DTC closes important tax-saving avenue

On Direct Tax Code, the government has done a commendable job in not only simplifying income tax provisions, but also proactively seeking and reacting constructively to public feedback through successive discussion drafts. From a capital gains perspective, a lot is spoken of its impact on shares and securities, but it is important not to lose sight of capital gains tax impact on 'other' assets.

Under the current tax regime, other assets such as immovable property were classified as long-term capital assets if held for more than three years, whereas under revised DTC a shorter period of one year is prescribed. Thus, all other assets will be entitled to indexation benefits much earlier under DTC.

Due to shift of base year, revised DTC provides capital gains exemption to unrealised gains from 1981 to 2000. While this may be positive news for investors who had purchased investment assets say, immovable property in 1980s, it will definitely impact adversely all other assets purchased post 2000, due to normal tax rate applicable under DTC as against the present reduced tax rate of 20%.

Under the revised DTC, the capital gains savings scheme (which entitled deduction against capital gains arising on sale of any investment asset) is dropped. This has closed out an important tax saving avenue for taxpayers. One hopes that with suitable representation, the government continues with such capital gains savings scheme or introduces other alternative saving schemes to encourage savings and avoid tax hardship to investor.

Good news for home buyers, retail investors

The draft Direct Tax Code (DTC) had envisaged a paradigm shift in the scheme of personal taxation. The focus was on taxation of income without exemptions, at a lower tax rate. The Discussion Paper on the revised DTC deviates from that scheme significantly.

Exempting retirement benefits like provident fund, life insurance products, annuity schemes under the current tax law is proposed to be continued under the revised DTC.

Originally, withdrawal from the retirement benefit schemes was to be taxed. Lumpsum withdrawals on maturity/retirement from life insurance schemes/provident fund would have resulted in taxation at the highest rate. India does not yet have high-class social security like developed countries. The proposal to exempt the retirement benefits would leave a larger capital base for the retiree and offset the gap to some extent.

The salaried class is one of the most tax-burdened in this country. The original proposal to tax employer's contribution to provident/superannuation funds and valuation of rent free accommodation at market value would have left very little take-home pay for a salaried employee. The proposal to exempt such contribution and valuing accommodation, possibly, as per current rules should remove the resultant anxiety of the salaried class. Similarly, house owners have reasons to cheer. It was proposed earlier that even vacant property would be taxed on presumptive rental value. There was no rationale for this. This has been done away with.

The deduction for interest on housing loan would help the buyers in the days of rising interest rates. There is good news for retail investors. Gain on sale of listed shares held for more than one year will be partially exempted through specified deduction, though STT is proposed to be retained. Excluding financial assets from wealth tax should propel longer term investments.

One has to see the fine print to judge the exact implications. Hopefully, tax rates do not go up significantly to offset the benefits.

Shefali Goradia Partner BMR Advisors FIIs do not have much to cheer about the DTC proposals regarding change in the tax treatment of capital gains and treaty override had raised huge concerns for the FIIs investing in the Indian capital markets. This had prompted many FIIs to make representations before the government.

Source: http://economictimes.indiatimes.com/