Direct Taxes Code Bill, 2010

Highlights of the Bill

• The Bill replaces the Income TaxAct, 1961 and the Wealth Tax Act, 1957.

• The Bill widens income tax slabs for individuals.  Income between Rs 2 lakh to Rs 5 lakh will be taxed at 10%, between Rs 5 lakh and Rs 10 lakh at 20%, and that over Rs 10 lakh at 30%.

• Companies will be taxed at 30% of business income.  Foreign companies shall pay an additional branch profits tax of 15%.  Non profit organisations are taxed at 15%.

• The Bill removes several tax deductions currently allowed for companies, but retains most deductions currently available to individuals.

• The Bill removes the distinction between short term and long term capital gains for all assets except securities listed on stock exchanges.

• The wealth tax exemption limit is increased from Rs 15 lakh to Rs 1 crore.

• The Bill introduces General Anti Avoidance Rules to allow tax authorities to classify any arrangement as one entered into for evading taxes.

Key Issues and Analysis

• A Draft Direct Taxes Code, 2009 that was published for public feedback had the intent of simplifying tax legislation and widening the tax base.  The Bill reverses some of the provisions of that Draft Code.

• Tax exemptions for individuals have been retained while most exemptions for corporates removed.  The tax rates for individuals have been lowered. The taxes paid by corporates will form a greater part of the government’s revenue than earlier.

• The Bill may increase the burden of compliance in two ways. There are no guidelines to indicate in what situations the General Anti Avoidance Rules will be implemented.  Additionally, the Bill requires income from different units of the same business to compute their tax liability separately.  

• The Bill retains the Dividend Distribution Tax and the Security Transaction Tax.  These taxes are levied at a uniform rate irrespective of the amount of income or profit, and go against the principle of progressive taxation of individuals.

• The Bill seeks to tax foreign companies if their place of ‘effective management’ is in India at any time of the year.  It is unclear as to what would constitute effective management of a foreign company in India.