Examining the effectiveness of the Direct Tax Code

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

New Delhi:  More NRIs may fall under the tax net if the Direct Taxes Code (DTC) Bill proposal to impose a levy on their global income if they stay in India for more than 60 days in a year is approved by Parliament.

As per the existing Income Tax laws, an NRI is liable to pay tax on global income if he is in India in that year for a period or periods amounting to 182 days.

Furthermore, in case an NRI resides in India for a period of 365 days or more over a period of four years prior to the assessment year, he is also liable to pay tax on his global income.

The new DTC Bill has proposed to make an NRI liable to pay tax on global income is he resides in India in a particular year for a period or periods amounting to 60 days, down from the existing provision of 182 days in the existing

Income Tax Act:

However, the present dispensation for taxation of global income if an NRI resides in India for 365 days or more over a four-year period has been retained in the proposed DTC.

The DTC hopes to plug loopholes with the proposed changes with the aim of preventing tax evasion through this route, said a senior Finance Ministry official.

In addition, the DTC has also removed the 'Resident Not Ordinarily Resident (RNOR)' category to simplify the tax laws, the official said.

Now, there will be only two categories, 'Resident' and 'Non-Resident', the official added.

Commenting on the proposal PwC Executive Director (Tax) Kuldeep Kumar said, "With this change, a non-resident would be at greater risk of becoming an ordinary citizen and become liable to pay tax in India as the threshold limit has been


There would be liability on a resident belonging to a country where the tax rate is lower than India and there is a Double Taxation Avoidance Agreement (DTAA) between both the countries. 

The non-resident would be considered a resident if the threshold limit of stay has been exceeded for the purpose of imposing tax.

In the case of a resident of a non-treaty country, which India has no DTAA with, the tax burden would be higher if he exceeds the threshold limit of stay in India, Kumar said, adding that he has to pay tax on all the global income in India as well as the country of residence as per the

prevailing tax laws of that country.


 At present, India has comprehensive DTAAs with about 74 countries, including the USA, Singapore, UK, Thailand, South Africa, Saudi Arabia, New Zealand and Australia.

Experts feel that the DTC proposal could be a damper for NRIs visiting India to meet their relatives or for business promotion. 

(B). New Direct Tax Code: Pay less in taxes from April 2011

New Delhi:  A windfall for taxpayers from the next financial year. You will in fact have to pay less Direct tax in every slab of income. This comes with the Cabinet clearing the Direct tax code.

The much-awaited Direct Taxes Code (DTC) Bill is likely to be tabled in Parliament during the ongoing Monsoon session and thereafter it may be referred to a select committee of members of both houses of Parliament.

The new provisions under the Direct Tax Code are as follows:

Tax for income between Rs. 2 lakh - Rs. 5 lakh: 10%

Tax for income between Rs. 5 lakh - Rs. 10 lakh: 20%

Tax for income over Rs. 10 lakh: 30%

The limit for exemptions for salaried people is Rs. 2 lakh, while that for senior citizens is Rs. 2.5 lakh. 

The new Code comes into effect from April, 2011.

After the approval of the Cabinet, the decks are cleared for tabling the legislation in the Monsoon Session of Parliament so that the new Act ushering in reduced tax rates and exemptions may come into effect from next fiscal.

When enacted, the Code will replace the archaic Income Tax Act and simplify the whole direct tax regime in the country.

The Code aims at reducing tax rates, but expanding the tax base by minimising exemptions.

The Finance Ministry had earlier come out with a draft on the (Direct Tax Code) DTC bill, some of whose provisions drew strong criticism from industry as well as the public.

To address those issues, the ministry brought out the revised draft, dropping earlier proposals of taxing provident funds on withdrawal and levying Minimum Alternate Tax on corporates based on their assets.

"As of now, it is proposed to provide the EEE (Exempt-Exempt-Exempt) method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and re cognized Provident Funds (RPF) ...", the revised DTC released by the Finance Ministry said.

The revised draft also puts pensions administered by the interim regulator PFRDA, including pension of government employees who were recruited since January 2004, under EEE treatment.

The first DTC draft had proposed to tax all savings schemes including provident funds at the time of withdrawal bringing them under the EET (Exempt-Exempt-Tax) mode.

Under the EEE mode, the tax exemption is enjoyed at all the three stages - investment, accumulation and withdrawal.


the earlier DTC draft had proposed to reduce the corporate tax to 25 per cent from the present 30 per cent. The revised proposal has also made it clear that tax incentives on housing loans will continue. Payment on interest on housing loans up to Rs. 1.5 lakh will continue. The earlier draft was silent on housing loans

(C)Impact of DTC

The Direct Taxes Code is not likely to have a major impact on residential segment, according to Mr. Amit Goenka, National Director - Capital Transactions; Knight Frank India. The DTC has suggested withdrawal of the tax deduction on the principal component of home loans effective April 1, 2012. This is aimed at bringing tax parity between various slabs of taxpayers. Those who have taken a home loan of more than Rs 20 lakh will not be affected as the interest component on that is usually enough to qualify for the Rs 1.5 lakh interest deduction. Also, this population, which typically earns over Rs 10 lakh, a year could not claim benefit of the principal deduction as the cap of Rs 1 lakh under Section 80CC/CCC was easily met leaving no room for principal deduction. According to the company, much of the initial phases of Avenue-71 have been booked by end-users. The township offers 2-, 3-, and 4-BHK apartments with a total saleable area of 16.5 million sq.

Avenue-71 is an energy-efficient and environment-friendly township. Only 18 per cent of the available area has been used for buildings; themed gardens take up much of the open spaces.

CREAA's office-bearers

Mr. Jayant Hemdev has been elected as President of the Chennai Real Estate Agents Association (CREAA) for 2010-11, according to a press release from the Association.


The tax impact will be felt by those earning lower incomes, say, Rs 2-5 lakh per annum and having availed themselves of lower home loans of, say, Rs 10 lakh. They would have a lower tax shield with this move. However, with a revision of the tax slabs, this impact would be nearly offset. Hence, the housing loan industry or mortgage owners would not be materially affected by the move under DTC which is seen as an equalizer across income classes and aims to bring more rationality to the tax regime

(D)Corporate India cautious in welcoming DTC bill

NEW DELHI: Corporate India was cautious in its response to the Direct Taxes Code bill, welcoming the proposal to raise the exemption limit for individual tax payers, while expressing disappointment that corporate tax rates were not lowered to 25 per cent. 

The three leading industry associations, which cover almost the entire gamut of corporate India, said some provisions of the DTC, tabled in Parliament today and proposed to be implemented from April 1, 2012, were not in sync with international best practices. 

"The proposed new direct tax code is a welcome move, but it has not gone far enough," said FICCI President Rajan Bharti Mittal. 

The industry body said that average global corporate tax rate is around 25 per cent and it is imperative that in India also have a corporate tax rate of 25 per cent. 

"The marginal adjustment of fixing the rate at 30 per cent is disappointing," Mittal said. 

Further, the new income tax slabs that have been proposed provide application of maximum tax rate of 30 per cent at income level of over Rs 10 lakh. This is also not a major change as originally the maximum rate was proposed to be levied at income levels of over Rs 25 lakh, FICCI said. 

Industry body Ascham complemented the UPA government and said that it would pave the way for equitable administration of direct taxes and address the concerns of industries. 

"The revised DTC should have addressed concerns relating to capital gains tax as well as minimum alternate tax (MAT) as per anticipation of India Inc.," Assocham President Swati Piramal said. 

PHD Chamber said that the increase in proposed MAT on book profits from current rate of 18 per cent to 20 per cent will be regressive for companies. Companies have been demanding an abolition of MAT. 


Making the tax rates a part of the code itself will be an appreciable move as it would provide stability to changing tax rates year after year.

However, corporate tax rate of 30 per cent as proposed by the code will be of marginal relief for the corporates and the Chamber believes that it should be brought down to a level of 25 per cent.

(E)Analysis of the Direct Tax Code 2010: Grant Thornton

The Central Board of Direct Taxes (CBDT) then issued a Revised Discussion Paper in June 2010 after considering the views of various business houses, forums and the general public.

The Direct Tax Code, which has now been tabled, rolls back certain controversial provisions such as levy of Minimum Alternate Tax (MAT) on gross assets basis, re-introduction of Exempt-Exempt-Tax (EET) regime in respect of taxation of savings, removal of the interest deduction up to Rs.150, 000 for self-occupied properties, taxation of long term capital gains on sale of listed shares, In fact the tax rates proposed on short term gains will be lower than the prevailing rate.

It has also sought to clarify that tax holiday of the units located in Special Economic Zones will be grandfathered. In many ways, the current Bill looks a lot more akin to the present Income Tax Act than the first Draft of the Code released for discussion.

The rates for taxes have been reduced and slabs widened to benefit both individuals and corporates. These changes though widely discussed and deliberated in media are fairly cosmetic compared to the substantial changes according sweeping powers to the Tax authorities in the dispensation of assessments and appeals under the Code.

The powers of the tax authorities under the General Anti-Avoidance Rules (GAAR) have not been diluted and this continues to be a cause for concern though it has been stated that the provisions are intended to be invoked only for willful evasion of tax.


The Direct Tax Code was intended to simplify the Income tax regime and reduce litigation -- in its current form it is more voluminous than the present Income Tax Act and bodes increased litigation.

While the intent of the law makers drafting this Code to bring in clarity and simplification is laudable, to what extent the execution reflects this integrity of thought remains to be seen.