Direct Tax Code

What is Direct Tax Code?

Direct Tax Code or DTC has been created to replace the archaic income and wealth tax laws in the country, a key reform initiative that is aimed at widening the tax net and increasing federal revenues.

Article Contribution:

CA Santhosh.N, Deputy General Manager - Finance,

Vodafone South Limited.

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What is the Direct Tax Code all about?

India wants to modernize its direct tax laws, mainly its income tax act which is now nearly 50 years old.

The government, wants a modern tax code in step with the needs of an economy which is now the third largest in Asia.

The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government’s coffers.

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Why is it important for Indian firms and foreign investors?

One of the key aims of the new tax code is to provide a system which takes into account increased cross border mergers and acquisitions by Indian Corporates over the last few years.

The new code is also expected to streamline tax rates and administration for foreign institutional investors, for whom India is a top destination.

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Will it provide greater stability to investors?

The code aims to provide greater tax clarity and stability to investors who want to invest in Indian projects and companies.

The officials have said the government would not like to tinker with tax rates every year to provide a greater degree of tax certainty to Corporates, investors and individuals.

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What will be the impact on Indian and foreign Corporates?

On the face of it, the corporate tax rate has been reduced from a little over 33% to 30%. But tax experts say whether a company pays more tax or less will also depend on a key provision called the minimum alternate tax (MAT).

MAT is applicable to those companies who do not show book profits liable to tax, as they claim a plethora of exemptions on account of being in capital intensive industries. The MAT rate has now been increased from 18% to 20% in the new code.

Foreign Corporates today pay a higher rate of tax. However, the new rate of taxation for foreign Corporates is not yet known.

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Will it be revenue positive for the federal government?

The government has marginally lowered the tax burden for individuals and has effectively left Corporates with largely similar tax rates as before, hoping that these changes will make the new code revenue positive.

Though the exact impact is not yet known, finance ministry officials have said the new code will help shore up the tax GDP ratio significantly from around the current 11 percent level.

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Proposed Personal Income Tax Slabs and Rate

Basic Exemption Limit

Category Existing DTC Provision
Women 1,90,000 NA
Senior Citizen 2,50,000 2,50,000
All Others 1,80,000 2,00,000

Implications

Beneficial: Increase in basic exemption limit is a welcome move, given high inflation.

Adverse: Preferential exemption for women removed.

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Income Tax Slabs

Slabs Existing DTC Provision
Upto 5,00,000 10% 10%
5,00,000 to 8,00,000 20% -
More than 8,00,000 30% -
5,00,000 to 10,00,000 - 20%
More than 10,00,000 - 30%

The above slabs are shown only to compare the savings from AY 2012-13. With the 2012-13 budget , the slabs are made at par with proposed DTC slabs.

Implications

Increase in slabs will directly results in savings. Also removal of eduation cess is positive for the tax payers.

Read More about Direct Tax Code Impact

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