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A STUDY ON CHANGING FACE OF TAXATION IN INDIA prepared by: PRAFUL LIMBACHIYA:

A STUDY ON CHANGING FACE OF TAXATION IN INDIA prepared by: PRAFUL LIMBACHIYA

Direct Tax Code:

Direct Tax Code INTRODUCTION On 12 th August, 2009 Hon'ble Finance Minister Shri Pranab Mukherjee released the Draft Direct Taxes Code for public debate. The Code envisages promoting voluntary tax compliance and an equitable and progressive tax regime by eliminating distortions in the tax structure, introducing moderate levels of taxation, expanding the tax base and simplifying the drafting language. Based on the inputs from the public, the Government will finalize the Draft Taxes Code Bill for presentation in the winter session of Parliament, 2009. The new law is proposed to be effective from 1 st April, 2012.

Backdrop & Objectives of the Code:

Backdrop & Objectives of the Code Backdrop Current law – Income-tax Act, 1961 Almost five decades old Over 5000 amendments – seriously mutilated! New Code in the making for four years Stated objectives Simplicity Minimizing litigation Broad basing the tax base Eliminating exemptions Providing stability

Slide 5:

The proposed Direct Tax Code is a combination of major tax relief and removal of most tax-exempted benefits. It is expected to usher in a new tax regime of transparency and greater compliance.

RESEARCH METHODOLOGY :

RESEARCH METHODOLOGY

OBJECTIVES OF STUDY:

OBJECTIVES OF STUDY To study the basic taxation structure and clarity of present scenario of taxation. To compare between IT1961 and DTC. To know correlation between source of income and savings . To know about the probable and expected effects of DTC on Indian economy.

Cont………:

Cont……… To understand the current income tax provisions and compare them with Direct tax code provisions. To find out the impact of Direct Tax Code on individuals tax calculation under various situations.

SCOPE & RESEACH TYPE OF THE STUDY:

SCOPE & RESEACH TYPE OF THE STUDY SCOPE For the understanding of the current income tax provisions and compare them with Direct tax code provisions. We found out the impact of Direct Tax Code on individuals tax calculation under various situations. DTC seeks to leave little scope for multiple interpretations and will thus curb(keep in check) disputes and litigation. RESEARCH DESIGN Type of our research is exploratory as well as descriptive.

Cont…:

Cont… SOURCES OF DATA Primary data : (Questionnaire) Secondary data: (Websites, business magazines, articles) SAMPLE PLAN Sampling unit : An auditors and chartered accountants SAMPLING SIZE: 30

Comparison between current tax rates & Direct tax code slabs:

Comparison between current tax rates & Direct tax code slabs Income of Rs. 600000 0 upto 160000 0 upto 160000 14000 10% (160000-300000) 44000 ( 160000-1000000 ) 10% 40000 20%(300000-500000) 0 (1000000-2500000 ) 20% 30000 30%( 500000-600000) 0 (2500000 or more) 30% 84000 Total tax 44000 Total tax Saving of Rs. 40000 47.60%

Comparison between current tax rates & Direct tax code slabs:

Comparison between current tax rates & Direct tax code slabs Income of Rs.2900000 0 upto 160000 0 upto 160000 14000 10% (160000-300000) 84000 10% (160000-1000000) 40000 20%(300000-500000) 300000 20%(1000000-2500000) 720000 30% (500000-2900000) 120000 30% (25,00,000 or more) 774000 Total tax 504000 Total tax Saving of Rs.270000 34.88%

Conclusion:

Conclusion DTC has greatly expanded current income slabs; the lower slab has been left unchanged so it is beneficial to middle class and higher middle class but there are no changes in the tax liability of lower middle class.

Capital Gains Comparison:

Capital Gains Comparison No distinction in short term and long term capital gain. Indexation advantage available on asset held for more than one year. Single tax rate for short term and long term capital asset. Very disadvantageous for capital gains in case of equity shares which is zero at present.

Case Study of capital Gain:

Case Study of capital Gain There will be no distinction in Short term and long term Capital Gains. Mr. X sold 200 shares of Reliance @ 1100. 100 shares were purchased 5 years back by him at indexed cost of 900 and 100 shares were purchased 9 months back at the cost of 900. Calculate Capital Gains tax.

Calculations of Capital Gains:

Calculations of Capital Gains Current Tax Rates Long term zero. No tax on shares which are listed and held for 1 year. Short term 100 Shares *( 1100{Selling price}-900{Cost}) 20000 Rs. Capital Gain Tax is 10% of 20000 or Rs. 2000/- Direct Tax Code Tax is 200 shares(1100{selling price} - 900 {cost}) 40,000 Rs. Capital Gain Tax is 20% of 40,000 or Rs. 8000/-

Conclusion:

Conclusion Removal of distinction between the long term and short term capital gains and taxing them at respective slab rates of individuals is another shocker. Those already in highest tax bracket may be negatively impacted while those in lower tax rate slabs may be positively impacted.

Income from House Property:

Income from House Property Two major changes have taken place in income from house property. Amount of repairs allowed as deduction has been reduced from 33.33% of rent to 20% of rent. Amount of deduction available on interest paid on own house, not let out is totally eliminated.

Case study on income from house property:

Case study on income from house property Mr. A is the owner of 2 houses. House 1 is used by the owner as his residence. House 2 is let out by him and he is earning annual rent of Rs.90,000. The house which is used by him as own residence is purchased by taking a loan the interest of which is 45000.

Calculations:

Calculations Current Tax Calculations Income from Own house Rent 0 (as it is not let out) Interest paid -45000 Total -45000 Income from house let out Rent 90,000 Repairs 30,000 (1/3 of rent) Total 60,000 Total income from house property is 15,000.

Calculation:

Calculation Direct Tax Code Calculation Rent - 0 Interest allowed - 0 Total - 0 Income from house let out Rent 90,000 Repairs 18,000 (1/5 of rent) Total - 72,000 Total income from house property is Rs. 72,000.

Conclusion:

Conclusion People in the low-income category will be hit by the proposal as it abolishes the exemption on home loan interest for self occupied property. However, if the same house or second house is given on rent, the person will get tax benefits on interest payout and that too, unlimited interest payment. Obviously the government seeks to favor landlords over tenants.

Income from Salary:

Income from Salary Rent free accommodation calculation for government employees will be same as the non government employees. Also a major development has been the EET proposal from EEE EET stands for Exempt – Exempt – Tax Whenever money is invested it leads to exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end will now be taxable.

Income from Salary & Case study:

Income from Salary & Case study EEE stood for Exempt – exempt – exempt Whenever money is invested it leads to exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end were also totally exempt from tax. Mr. A has invested money in retirement benefit plan amounting to Rs.100,000 every year. He has been investing money since last 15 years. He gets Rs. 8500 as interest every year on the money invested which gets accumulated. On retirement he will get a total amount of Rs. 30,00,000.

Calculation under Salary:

Calculation under Salary Current tax regime: EEE is the current system. So whenever he invests money he gets exemption of Rs. 100,000 every year. The interest earned by him every year is exempt from Tax. On retirement Rs. 30,00,000 received by him will be exempt from tax. Direct Tax Code: EET is the proposed system. - So whenvere he invests money he gets exemption of Rs. 100,000 every year. - The interest earned by him every year is exempt from Tax. - On retirement Rs. 30,00,000 received by him will be taxable. - The taxable amount will be Rs. 15,00,000 (30,00,000-15,00,000) There is no clarity on the plans which wont fall under EET scheme.

Conclusion:

Conclusion People in the low-income category will be hit by the proposal as it abolishes the exemption on HRA benefits. India has a saving rate of almost 35% while most of the developed countries have the saving rate (ratio of gross national savings to GDP) around 14-20%. It proposes to introduce exempt-exempt-taxation (EET) method and taxing capital gains may discourage saving.

Case study on Rent free Accommodation:

Case study on Rent free Accommodation Mr. X is a government employee. He has been provided with the house by the government. The rent paid by the government for that house is Rs.1,20,000 per annum. The license fees paid for the house is Rs. 10,000. His total taxable salary including all the allowances amounts to Rs. 15,00,000.

Calculation:

Calculation Current Tax Regime Under the current tax regime the amount of taxable Rent free accommodation will be the license fees that is Rs.10,000. So taxable amount is Rs.10,000. Direct Tax Code Under the new tax code the taxable amount will be: 10% of salary that is Rs. 1,50,000 or Rent paid by the government that is Rs. 1,20,000 whichever is less. - So taxable amount is Rs. 1,20,000.

Other salient features of the Act:

Other salient features of the Act Capital Gains to be proposed at the normal rates as per the slab of the assessee . Corporate tax will be reduced to 25%. TDS of 10% on capital gains. STT to be abolished.0.05%.security transaction tax It’s taxable on for shares Base year shifted from 1/4/1981 to 1/4/2000.

Other salient features of the Act:

Other salient features of the Act Capital Gains taxable at 30% for non residents. Wealth Tax redused to 0.25% from 1%. Wealth tax exemption enhanced from 30 lakhs to 50 crores . 80C benefit limit raised to Rs. 3,00,000.lic providant fund,national savings certificate

Conclusion :

Conclusion DTC affects the households, investors and businesses the most. DTC is indeed simple to understand and will go a long way in reducing the ambivalence (confusion) in comparison of existing Income Tax Act, 1961. DTC is in fact a completely new tax law aiming to simplify the direct tax system in India and has tried to capture the best international practices. DTC also attempts to make direct taxes equitable by introducing moderate levels of taxation and expanding the overall tax base. DTC attempts to simplify the legalities to enable better understanding so as to ensure a higher degree of compliance (as per rules, accordance with law).

Conclusion :

Conclusion DTC has greatly expanded current income slabs; the lower slab has been left unchanged so it is beneficial to middle class and higher middle class but there are no changes in the tax liability of lower middle class. DTC abolish useless various exemptions and deductions in IT Act. DTC system also provides salaried with greater avenues of tax-exempt savings and investment options by tripling annual investment limit to Rs 3 lakh . Faster economic growth needs higher savings and investments while efficiency requires squeezing more out of the existing assets or capital.

Conclusion :

Conclusion DTC linked minimum alternate tax (MAT) to gross assets rather than profits, the new system is to encourage companies to make most of their existing assets rather than go on an asset creation binge (uncontrolled) which is quite common right now. New system will be helpful to government to bridging the between government expenses and the tax revenues.

Findings :

Findings An ideal direct tax system should be simple to understand and administer, equitable and progressive, and reward economic activity. The two broad heads of income would now be income from ordinary source and income from special source. The first head would include income from employment; house property and business while the second head would include capital gains on equity and equity oriented funds and income of any other nature. DTC endeavors to make the direct tax more equitable and progressive; however in actual practice it fails this test. DTC has very less scope of practical implications near future.

Findings :

Findings By reducing the effective tax burden for those with the higher propensity to save and invest (individuals with income of Rs 5 lakh and more), the DTC may improve the chances of economic growth. DTC is a step in the right direction to being investor friendly. India has a low tax-to-GDP ratio of around 10% and there is enough scope for improvement. It seems that government takes from one assesse and gives benefit to another assesse. Removal of exemptions has been compensated by reduction in tax rates.

Thank you ..!! :

Thank you ..!! 

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