fourth draft of chidambaram‘s direct taxes code how long can the country go on discussing such...

Volume VIII Part 1 July 10, 2014 3 Business Advisor

Fourth draft of Chidambaram‘s Direct

Taxes Code: How long can the country go

on discussing such imperfect drafts?

T. N. Pandey

The 4th draft of the Chidambaram‘s Direct Taxes Code

(DTC) was released by the Finance Ministry on 1st April,

2014 in pursuance of declaration made at the time of

presentation of Interim Budget in February, 2014 for the

current year, till the regular budget is presented and

passed.

The observations were:-

―We have also got ready a Direct Taxes Code that will

serve us for at least the next 20 years. I intend to place it on the website for

a public discussion without partisanship or acrimony.‖

2. Whether 4th attempt would succeed?

The issue that arises in this context is whether any useful purpose would be

served by discussing this draft, which is the 4th in series of such unfruitful

exercises carried out by Shri Chidambaram since the year 1996 when he

became the Finance Minister (FM) for the first time in UF Govt. New DTC‘s

prospects will depend on the priorities of the next Govt. One should have

waited for the formation of the next Govt. post-general election and when

DTC would be on the agenda of the new Govt. whether the new FM would

like to go ahead with the draft prepared by Shri Chidambaram‘s team of

officers working in the Income Tax Dept. or he would like to start the

process de novo after discarding DTC, 2013 in the same manner as Shri

Chidambaram did in regard to DTC, 2010, prepared during the time Shri

Pranab Mukherjee was the FM in his taking over as FM in the 3rd term.

3. Why earlier attempts failed?

Regretfully, the position is that the exercise of enacting a new simple and

long-lasting consolidated Code for two Direct Taxes namely the Income Tax

Act, 1961 and the Wealth Tax Act, 1957 has been made a mess by Shri

Chidambaram himself by his overbearing self-righteousness attitudes,

approving only such drafts that suited his line of thinking and getting the

Code prepared as per his dictates through a set of officers working in the


I.T. Dept/CBDT under his control. This resulted in one after another draft

getting replaced because of various deficiencies noticed during discussions.

This resulted in three previous drafts titled Income Tax Bill, 1997, DTC,

2009 & DTC, 2010 becoming otiose to be superceded, resulting in 4th draft,

which has now been placed in the Finance Ministry‘s website for discussion

once again.

3.1 Briefly, the reasons for failure of attempts spreading nearly 18 years

could be summarised as under:-

Hurried and ad hoc approaches;

Non-clarity regarding what was intended to be achieved;

Entrusting the work without any terms of reference to so-called expert

bodies;

Not constituting an independent Commission of experts from different

disciplines, headed by a Judge of Supreme Court, to draft the new

Code, on the lines of Wanchoo Commission in the past or requesting

the Law Commission to do the job on the lines it drafted the present

I.T. Act.

4. The time, efforts and money spent in the previous 3 drafts have become

total waste because of ad hoc-ism and delays in the processes followed. The

same, it is feared, is expected to be the fate of the latest draft – DTC, 2013,

which will have to be re-christened in the year in which it is introduced in

the Parliament – may be year 2014 or 2015.

5. Salient aspects of the new Code – DTC, 2013

These are summarised in later discussion.

[A] Concerning Income Tax Act

[a] The Standing Committee on Finance (SCF), headed by Ex-Finance

Minister, Shri Yashwant Sinha, had recommended that the general initial

exemption limit be raised from Rs 2,00,000 to Rs 3,00,000 with adjustment

in slabs. This suggestion has not been accepted and the 2013 draft

The time, efforts and money spent in the previous 3 drafts

have become total waste because of ad hoc-ism and delays in

the processes followed.


continues with rates and slabs mentioned in draft DTC, 2010 on the ground

that the acceptance of these would lead to revenue loss of Rs 60,000 crore.

Existing slabs

[Rs in lakh] Rates

Slabs

suggested by

SCF [Rs in

lakh]

Rates

2.5 10% 3-10 10%

5-10 20% 10-20 20%

Over 10 30% Over 20 30%

[b] The suggestion of the SCF to link the exemption limit to the consumer

price index has been rejected on the ground that the change in the base

year and the composition of the index is expected to complicate matters.

According to the FM, indexing the slabs to inflation indeed is not a

comprehensive approach, as the slab structure is dependent on a number of

factors, including other reliefs given to the taxpayer, potential revenue loss

to the Govt., the number of taxpayers, who would go out of tax net, etc.

[c] Suggestion regarding abolition of Security Transaction Tax (STT), as

suggested by the SCF has not been accepted. It has been argued that the

levy is needed to regulate day trading and the burden has been reduced

through as the rate has been reduced significantly.

[d] In 2010 DTC, tax rate for insurance companies was proposed @30% on

the ground that the tax base for a life insurance company is limited to the

surplus generated for the company in the shareholders account, while the

surplus determined in the policyholders‘ account (technical account) is not

taxable. Therefore, rate of tax on such companies is aligned with that

applicable to other companies, i.e. 30%. In the new draft, tax rate for

insurance companies has been retained at 15% instead of 30% as proposed

in the DTC, 2010.

[e] For life insurance products, where premium payable or paid does not

exceed 10% of the capital sum assured, any amount, including bonus, will

not be liable to tax.

[f] The Ministry has rejected the demand for allowing deduction for

corporate social responsibility (CSR) expenditure in backward regions and

districts. According to the Ministry, allowing deduction for CSR expenditure


would imply that the Govt. would be contributing one third of this

expenditure as revenue foregone.

[g] The new DTC proposes to allow tax deduction against interest on loans

taken from employer for self-occupied property in addition to home loans

from banks, a concession that was not offered in the DTC Bill, 2010. The

move follows a suggestion by the Parliamentary Standing Committee on

Finance but comes with a ceiling of Rs 1.5 lakh for purchase or construction

of house property and Rs 50,000 in the case of repairs. The move will come

as a boon for several employees, who can now hope to get additional tax

benefits from loans taken from employers.

[h] Changes concerning income from ‗house property‘

Existing position Proposed in the Bill

[i] Income from

house

property

Property not to include

property used for the

purpose of business or

profession

Property will not include

property used for

business or commercial

purposes.

[ii] Deduction for

interest

As indicated at S.No. [g]

earlier

As indicated at S.No. [g]

earlier

[i] Dividend exceeding Rs 1 crore will be liable to tax @10%

Under the present I.T. Act, as well as in the DTC Bill, 2010, the dividend

distribution tax is to be levied at the rate of 15%. No tax on dividends is

charged. The draft proposes tax at 10% on dividends exceeding Rs 1 crore.

[j] The new Code proposes a 35% tax rate for an individual and a Hindu

Undivided Family (HUF) having income exceeding Rs 10 crore. In the 2013-

14 budget, the FM had imposed a surcharge of 10% on those with taxable

income in excess of Rs 1 crore, pegging the number of such taxpayers at

42,800.

[k] Taxation on indirect transfers (like that in the case of Vodafone) has been

made more explicit. The proposals provide for a threshold of 20% of the

value of global assets to be located in India for triggering a tax incidence in

the country. Actually, the law proposed deviates from the recommendation

of the Shome Committee, which had recommended a 50% threshold limit.

This has been reduced to 20% on the ground that there could be situation

that a company has 33.33% assets in three countries but it will not get

taxed anywhere. Accordingly, the revised Code provides for a threshold of


20% of global assets to be located in India for taxation of income from

indirect transfer in India.

[l] More clarity on tax residency rule has been provided. As of now, a

company is a tax resident of India and subject to tax on worldwide income if

it is registered in India or during a year, the control of its affairs is situated

wholly in India. DTC, 2013 has brought more clarity for determining tax

residency and has retained the place of effective management norm from

DTC, 2010.

[m] Tax provisions concerning non-profit organisations have been

rationalised by taxing their surplus at a concessional rate of 15%, allowing

basic exemption limit of Rs 1 lakh and allowing all capital expenditure as

revenue outgoing. The draft Code also does not provide for specific modes of

investments. An NPO would be free to make its investments, other than the

limited prohibited modes of investments. Consequently, specific deduction

for accumulation and the provision for carry forward of deficit are proposed

to be removed.

[n] Settlement Commission scrapped. The DTC, 2013 has no provisions

relating to Settlement Commission.

[o] Weighted deduction for scientific research

DTC Bill, 2010 provides for weighted deduction of 175% to the donor on any

donation made by it to the specified institutions to be utilised by them in

scientific research. Weighted deduction of 200% is also provided for in-

house scientific research. Since the weighted deduction reduces the actual

expenditure on research and there is significant potential for its misuse, the

revised Code provides for weighted deduction of 150% for in-house scientific

research and 125% to the donor on any donation made by it to the specified

institutions.

[B] Changes concerning Wealth Tax

Significant changes concerning wealth taxation have been made. The

As of now, a company is a tax resident of India and subject to

tax on worldwide income if it is registered in India or during a

year, the control of its affairs is situated wholly in India.


proposal is to tax financial assets also along with all physical/productive

assets. Wealth tax is proposed to be levied on individuals, HUFs and private

discretionary trusts at the rate of 0.25%. The threshold for levy of wealth-

tax in the case of individual and HUF shall be Rs 50 crore. These were the

rates and exemption limit in the DTC, 2009 also, which were revised in

DTC, 2010 as under during Shri Pranab Mukherjee‘s regime.

Initial exemption limit: Rs 1 crore

Rate of tax : 1% exceeding Rs 1 crore

No grounds have been given as to why the proposal concerning rate of tax

and threshold limit as contained in DTC, 2009, have been revised. Such low

rate of tax and fixing of exemption limit at Rs 50 crore neutralises the

expansion of tax base. Prima-facie also, the limit of Rs 50 crore is on the

high side and tax rate on the low side, for which no justification has been

given in the explanatory note appended to the DTC, 2013.

Summary of the article

The author, in this write-up, has discussed salient aspects of DTC, 2013 –

the 4th in the series presented by Shri Chidambaram as FM in his 3 tenures

in the GOI in a period of 18 years since his first tenure in the year

1996/1997. The exercises done in regard to first three drafts ended as futile

exercise because of the reasons stated, as no DTC could be enacted on the

basis of these drafts.

The same may be the fate of the 4th draft (DTC, 2013) because of change in

Govt. consequent to elections in May, 2014. The new changes in DTC, 2013

vis-à-vis DTC, 2010 have been highlighted. The author has expressed

surprise for keeping the exemption limit for wealth tax at Rs 50 crore (from

Rs 1 crore in DTC, 2010) and reducing the rate to 00.25% (from 1% in DTC,

2010) without mention of any pressing reasons. Such changes neutralise

the impact of expansion of tax base for wealth-tax levy.

(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)

Wealth tax is proposed to be levied on individuals, HUFs and

private discretionary trusts at the rate of 0.25%. The

threshold for levy of wealth-tax in the case of individual and

HUF shall be Rs 50 crore.