Tax rates mentioned
in Schedule to the Code
Under the Code, all rates of taxes are proposed to be prescribed in the
First to the Fourth Schedule to the Code itself. This obviates the need for an
annual Finance Bill if, there is no proposal to change the tax rates. The changes in the
rates,
if any, will be
done
through
appropriate amendments
to the Schedule brought before Parliament in the form of an Amendment Bill. Other amendments to the Code will
also
be through amendment bills.
Concept of financial year
Under the current Income Tax Act, 1961 the income earned in a year is taxed in the next year. The year in which income is earned is termed as 'previous
year' and the following year in which it is charged to tax is termed as 'assessment year'.
The use of the two expressions has caused confusion in both compliance
and
administration.
The existing concept of assessment year has been dropped. Under
the Code, all
rights
and obligations
of the taxpayer and the tax administration will be with reference to the 'financial year'.
This change will not change the
existing
system
of deduction of
tax at
source and
payment of
advance tax in the year
of earning
of
income and payment of self-assessment tax in the following year before filing of tax return.
Classification
of income
All accruals and receipts in the nature of income, shall, in general, be
classified into a 'special source'
or
an 'ordinary source'.
The special sources are sources of income specified in the Part III of the
First Schedule.The income
from
these
sources will be
liable
to
tax at
a
scheduled rate on gross basis. No deduction is allowed for any expenditure and
the gross
amount
is
subject to tax, generally
at a lower rate.
This is
the application of presumptive taxation. These special source‘ incomes have been
made applicable to mainly non-residents as only that portion of their total income
which is sourced from India India
A similar system exists in the current Act. However, it is not explicitly
structured as the special
source incomes are mentioned across Chapter XII (Determination of tax in certain special cases), Chapter XII-A (Special provisions
relating to certain incomes of non-residents) and
Chapter XII-B
(Special provisions relating to certain companies).
The accruals or receipts relating to an 'ordinary source' will be further
classified under one of the five different heads:
A. Income from
employment
B. Income from
house property
C. Income from
business
D. Capital gains
E. Income from residuary sources.
Aggregation of income and carry forward of
losses
Ordinary sources
A person may have many ordinary sources‘,
the income from which would
be classified under one of the heads of income as
explained above.
(i) The first step will be to compute the
income in respect of each of these
sources. This could either
be income or
loss (negative income). For example, if a person carries on several
businesses, the income from each and
every such business will have to be separately computed.
(ii) The
second step will
be to aggregate
the income from
all the sources falling
within a head
to arrive at
the figure of
income assessable under that
particular head. The result of
such computation may be a profit
or a loss
under that head. The aforesaid two steps will be
followed to compute the income under each head.
(iii) The third step will be to aggregate the income under all the heads
to arrive at the 'current income from ordinary sources'.
(iv) The fourth step will be to aggregate the current income with the
unabsorbed loss at the end of the
immediate preceding financial year,
if any, to
arrive at the 'gross total
income from ordinary sources'.
If the result of aggregation is a loss, the 'gross total income from ordinary
sources' shall be 'nil' and the loss will be treated as the 'unabsorbed current loss from ordinary sources' at the end of the financial year.
The 'gross total income from ordinary sources',
so arrived, will be further reduced by incentives in accordance with sub-chapter I of Chapter III. The
resultant amount will be 'total
income from ordinary sources'.
Special Sources
A person
may
have
many special
sources. The first step
will
be to compute the income in respect of each of these special sources in accordance with
the provisions of
the
Fourth
Schedule. The income so computed
with respect to each of such special sources shall be called 'current income from the special source'. The second step will be to aggregate the 'current income from
the
special source' with the unabsorbed loss from that special source at the end of the immediate preceding financial year, if any. The result of such aggregation shall
be the
'gross total income from the
special source'.
If the result
of aggregation is a loss, the 'gross total income from the special source' shall be 'nil' and the loss will be treated as the 'unabsorbed current loss from the special source', at the end of the financial year. The 'gross total income from the special
source' shall be computed with respect to each of the special sources. The third step will be to aggregate the gross total
income from all such special sources and
the
result of this addition shall be the 'total income from special sources'.
Total income
The 'total income from ordinary sources' will be aggregated with the 'total income from special sources' to arrive at the 'total income' of the taxpayer.
Losses
In order to simplify
the provisions, the
carry
forward
of losses
under
ordinary sources is allowed at the level of gross total income instead of at head level except in the case of capital loss, speculation loss, and loss from owning and maintaining horses for
the
purpose of horse racing.
The loss under the head 'Capital gains' shall be ring-fenced and such loss
shall not be allowed to be set off against income under other heads. Similarly the loss
from speculative business and from owning and maintaining horses for the purpose of horse racing will
also
be ring-fenced.
Losses will be allowed to be indefinitely carried forward for set off against
profits in the subsequent financial years as against a restriction of carry forward for
only
eight years in the current legislation.
General Anti Avoidance Rule (GAAR)
Tax avoidance, like tax evasion, seriously undermines the achievements
of
the public finance objective of collecting revenues in an efficient, equitable and effective manner. Sectors
that
provide a greater opportunity for tax avoidance tend to cause distortions in the allocation of resources.
In the past, the response to tax avoidance has been the introduction of legislative
amendments to deal with specific instances of tax avoidance. Since
the
liberalization of the Indian economy, increasingly sophisticated forms of tax avoidance are being adopted by the taxpayers and their advisers.
The problem has been further compounded by tax avoidance arrangements spread across
several tax jurisdictions. This has led to
erosion of the tax base.
In view of the above and consistent with the international trend, a general anti-avoidance
rule
has
been
introduced
in
the DTC which will serve as
a
deterrent against such practices.
Introduction of Investment linked and phasing out of profit linked
deductions
The DTC proposes investment linked deductions for priority sectors. Profit
linked deductions are being phased out in the Income Tax Act, 1961 and have also been dropped in the DTC. They and being replaced by investment linked
deductions for
specified sectors. This
is for
the
following reasons:
(i) Profit linked deductions lead to distortions such as artificial creation
of
profits and
transfer of profits from the non-exempt unit to the exempt unit. They erode the existing tax base by allowing firms to funnel
profits, via
transfer pricing,
from an
existing
profitable
company through the ―tax holiday
company and, therefore, avoid
paying tax on either.
(ii) They lead to a substantial amount of revenue being foregone. The
revenue foregone on
account
of profit
linked deductions
for
financial year 2008-09 was Rs.43122 crores. Firms
have
an incentive to close down and sell their businesses at the end of the
tax holiday, only
then to re-open
as a ―new investment, thus
gaining an indefinite tax holiday.
(iii) They cause
a majority of
the
tax litigation.With foreign direct investment operating under
double taxation agreements,
in the
absence of tax sparing, tax holidays simply lead to a transfer of tax
revenue to the foreign country.
(iv) They impede efforts to give a moderate tax rate to other taxpayers as the higher taxes paid by others subsidize the lower tax rates of the profit linked deduction sectors. They tend to attract footloose investments that move away as
soon
as the tax holiday ends.
(v) They add to discretionary powers.
(vi) They strain the enforcement resources of the Department.
(vii) It has therefore been a consistent policy of the Government to
phase out profit linked deductions. They do not explicitly target capital investment;
tax holidays are
a
blanket
benefit given
to
investors and are not related to the amount of capital invested or
even the growth in investment during the period of the tax holiday.
These could be
linked together, for example, through minimum capital investment requirements to get the benefit of the tax holiday.
(viii) Complete
withdrawal
of such profit linked deductions has been proposed in
the Direct Taxes Code (DTC). They are also being
phased out in the Income Tax Act.
(ix) Instead of profit linked deduction, it has been proposed to provide investment linked deduction to priority sectors in the Income Tax Act as
well
as the DTC. Investment
linked deductions
are
performance based and, therefore, superior tax incentives. They
target the
incentive specifically
to
the capital
investment. As a result,
the cost-benefit
ratio
(in terms of
additional investment
generated per
unit
of revenue lost) is high.
Income from
house property to be recognised on actuals.
taken as the rent to be taxed.
Characterization of
of Foreign Institutional Investors(FIIs)
of Foreign Institutional Investors(FIIs)
A foreign company is not allowed to invest in securities in India India
gains and to reduce litigation on the issue of characterization of FIIs income.
Resolution of disputes with Public Sector Undertakings (PSUs) -
In order to reduce litigation involving PSUs, it is proposed that no appeal
shall lie to Appellate Tribunal, High Court and Supreme Court after the order of
CIT (A). Instead, an appeal may be filed before the Authority of Advance Ruling and Dispute Resolution19. The order of the Authority shall be final and binding on both revenue as well as the public sector
company. This will assist in the
expeditious
resolution of disputes between
the Income Tax Department and PSUs.
Taxation of Non Profit Organizations and
Trusts
The income of
non-profit organizations
whose
activities
are for public
religious purpose is proposed to be exempt. As regards income of non-profit organizations set up for charitable purposes, it is proposed to levy a tax on their surplus (at the rate of 15%),
after
allowing
(i) all receipts of the month of March of the financial year to be carried forward if
deposited in specified account under a scheme to be prescribed so that they
can be spent by the end of the next financial year
deposited in specified account under a scheme to be prescribed so that they
can be spent by the end of the next financial year
(ii)a deduction of 15% of the surplus or 10% of the gross receipts,
whichever is
higher and
higher and
(iii) a basic exemption limit of Rs.1 lakh
Donations to these non-profit organizations (whose surplus is proposed to
be
taxed) will be eligible for tax deduction in the hands of the donor.
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