36447518 ey ppt on direct tax code dtc aug 2010

Direct Tax Code-

Personal Tax ImplicationsErnst & Young Webcast

Held on 9 August 2010 at 03:00 p.m. IST

Contents

► Background

► Residential Status

► Income from Employment

► Income from House Property

► Capital Gains

► Tax Incentives

► Wealth Tax

► Rates of Personal Tax

Background

Direct Tax Code- Personal Tax Implications9 August 2010

Background

► 12th August 2009 : Direct Tax Code (‘DTC’) Bill, 2009 and Discussion Paper released

► Inputs received from large number of organizations and individuals

► News reports: Over 10,000 responses from stakeholders

► Key areas of concern identified

► 15 June 2010: Revised Discussion Paper (‘RDP’) released

► RDP addresses 11 major issues arising from draft DTC

► Responses solicited upto 30 June 2010

► Other issues to be considered while finalizing the DTC Bill

► DTC proposed to be effective from 1 April 2011

4

Residential Status


Particulars Existing provisions Proposed provisions Impact

► Residential

Status

► The residential status

is classified as:

► Ordinarily

Resident

► Non Resident

► Not Ordinarily

Resident

► An individual will be

resident in India if his

stay in India is:

► 182 days or

more during

the Financial

Year (‘FY’), or

► 60 days or

more in that FY

and 365 days

in last four FYs.

► DTC has done away

with the concept of

Not Ordinarily

Resident

► The way residential status

is determined is revamped

► The term ‘Not Ordinarily

Resident’ has been done

away with but the concept

still remains.

Residential Status


Residential Status

► Under the DTC, the concept of residential status and the taxability of income

has been revamped.

► The term ‘Not Ordinarily Resident’ has been done away with but the concept

remains.

► Resident would normally be taxable on his worldwide income except in

specified circumstances.

► Income accrued, deemed to accrue or received outside India is not

considered taxable in the year the individual ceases to be a Non Resident

and the immediately succeeding year provided the individual was a Non

Resident in 9 immediately preceding years.

► The current 730 days for Ordinary Resident test has been done away with

which protected the first time expatriates into India from becoming Ordinary

Residents upto 3-4 years of assignment.

Residential Status

7


Example

► If John, a US citizen comes to India for the first time in FY 2011-12 and his

presence in India is as under:

► Under the Act, he retains the status of ‘Not Ordinarily Resident’ in all these

years since his presence in India for last seven years does not exceed 729

days.

► However, under DTC, he will lose the exemption from FY 2013-14

onwards since he will not fulfill the condition of being Non Resident for nine

out of ten immediately preceding FYs. He will be subject to worldwide

taxation from FY 2013-14.

Residential Status

FY 2011-12 2012-13 2013-14 2014-15

No. of days

in India

200 200 200 200

8

Income from Employment


Concept of Economic Employer

► It is a welcome move that the concept of economic employer has been recognized and

‘employer’ has been defined in the DTC.

► Under DTC, ‘employer' has been defined to mean:

► an entity which controls and directs the individual under express or implied employment

contract and

► is obligated to pay compensation to such individual.

► However, this definition is rigid and is likely to create challenges when looking at cross

border movement of employees as envisaged in the following situations:

► Where a group company may second its employee to work under the control and

direction of another group company without cross-charge/ partial cross-charge of salary.

► Where payroll is maintained with more than one entity while the individual works for and

under the control and direction of only one entity.

► Where deputation is for a fixed period under which the individual works under the

directions of the entity to which he is deputed and which is also obligated to bear the

salary costs, but the individual remains on the payroll of the parent entity (the legal

employer) and is supposed to repatriate to his parent job post-deputation.

10



► Income from employment is to be computed as ‘Gross Salary’ reduced by aggregate of

permissible deductions.

► Gross Salary includes:

► Value of perquisites

► Profits in lieu of salary

► Leave travel concession

► Medical reimbursement

► Free or concessional medical treatment paid for, or provided by the employer

► Permissible deductions include:

► Professional tax

► Transport allowance

► Prescribed special allowances or benefit granted to meet official expenses to the

extent of expenses actually incurred

11



► Perquisites defined as:

► Value of any accommodation

► Payment for life insurance or annuity

► Employer’s contribution to Approved Superannuation Fund, Approved Provident

Fund or New Pension Scheme above the prescribed limits

► Value of sweat equity shares

► Discharge of any obligation of the employee

► Any other amenity, facility etc.

► DTC proposes to exempt the following, subject to the specified limits:

► Gratuity received

► Amount received under Voluntary Retirement Scheme

► Commuted pension linked to gratuity

► Leave encashment

12



Component Existing provisions

► Medical reimbursements ► Exempt upto Rs.15,000 p.a.

► Motor car ► Taxed at notional value of Rs.1800 p.m. / Rs.2400 p.m.

(plus Rs.800 p.m. for driver) if the motor car is used for

both official and personal purposes and expenses for

running and maintenance are met or reimbursed by the

employer (motor car owned by the employer)

► Domestic Servant ► Actual cost

► Gas/electricity/ water ► Actual cost

► Educational facilities ► Actual cost except when educational institution is

maintained by the employer

Rules for valuation to be prescribed for:

13



Existing provisions Proposed provisions

► House Rent Allowance (‘HRA)’ is exempt

under provisions of the Income tax Act,

1961 (‘Act’) to the extent prescribed under

Income tax Rules, 1961 (‘Rules’)

► No deduction from gross salary in respect

of such allowance

► Transport Allowance granted to meet

expenditure for the purpose of commuting

between the place of residence and place

of duty is exempt upto Rs. 800 per month

► Amount received from employer for journey

by the person between his residence and

office or any other place of work, is

deductible from gross salary to the extent

prescribed.

Special Allowances are exempt under Section

10(14) of the Act read with Rule 2BB :

Rule 2BB(1)

► Prescribed allowances to meet official

expenses to the extent actually incurred.

► Deductible from gross salary, as

prescribed, to the extent actually incurred.

14




Rule 2BB(2)

► Prescribed allowances to meet personal

expenses at place of employment or

residence

► Only transport allowance will be deductible

from gross salary, to the extent prescribed

► Prescribed allowance to compensate for

increased cost of living

► Taxable

► Personal allowance (prescribed) for

performing duties of special nature, related

to place of posting or residence

► Taxable

15


Issues

► No exemption was proposed for HRA under DTC. Initial discussion paper, is

understood to have slipped on HRA but RDP has also not addressed this.

► What does this means for an individual staying in rented accommodation?

► May result in inequity vis-à-vis value of company leased accommodation.

► RDP clarified that perquisite value of rent free accommodation would not be based

on market value.

► Leave Travel Concession has been proposed to be made fully taxable.

► Special allowance or benefit granted to meet expenses wholly and exclusively incurred

in the performance of duties to the extent actually incurred, as may be prescribed is

deductible from the taxable income. This provision is similar to Section 10(14) of the

Act.

► Whether the employees will need to submit proof of expenditure / documentation

for per diems paid for official tour to claim deduction from tax since the character of

tax benefit is now changing from ‘exemption’ to ‘deduction’?

16


Issues

► Will the Supreme Court’s decision in case of Larsen & Toubro hold relevance which

says that the employer is under no statutory obligation to collect evidence to show

that employees had actually utilized the leave travel concession / conveyance

allowance?

► Whether the employer would be required to report the amount of allowance which

is deductible?

► Impact will be clear once rules are prescribed.

► Tax borne by the employer on non monetary perquisites presently exempt u/s

10(10CC) of the Act has been done away with under DTC.

► Taxation of employee share plans need to be more comprehensively stated, taking into

consideration the cross border movement of employees and various types of plans.

Clarity is required on the pro-ration of gains arising to non-resident globally mobile

employees.

17


Retirement Benefits


► Gratuity ► Exempt up to Rs.10 lakh ► DTC proposed to

provide for exemption

in respect of gratuity

received, subject to

monetary limits. The

present exemption

limit of Rs.10 lakhs is

expected to continue.

► No impact

► VRS

Compensation

► Exempt up to Rs.5 lakh ► DTC proposed to

provide for exemption

in respect of VRS

compensation

received, subject to

monetary limits. The

present exemption

limit of Rs.5 lakhs is

expected to continue.

► No impact

18


Retirement Benefits


► Pension ► Pension commuted

exempt up to certain limit

► Uncomuted pension fully

taxable

► DTC proposed to

provide exemption in

respect of commuted

pension linked to

gratuity received,

subject to monetary

limits.

► No change

► To be analyzed once

limits are prescribed

► No impact

The Retirement Benefits Account Scheme which was proposed to be introduced in original

draft of DTC has been withdrawn in RDP.

19

Income from House Property




Tax base ► Annual value is the

basis for taxation

► Rent realized and

Fair Market Value

form the basis for

determining Annual

Value

► Gross Rent is the basis for

taxation

► Gross Rent will be

contractual rent i.e. the

amount of rent received or

receivable for the FY

► Concept of Fair Market

Value done away with to

simplify and reduce

litigation

► RDP removed

calculation of gross rent

at a presumptive rate of

6%

Standard

deduction

► 30% of Annual

Value

► 20% of Gross Rent ► May increase the tax

liability

Interest on

borrowed

capital

► Allowed upto Rs.

150,000 for self

occupied property.

► Allowed without limit

for let-out

properties.

► Deduction upto Rs. 150,000

available for self occupied

property

► Allowed without limit for let-

out property

► RDP restored deduction

of Rs.150,000 on

account of interest on

borrowed capital for self

occupied property

21




Deduction for

interest paid on

loan during the

pre-construction

or pre-

acquisition

period

► Allowable in 5

installments

► Not allowed ► Such interest may be

sunk cost

Deduction for

service tax

► Ambiguous ► Specific provision

included

Doing away with taxation of house property income on deemed rent basis is a welcome

move and is in line with international best practices.

22


Case Study - Let out House Property

Income from House Property Existing provisions Proposed provisions

Rent received/ receivable 1,00,000 1,00,000

Less: Municipal Tax 10,000 10,000

Less: Standard Deduction 27,000 (ie.30% of 90,000) 20,000 (ie.20% of 100,000)

Less: 1/5 of pre- construction

period interest

3,000 0

Less: Interest paid on loan

during the financial year

8,000 8,000

Income from House property 52,000 62,000

(all figures in Rs.)

23

Capital Gains


Capital Gains

Particulars Existing

provisions

Proposed provisions Impact

Distinction between

short-term and long-

term capital asset

► Distinct tax

treatment and

rate

► Prima-facie no

distinction

► All capital gains will be

taxed at normal rates

except LTCG on sale of

listed equity shares or

units of equity oriented

fund which will be taxed

after giving specified

deduction

Base date for

indexation and

substitution of FMV to

determine cost of

acquisition

► 1 April 1981 ► 1 April 2000 ► Appreciation upto 1

April 2000 will not get

taxed. Increased cost

of acquisition and thus

reduced taxes.

Set-off and carry

forward of short term

and long term capital

gains

► Subject to

restrictions

► All capital gains can be

set-off against each

other and resultant loss

can be carried forward

► Will reduce overall tax

liability as LTCL can be

set off against STCG

25


Capital Gains

Particulars Existing

provisions

Proposed provisions Impact

Capital assets eligible

for indexation

► Any capital

asset held for

more than 36

months (12

months in

certain cases)

immediately

preceding date

of its transfer

► Any capital asset other

than listed equity

shares or units of

equity oriented fund

transferred after one

year from the end of FY

in which it is acquired

Sale of listed equity

shares or units of equity

oriented fund

► LTCG arising on

sale of shares

or units held for

more than 12

months are

exempt from tax

u/s 10(38) of

the Act

► For shares/units held

for at least one year

from the end of FY,

gain will be computed

after allowing deduction

at a specified

percentage

► Will increase the overall

tax liability

26


Capital Gains

Particulars Existing Provisions Proposed provisions Impact

► STCG arising on

shares or units

(STT paid) held for

12 months or less

are taxed at special

rate of 15%

► For shares/units held

for less than one year

from the end FY, gain

shall be computed

without any specified

deduction

► Will increase the tax

liability for higher

income groups as

STCG will be taxed at

30% instead of 15%.

27


Case Study - Capital gain on sale of long term

listed shares

On transfer of listed shares/ units

of equity oriented mutual fund


Sale Consideration 1,000 1,000

Less: Expenses on transfer 100 100

Less: Cost of acquisition

of listed shares / units of equity

oriented mutual fund for Rs. 600 on

April 1, 2008

600 600

Capital Gain 300 300

Less: Deduction @ 60% 0 180

Tax liability 0 [exempt u/s 10(38) of

the Act ]

36

[@ 30% of (300-180)]

(all figures are in Rs.)

Substantial increase in tax liability as exemption similar to existing provisions is not available under

DTC

28


Case Study - Capital gain on sale of short term

listed shares

On transfer of listed shares/

units of equity oriented mutual

fund


Sale Consideration 1,000 1,000

Less: Expenses on transfer 100 100

Less: Cost of acquisition

of listed shares / units of equity

oriented mutual fund for Rs. 600

600 600

Capital Gain 300 300

Tax liability 45 (@ 15%) 90 (@ 30%)

(all figures are in Rs.)

Tax liability doubles for higher income groups as benefit of lower rate is not available under DTC

29


Issues

► Roll over benefit on sale of a residential house currently available under the Act

irrespective of the number of houses owned, is sought to be restricted in DTC.

► Avenue for deposit of capital gains to get exemption from tax needs to be specified as

Capital Gains Savings Scheme (‘CGSS’) is not to be introduced.

► STT proposed to be re-calibrated.

30

Tax Incentives


Tax Incentives

► DTC proposed the EET method of taxation for savings.

► EET stands for:

► E-where the contribution towards certain savings is deductible from taxable income

► E- where the accumulation/accretion are exempt from tax till such time they are invested

► T- where all withdrawals are taxed subject to applicable marginal rate

► Grandfathering under EET:

► DTC exempted the withdrawal of any accumulated balance from recognised Provident Fund (‘PF’) and Public Provident Fund (‘PPF’) available as on March 31, 2011 and;

► Only new contributions/ accretions after DTC were to be subject to EET .

32


Tax Incentives

► Based on recommendations received from various sections, RDP has restored EEE taxation for:

► Government Provident Fund

► Public Provident Fund

► Recognised Provident Fund

► Pension Scheme administered by Pension Fund Regulatory and Development Authority (‘PFRDA’)

► Approved pure life insurance products and annuity schemes

► Investments made prior to commencement of DTC which enjoy EEE method under the Act

► Though as of now EET is proposed to be withdrawn but the issue is whether it is a serious move or temporary adjustment to smoothly introduce the DTC ?

33

Wealth Tax


Wealth Tax

Particulars Existing provisions Proposed provisions

Scope of Wealth Tax ► Applicable to Individuals, HUFs

and Companies

► Applicable to all tax payers except

non profit organizations

Threshold Limit ► Wealth tax payable on net wealth

in excess of Rs. 30 lakhs

► Limit to be suitably calibrated

Rate of tax ► 1% of net wealth in excess of Rs.

30 lakhs

► Limit to be suitably calibrated

Assets ► Specified assets such as motor

cars, jewellery, urban land etc

(specified unproductive assets)

► Likely to be the same as existing

provisions

35

Rates of Personal Tax



Income Slab Existing

Rates

Proposed

Rates

Upto Rs.1,60,000* Nil Nil

Rs.1,60,000 to 5,00,000 10%

10%Rs.5,00,000 to 8,00,000 20%

Rs.8,00,000 to 10,00,000 30%

Rs.10,00,000 to 25,00,000 30% 20%

Above Rs. 25,00,000 30% 30%

Income

(Rs.)

Current

tax (Rs.)

Proposed

tax (Rs.)

Savings

(Rs.)

Savings

(%)

1,50,000 Nil Nil - -

3,00,000 14,420 14,000 420 3

5,00,000 35,020 34,000 1,020 3

7,50,000 86,520 59,000 27,520 32

10,00,000 158,620 84,000 74,620 47

20,00,000 467,620 2,84,000 183,620 39

Tax Rates Tax Savings (without considering the effect of HRA, LTA etc.)

*Higher limits for women and senior citizens

37



► No change in minimum threshold

► No change in tax rates up to Rs.5 lakhs

► Tax slabs likely to be calibrated

► It is likely that the highest slab will be in the range of Rs.15 lakhs to Rs.20 lakhs

38


Thank you

“This Presentation provides certain general information existing as at the time of production. This Presentation does not purport to identify all the

issues or developments pursuant to the transaction. Accordingly, this presentation should neither be regarded as comprehensive nor sufficient

for the purposes of decision-making. Ernst & Young does not undertake any legal liability for any of the contents in this presentation. The

information provided is not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be

sought before taking action on any of the information contained in it. Without prior permission of Ernst & Young, this document may not be

quoted in whole or in part or otherwise referred to in any documents.”

Ernst & Young Presenter

Sonu Iyer – Partner, Ernst & Young India

For enquiries, please write to: [email protected]

Recorded version of the webcast will be accessible till 08 September 2010 at:

http://webex.wstream.net/eytaxupdate/directtaxcode/

mailto:[email protected]

36447518 ey ppt on direct tax code dtc aug 2010

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