010
Tax Incentives
► DTC proposed the EET method of taxation for savings.
► EET stands for:
► E-where the contribution towards certain savings is deductible from taxable income
► E- where the accumulation/accretion are exempt from tax till such time they are invested
► T- where all withdrawals are taxed subject to applicable marginal rate
► Grandfathering under EET:
► DTC exempted the withdrawal of any accumulated balance from recognised Provident Fund (‘PF’) and Public Provident Fund (‘PPF’) available as on March 31, 2011 and;
► Only new contributions/ accretions after DTC were to be subject to EET .
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Direct Tax Code- Personal Tax Implications9 August 2010
Tax Incentives
► Based on recommendations received from various sections, RDP has restored EEE taxation for:
► Government Provident Fund
► Public Provident Fund
► Recognised Provident Fund
► Pension Scheme administered by Pension Fund Regulatory and Development Authority (‘PFRDA’)
► Approved pure life insurance products and annuity schemes
► Investments made prior to commencement of DTC which enjoy EEE method under the Act
► Though as of now EET is proposed to be withdrawn but the issue is whether it is a serious move or temporary adjustment to smoothly introduce the DTC ?
33
Wealth Tax
Direct Tax Code- Personal Tax Implications9 August 2010
Wealth Tax
Particulars Existing provisions Proposed provisions
Scope of Wealth Tax ► Applicable to Individuals, HUFs
and Companies
► Applicable to all tax payers except
non profit organizations
Threshold Limit ► Wealth tax payable on net wealth
in excess of Rs. 30 lakhs
► Limit to be suitably calibrated
Rate of tax ► 1% of net wealth in excess of Rs.
30 lakhs
► Limit to be suitably calibrated
Assets ► Specified assets such as motor
cars, jewellery, urban land etc
(specified unproductive assets)
► Likely to be the same as existing
provisions
35
Rates of Personal Tax
Direct Tax Code- Personal Tax Implications9 August 2010
Rates of Personal Tax
Income Slab Existing
Rates
Proposed
Rates
Upto Rs.1,60,000* Nil Nil
Rs.1,60,000 to 5,00,000 10%
10%Rs.5,00,000 to 8,00,000 20%
Rs.8,00,000 to 10,00,000 30%
Rs.10,00,000 to 25,00,000 30% 20%
Above Rs. 25,00,000 30% 30%
Income
(Rs.)
Current
tax (Rs.)
Proposed
tax (Rs.)
Savings
(Rs.)
Savings
(%)
1,50,000 Nil Nil - -
3,00,000 14,420 14,000 420 3
5,00,000 35,020 34,000 1,020 3
7,50,000 86,520 59,000 27,520 32
10,00,000 158,620 84,000 74,620 47
20,00,000 467,620 2,84,000 183,620 39
Tax Rates Tax Savings (without considering the effect of HRA, LTA etc.)
*Higher limits for women and senior citizens
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Direct Tax Code- Personal Tax Implications9 August 2010
Rates of Personal Tax
► No change in minimum threshold
► No change in tax rates up to Rs.5 lakhs
► Tax slabs likely to be calibrated
► It is likely that the highest slab will be in the range of Rs.15 lakhs to Rs.20 lakhs
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Direct Tax Code- Personal Tax Implications9 August 2010
Thank you
“This Presentation provides certain general information existing as at the time of production. This Presentation does not purport to identify all the
issues or developments pursuant to the transaction. Accordingly, this presentation should neither be regarded as comprehensive nor sufficient
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Ernst & Young Presenter
Sonu Iyer – Partner, Ernst & Young India
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