Original DTC was pro-middle class. Now it is Pro-rich. Do you agree?

“Old wine in a new bottle”

This is centered around expectations to minimize tax exemptions, but widen tax slab on personal finances.

The government is quite confident of replacing archaic Income Tax Act with DTC from April 1, 2011
THE DIRECT TAXES CODE PROPOSES TO introduce considerable novelty like reduction in corporate tax rate and widening of personal income tax slabs. They can give a new direction to taxation system. However, there is a little bit of uncertainty on them at this stage, following changes proposed in the original taxes code. The DTC has tinkered with the short-term capital gain tax charged from investors. Individual investors will now have to pay tax on 50% of the gains earned. The rate of short-term capital gain tax would be according to the income tax slab of that individual. For corporates, the short-term capital gain tax would be calculated at 30% after deducting 50% from the overall gains. In an overall positive reaction to the DTC Bill, the Dalal Street experts said that the new code is in favour of the common man and can even boost retail participation in stock market. On the long-term basis, the move will give a big push to the inclusive growth agenda. Retail investors will get a big booster from the proposal,” CNI Research CMD Kishore P Ostwal said. The DTC Bill seeks to increase tax exemption on income from Rs 1.6 lakh to Rs 2 lakh and fix the corporate tax at a flat 30%. Echoing a similar view, Geojit BNP Paribas Assistant vice-president Gaurang Shah said, “On long-term basis it is a healthy and a positive move for retail investors, who will have more money to invest in the market.” On the Distribution Dividend Tax, which will be at 15%, Ostwal said, “It will slightly affect the cash proportion of smaller companies. THE PROPOSED NEW DIRECT TAXES LAW will take away the special treatment that women have so far enjoyed and force individuals to overhaul the way in which they plan their savings.
Women will be put on the same footing as men. Tax-free savings schemes will be fewer, with the government knocking off many from among the 16 odd available now. DTC has been cleverly packaged. The total amount of amount of tax deduction that will be available to individuals, including interest on housing loans will be around 3 lakh, roughly the same as now.

The new Bill has only tinkered at the fringes, with no significant benefits for the aam admi. The re-packaging of the savings schemes will significantly lower the savings potential”, said Sandip Mukherjee, executive director, PwC. “The exemption of 2 lakhs is four time the per capita income, which is a generous limit,” countered a senior tax department official. The maximum a person can save on her tax burden is 24,000 and that too if she earns more than 8 lakh a year.

Why?

The potential revenue loss from exemptions has forced the government to scrimp on the hikes in the threshold levels of personal income tax.

DTC Bill is good for the market but not for the ordinary man. One of the highlights of the DTC was the introduction of the Exempt Exempt Taxation (EET) system of taxation on savings schemes as against the prevailing Exempt-Exempt-Exempt (EEE) system. Under the EET system of taxation of savings, a tax payer would get a tax breakon contributions to specified saving schemes (eg Public Provident Fund) as well as on any accretion/ accumulation of income in such account. However, any withdrawals would be taxed at the time of withdrawal or receipt. This would lead to drain in the savings of the tax payer when it would be required the most (eg after retirement). The DTC bill also proposes to retain corporate tax at 30 per cent, but without surcharge and cess. With them, the current tax liability on corporates comes to over 33 per cent. The government also conceded to the industry demand not to levy minimum alternate tax (MAT) on assets but book profits of the companies. So, it had to dilute earlier proposal of cutting corporate tax to 25 per cent, sources said. Tax experts said this proposal will provide much needed relief to the industry and bring the levy on par with global standards, though the industry wanted it to be reduced to 25 per cent. However, the government raised MAT to 20 per cent from 18 per cent, but it should not make much of a difference since with surcharge and cesses, MAT currently comes to 19.33 per cent.