The draft Direct Taxes Code Bill seeks to consolidate and amend the law relating to all direct taxes and will replace the Income Tax Act, 1961.  The draft Bill, along with a discussion paper, was released for public comments in August 2009.[1] Following inputs received, the government proposed revisions to the draft Bill in June 2010. The table below summarises these revisions.  The government has not released the changes proposed in the form of a revised draft bill however, but as a new discussion paper.  The note is based on this discussion paper.[2] The Code had proposed a number changes in the current direct tax regime, such as a minimum alternate tax (MAT) on companies’ assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor.  Under the new amendments, some of these changes, such as MAT, have been reversed.  Personal savings in specified instruments (such as a public provident fund) will now continue to remain tax-free at all times.  The tax deduction on home loan interest payments, which was done away with by the Code, has now been restored. However, the discussion paper has not specified whether certain other changes proposed by the Code (such as a broadening of personal income tax slabs), will continue to apply.

Issue Income Tax Act, 1961 Draft Direct Taxes Code (August 09) Revisions Proposed (June 2010)
Minimum Alternate Tax (MAT) MAT currently imposed at 18% of profits declared by companies to shareholders. To be imposed on assets rather than profits of companies.  Tax rate proposed at 2% (0.25% for banks) MAT to be imposed on book profit as is the case currently.  Rate not specified.
Personal Saving / retirement benefits Certain personal savings, such as public provident funds, are not taxed at all. Such savings to be taxed at the time of withdrawal by the investor. Such savings to remain tax-exempt at all stages, as is the case currently.
Income from House Property Taxable rent is higher of actual rent or ‘reasonable’ rent set by municipality(less specified deductions). Rent is nil for one self-occupied property. Taxable rent is higher of actual rent or 6% of cost /value set by municipality (less specified deductions). Rent is nil for one self-occupied property. Taxable rent is no longer presumed to be 6% in case of non-let out property. Tax deductions allowed on interest on loans taken to fund such property.
Interest on Home loans Interest on home loans is tax deductible Tax deductions on home loan interest not allowed. Tax deductions for interest on loans allowed, as is currently the case.
Capital Gains Long term and short term gains taxed at different rates. Distinction between long and short term capital gains removed and taxed at the applicable rate; Securities Transaction Tax done away with. Equity shares/mutual funds held for more than a year to be taxed at an applicable rate, after deduction of specified percentage of capital gains. No deductions allowed for investment assets held for less than a year. Securities Transaction tax to be ‘calibrated’ based on new regime. Income on securities trading of FIIs to be classified as capital gains and not business income.
Non-profit Organisations Applies to organizations set up for ‘charitable purposes’. Taxed (at 15% of surplus) only if expenditure is less than 85% of income. To apply to organizations carrying on ‘permitted welfare activities’. To be taxed at 15% of  income which remains unspent at the end of the year.  This surplus is to be calculated on the basis of cash accounting principles. Definition of ‘charitable purpose’ to be retained, as is the case currently. Exemption limit to be given and surplus in excess of this will be taxed.  Up to 15% of surplus / 10% of gross receipts can be carried forward; to be used within 3 years.
Units in Special Economic Zones Tax breaks allowed for developers of Special Economic Zones and units in such zones. Tax breaks to be done away with; developers currently availing of such benefits allowed to enjoy benefits for the term promised (‘grandfathering’). Grandfathering of exemptions allowed for units in SEZs as well as developers.
Non-resident Companies Companies are residents if they are Indian companies or are controlled and managed wholly out of India. Companies are resident if their place of control and management is situated wholly or partly in India, at any time in the year.  The Bill does not define ‘partly’ Companies are resident if ‘place of effective management’ is in India i.e. place where board make their decisions/ where officers or executives perform their functions.
Double Taxation Avoidance Agreements In case of conflict between provisions of the Act, and those in a tax agreement with another country, provisions which are more beneficial to the taxpayer shall apply The provision which comes into force at a later date shall prevail.  Thus provisions of the Code would override those of existing tax agreements. Provisions which more beneficial shall apply, as is the case currently.  However, tax agreements will not prevail if anti-avoidance rule is used, or in case of certain provisions which apply to foreign companies.
General Anti-Avoidance Rule No provision Commissioner of Income Tax can declare any arrangement by a taxpayer as ‘impermissible’, if in his judgement, its main purpose was to have obtained a tax benefit. CBDT to issue guidelines as to when GAAR can be invoked; GAAR to be invoked only in cases of tax avoidance beyond a specified limit; disputes can be taken to Dispute Resolution Panel.
Wealth Tax Charged at 1% of net wealth above Rs 15 lakh To be charged at 0.25% on net wealth above Rs 50 crore; scope of taxable wealth widened to cover financial assets. Wealth tax to be levied ‘broadly on same lines’ as Wealth Tax Act, 1957. Specified unproductive assets to be subject to wealth tax; nonprofit organizations to be exempt.  Tax rate and exemption limit not specified.
Source: Income Tax Act, 1961, Draft Direct Taxes Code Bill (August 2009), New Discussion Paper (June 2010), PRS

[1] See PRS Legislative Brief on Draft Direct Taxes Code (version of August 2009) at  http://prsindia.org/index.php?name=Sections&id=6 [2] Available at http://finmin.nic.in/Dtcode/index.html

   

The government is considering a number of measures to tackle corruption such as the formation of the office of the Lokpal or Ombudsman to investigate corruption cases, the Judicial Standards and Accountability Bill, 2010 that requires judges to declare their assets, lays down enforceable standards of conduct for judges, and establishes a process for removal of the Supreme Court and High Court judges (see PRS Analysis) and the Public Interest Disclosure and Protection of Persons Making the Disclosure Bill, 2010. In 2004, following the death of whistleblower Satyendra Dubey, the government issued a notification laying down certain guidelines for whistleblowing and protecting whistleblowers.  It introduced the Public Interest Disclosure and Protection of Persons Making the Disclosure Bill, 2010 in August 2010 to give statutory backing to the 2004 government resolution.  Commonly known as the Whistleblower’s Bill, it seeks to protect whistleblowers i.e. persons making a public interest disclosure related to an act of corruption, misuse of power or criminal offence by a public servant.  It designates the Central and State Vigilance Commissions to receive disclosures from whistleblowers and lays down safeguards for protection of whistleblowers (see PRS Analysis). The Bill was referred to the Departmentally related Standing Committee on Personnel, Public Grievances, Law and Justice.  The Committee presented its report on June 9, 2011. Key recommendations of the Standing Committee

  • § The Bill seeks to establish a mechanism to register complaints on any allegation of corruption or wilful misuse of power by a public servant.  The Committee broadly agreed with the provisions of the Bill but hoped that the government would consider the recommendations and adopt them wherever found appropriate.
  • § The Bill covers any complaint under the Prevention of Corruption Act, 1988; wilful misuse of power, and a criminal offence by a public servant.  The Committee suggested that the scope of the Bill may be widened to include offences such as maladministration and human rights violations.  Specifically, the Bill should cover accrual of wrongful gain to a third party.  Also, the definition of “public servant” in the Indian Penal Code and the Prevention of Corruption Act, 1988 could be adopted for this Bill.
  • § The Committee proposed that the defence forces and intelligence organisations should be included within the ambit of the Bill.  There could be reasonable exceptions based on operational needs of the forces.  Alternately, a separate authority could be set up for these exempted agencies.  It added that the Bill should cover members of the Council of Ministers, the judiciary (including higher judiciary) and regulatory authorities.
  • § The Bill states that a public interest disclosure can be made only to the Central or State Vigilance Commissions (VCs).  The Committee is of the opinion that this may restrict access especially to population in remote areas.  It recommended that the Rules should provide for a smooth and convenient system.  The Committee added that if there are multiple points at which complaints can be made, the identity of the complainant should be strictly protected.
  • § The Bill does not allow anonymous complaints.  The Committee however suggested that if the anonymous complaints have supporting documents that substantiates the claims, the VCs can investigate it.  It also advised that an alternative mechanism could be set up within or outside the Bill for inquiring into anonymous complaints.
  • § The Committee recommended that there should be a foolproof mechanism to ensure that the identity of the complainant is not compromised with at any cost.  This is especially important because without such a mechanism it would deter prospective complainants due to fear of harassment and victimisation.
  • § The Bill allows the VCs to reveal the identity of the complainant to the head of the organisation if it is necessary to do so.  The Committee recommended that the identity of the complainant should not be revealed to the head of the organisation without the written consent of the complainant.
  • § The Committee felt that undue burden should not be placed on the complainant to provide proof to substantiate his case.  As long as he is able to make out a prima facie case, the VCs should follow up on the case.
  • § The Committee is of the view that the VCs should inform the complainant about the outcome of the complaint.  Also, the VCs should give reasons if it decides to dismiss a complaint and the complainant should be given a reasonable hearing if he is not satisfied with the dismissal.
  • § The Committee proposed that there should be a time limit for conducting discreet inquiry by the VCs, for inquiry by the head of the organisation and for taking action on the recommendations of the VCs.  The authority would have to give reasons in writing if it wants the time limit to be extended.  There should also be some mechanism to ensure that the directions of the VC are not avoided to protect the wrongdoer.
  • § The Bill states that the VCs shall not entertain any complaints made five years after the action.  However, the Committee is not convinced that this restriction should be prescribed.  If at all there has to be a time limit, exceptions should be made in case of complaints which prima facie reveal offences of a grave nature.
  • § The Committee recommended that the term “victimisation” should be defined and the whistleblower should be provided with sufficient protection to protect him from violence.  Also, witnesses and other persons who support the whistleblower should be accorded the same protection.
  • § The Committee strongly recommended that there should be a mechanism to ensure that the orders of the VCs are complied with. Stringent action should be taken against any person who does not comply with the order.
  • § The Committee felt that the penalty for frivolous or malafide complaints was too high and should be substantially reduced.  Also, while deciding whether a disclosure is frivolous, the intention of the complainant should be examined rather than the outcome of the inquiry.  The complainant should also have the right to appeal to the High Court.