INCOME TAX - DRAFT DIRECT TAX CODE 2009

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The Revised DTC - Ice Candy For Government Employees?

Shri Govardhana Rao dated 19-06-2010

The Government has now released a revised discussion paper on DTC proposed to be introduced in the next session of the Parliament. On going through the same the public in general and the government employees in particular may feel that the Government has given just an ice candy for a temporary relief.

Chapter II EET v/s EEE:

Action proposed, in Para 3 that deals with tax treatment of savings, says, “In order to achieve the objective of long term savings, the rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are actually made and utilised by the taxpayer for the long term. Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.” So it appears that the EEE treatment will be available only for the existing GPF, PPF, RPF (Recongnised Provident Fund), pension scheme approved by PFRDA, pure life insurance products and annuity schemes. If any individual subscribe to these products after the enactment of Tax Code the treatment may be different.

There is also caveat in giving this facility, i.e. such savings are actually made and utilised by the taxpayer for the long term investments. This so called long term investment is not defined at all. The compulsion from the Government to invest the proceeds of one long term investment in another long-term investment is also not understandable. The Government can maneuver anything and everything to get a plum share from the individual honest tax payer. Commonsense will prevail that the final amount of any long term investment is used for improving the living conditions of an individual during his life span and as such these investments, will also one day, come to the taxable income stream. Therefore, any differentiation should not be there at all. In effect the the current proposal cannot be called EEE but is EEET (Exempt, Exempt, Exempt and Tax)!

Chapter III Retirement Benefits:

However, a commitment is made that the contribution to pension and superannuation funds will not be treated as salary. There is also a clause provided by the Government to limit the tax free retirement benefits. Why this limit is fixed is not understandable. So be prepared for payment of tax on Gratuity, VRS benefit, Commutation of pension and encashment of leave at the time of your retirement day. The Government will definitely make this sweet day to sour! Medical expenditure reimbursement is also not fully exempted. Government wants to put a limit here too. Medical reimbursement at actuals shall be fully exempted and shall not be considered as income.

Chapter IV Income from House Property:

Status quo is maintained here which is a good beginning at last. Interest payable on housing loan up to Rs.1,50,000 is also going to be exempted. Principal payment has been excluded. This should have been included for exemption.

Chapter V Capital Gains:

Bad news is that the long-term capital gains on equity, that is presently exempt from tax, is taxed at 50% (at the highest tax rate). This is not a welcome step. Actually the Government is already getting its due from imposing Security Transaction Tax (STT) and Service Tax (ST) on brokerage. Percentage of retail investors in India is very low. In order to attract new investors and to increase retail investor participation in the stock markets the Government should encouraged them by doing away with both short term and long term capital gains taxes. This could have been compensated by marginal increase in STT. It would be more beneficial for the Government since it gets its due share of revenue immediately on transaction and in anycase before the annual filing of tax returns.

To conclude, the following amendments needs to be done by the Government in the interest of honest employees in India.

1. EEE method of taxation should be continued without any stipulation for long term investments like GPF, PPF, RPF (Recongnised Provident Fund), Pension scheme approved by PFRDA, pure life insurance products and annuity schemes.

2. Retirement Benefits like Gratuity, VRS benefit, Commutation of pension and encashment of leave should be exempted in full without any limit.

3. Medical reimbursement at actual should be fully exempted.

4. The principal paid in respect of housing loan should be qualified as allowed deduction from income.

5. Individual retail investors should be completely exempted from long term capital gains tax by increasing STT appropriately.

If these reliefs are not given then revised DTC will be just like an ice candy, which will melt within a fraction of time.

Please click here to see the Revised Discussion Paper.
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