Direct Tax Code: What it means for us ?

Is the UPA government’s well-advertised bias towards the common man mere lip service? It does seem so after the announcement of the new direct tax code (DTC), which is loaded against the middle class. With the removal of a whole set of exemptions, the new DTC aims to squeeze more tax revenue from an overwhelming majority of taxpayers. The new tax code is regressive in nature as it punishes the people in the lower income bracket while those in higher income bracket will enjoy a higher post-tax income. Going by the calculations, people falling in the Rs 5-6 lakh category that forms a large chunk of taxpayers would be affected most. For the benefit of our readers,we at ET Intelligence Group undertook the exercise to calculate the code’s impact on their disposable income. Decoding the directive: There has been a major rejig in the slab rate for determining taxable income. The basic exemption limit continues to be Rs 1.6 lakh. The highest tax rate of 30% that was earlier applicable for individuals earning above Rs 5 lakh has now shot up to Rs 25 lakh. This measure has been the most talked about. In fact, surcharge and cess are also proposed to be abolished. But the carrot comes with its stick. The most popular exemptions — interest deduction on home loan, house rent allowance, leave travel allowance, medical reimbursements are either removed completely or will now form part of the taxable income. For other proposals refer to story titled Robbing from Paul to pay Peter on page 1. The calculations: Here we are analyzing for three salary levels. For all levels we have assumed that the exemptions will not be more than 10% of the salary. Basic salary has been taken as 40% of the total salary (as it is widely seen) and for HRA calculation we take 50% of the basic salary for four metros as prescribed by the Income tax Act.
For home loan and basic exemption, full claim of Rs 1.5 lakh and Rs 1.6 lakh, respectively, is made. The maximum deduction under Sec 80C of Rs 1 lakh has been considered and in the proposed case we have taken it as Rs 3 lakh. In the new scheme of things, an individual with an annual salary of Rs 5 lakh will witness a significant drop in disposable income if he utilises full Rs 3 lakh deduction, hence we have taken a hypothetical number of Rs 1.5 lakh for investments. The calculations show that taxpayers with falling in the Rs 5-6 lakh slab would be affected negatively as it will increase in their tax liability. For individuals with salary levels upwards of Rs 10 lakh, the total tax outflow will come down. For details see table given below. The effects: At the macro level the new DTC induces consumption as it reduces the effective tax rate for individuals by 5-7% . However, people in the highest income bracket will capture maximum gains. This may prove beneficial for companies in sectors that serve the needs of upper middle class households such as FMCG, entertainment, retail, financial services and other life style products. On the other hand investment demand led stocks like realty, nonbanking finance companies’ would tend to lose. Nonetheless, one must bear in mind that the new direct tax code will be effective from April 1, 2011 subject to its approval by Parliament and also that over next two years; the code itself may see lot of changes.
Source : ET

Direct Tax Code : NO MORE A SAVING GRACE

NO MORE A SAVING GRACE
THE proposed Direct Tax Code (DTC) 2009 seems to have brought cheer among equity investors. Sensex surged 500 points on Aug 14, thanks to proposed raise in tax slabs for individuals, cut in corporate tax rate and enhancement in the investment limit in saving schemes to Rs 3 lakh from the current level of Rs 1 lakh. Prima-facie, these proposals give an impression that Indian taxpayers will be able to save more.
However, a closer look at the draft suggests that it may curtail retail investor’s participation in equities or equity-oriented funds. One of the major incentives for equity investors at present is tax exemption on capital gains earned on investments in equities or equity-oriented funds over long-term. Long-term in this case is defined as one year. However, as per the proposed draft, long-term capital gains on equity shares could be taxable. Actually, the bill has removed the distinction between long-term and shortterm capital gains in case of capital assets.
Transfer of any financial or nonfinancial asset after one year from the end of financial year in which asset was acquired is subject to tax, but can enjoy indexation benefit, which means gains earned from such transaction will be adjusted for inflation before calculating tax liability. But the tax rate is not yet specified.


Investments in equity-linked saving schemes of Mutual Funds (ELSS), a major source of retail investors’ participation in the equity market, are popular among taxpayers. However, the latest proposal denies this benefit to investments in ELSS. In the latest draft, the scope of investment subject to tax deductions is proposed to be restricted to investments in provident funds, pension schemes, bank deposits, life and health insurance. All other investments do not enjoy this incentive.
Considering the restricted scope of tax exempted savings, an Indian tax payers will be forced to invest in PPF, EPF and Pension schemes in order to reduce tax liability.
At present, a large chunk of salaried class earns a salary in the range of Rs 4-6 lakh per annum. As HRA, Medical and leave travel allowance are proposed to be clubbed with the gross salary, the taxable income will increase substantially. The rise could be two to three folds per annum considering the proposed tax slab for individuals. There will be hardly any deduction available after the removal of tax incentive on interest payment for home loans. (Most of the people belonging to this category currently enjoy this benefit). So the individual would have two options — either to pay tax and make investments from the residual income as per his/her own wish or opt for investments in permitted saving schemes like EPF, PPF, life
insurers for up to Rs 3 lakh and save tax.
But the story does not end here. One can save tax at the time of investment in such scheme, but could not escape from the tax liability at the time of maturity or withdrawal. Right now, interest earned on investment in EPF or PPF at the time of maturity or withdrawal does not attract any tax. But according to the EET (Exempt-Exempt-Tax), method of taxation of savings introduced as per the latest proposal, these returns will be taxable at the time of withdrawal or maturity.
In short, the avenues to save on tax have been dealt a hard blow in this proposed direct tax code. Postponement of tax liability is the only option available after the latest draft. So, tax liability of an individual will be the most influential factor while taking investment decisions.
Source: ET