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Amendments Proposed to Draft Direct Taxes Code

July 15th, 2010 3 comments

The draft Direct Taxes Code Bill seeks to consolidate and amend the law relating to all direct taxes and will replace the Income Tax Act, 1961.  The draft Bill, along with a discussion paper, was released for public comments in August 2009.[1] Following inputs received, the government proposed revisions to the draft Bill in June 2010.

The table below summarises these revisions.  The government has not released the changes proposed in the form of a revised draft bill however, but as a new discussion paper.  The note is based on this discussion paper.[2]

The Code had proposed a number changes in the current direct tax regime, such as a minimum alternate tax (MAT) on companies’ assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor.  Under the new amendments, some of these changes, such as MAT, have been reversed.  Personal savings in specified instruments (such as a public provident fund) will now continue to remain tax-free at all times.  The tax deduction on home loan interest payments, which was done away with by the Code, has now been restored.

However, the discussion paper has not specified whether certain other changes proposed by the Code (such as a broadening of personal income tax slabs), will continue to apply.

Issue Income Tax Act, 1961 Draft Direct Taxes Code (August 09) Revisions Proposed (June 2010)
Minimum Alternate Tax (MAT) MAT currently imposed at 18% of profits declared by companies to shareholders. To be imposed on assets rather than profits of companies.  Tax rate proposed at 2% (0.25% for banks) MAT to be imposed on book profit as is the case currently.  Rate not specified.
Personal Saving / retirement benefits Certain personal savings, such as public provident funds, are not taxed at all. Such savings to be taxed at the time of withdrawal by the investor. Such savings to remain tax-exempt at all stages, as is the case currently.
Income from House Property Taxable rent is higher of actual rent or ‘reasonable’ rent set by municipality(less specified deductions). Rent is nil for one self-occupied property. Taxable rent is higher of actual rent or 6% of cost /value set by municipality (less specified deductions). Rent is nil for one self-occupied property. Taxable rent is no longer presumed to be 6% in case of non-let out property. Tax deductions allowed on interest on loans taken to fund such property.
Interest on Home loans Interest on home loans is tax deductible Tax deductions on home loan interest not allowed. Tax deductions for interest on loans allowed, as is currently the case.
Capital Gains Long term and short term gains taxed at different rates. Distinction between long and short term capital gains removed and taxed at the applicable rate;

Securities Transaction Tax done away with.

Equity shares/mutual funds held for more than a year to be taxed at an applicable rate, after deduction of specified percentage of capital gains. No deductions allowed for investment assets held for less than a year.

Securities Transaction tax to be ‘calibrated’ based on new regime.

Income on securities trading of FIIs to be classified as capital gains and not business income.

Non-profit Organisations Applies to organizations set up for ‘charitable purposes’.

Taxed (at 15% of surplus) only if expenditure is less than 85% of income.

To apply to organizations carrying on ‘permitted welfare activities’.

To be taxed at 15% of  income which remains unspent at the end of the year.  This surplus is to be calculated on the basis of cash accounting principles.

Definition of ‘charitable purpose’ to be retained, as is the case currently.

Exemption limit to be given and surplus in excess of this will be taxed.  Up to 15% of surplus / 10% of gross receipts can be carried forward; to be used within 3 years.

Units in Special Economic Zones Tax breaks allowed for developers of Special Economic Zones and units in such zones. Tax breaks to be done away with; developers currently availing of such benefits allowed to enjoy benefits for the term promised (‘grandfathering’). Grandfathering of exemptions allowed for units in SEZs as well as developers.
Non-resident Companies Companies are residents if they are Indian companies or are controlled and managed wholly out of India. Companies are resident if their place of control and management is situated wholly or partly in India, at any time in the year.  The Bill does not define ‘partly’ Companies are resident if ‘place of effective management’ is in India i.e. place where board make their decisions/ where officers or executives perform their functions.
Double Taxation Avoidance Agreements In case of conflict between provisions of the Act, and those in a tax agreement with another country, provisions which are more beneficial to the taxpayer shall apply The provision which comes into force at a later date shall prevail.  Thus provisions of the Code would override those of existing tax agreements. Provisions which more beneficial shall apply, as is the case currently.  However, tax agreements will not prevail if anti-avoidance rule is used, or in case of certain provisions which apply to foreign companies.
General Anti-Avoidance Rule No provision Commissioner of Income Tax can declare any arrangement by a taxpayer as ‘impermissible’, if in his judgement, its main purpose was to have obtained a tax benefit. CBDT to issue guidelines as to when GAAR can be invoked; GAAR to be invoked only in cases of tax avoidance beyond a specified limit; disputes can be taken to Dispute Resolution Panel.
Wealth Tax Charged at 1% of net wealth above Rs 15 lakh To be charged at 0.25% on net wealth above Rs 50 crore; scope of taxable wealth widened to cover financial assets. Wealth tax to be levied ‘broadly on same lines’ as Wealth Tax Act, 1957. Specified unproductive assets to be subject to wealth tax; nonprofit organizations to be exempt.  Tax rate and exemption limit not specified.
Source: Income Tax Act, 1961, Draft Direct Taxes Code Bill (August 2009), New Discussion Paper (June 2010), PRS

[1] See PRS Legislative Brief on Draft Direct Taxes Code (version of August 2009) at  http://prsindia.org/index.php?name=Sections&id=6

[2] Available at http://finmin.nic.in/Dtcode/index.html

Are laws covered by copyright?

June 29th, 2010 3 comments

The simple answer is yes.

Under the Copyright Act, 1957, the government, and the government alone, can print its laws and issue copies of them.  If, for instance, a person, takes a copy of an Act, and puts it up on their website for others to download, it’s technically a violation of copyright.

The only way any person can do so, without infringing copyright, is to ‘value-add’ to the text of the Act, by say, adding their own commentary or notes. But simply reproducing the entire text of the Act, without comment, is an infringement of the copyright.

Section 52 (1)(q) of the copyright Act, which covers ‘fair use’ of a copyrighted work says the following:

52 (1) The following acts shall not constitute an infringement of copyright, namely:

(q) the reproduction or publication of-

(i) any matter which has been published in any Official Gazette except an Act of a Legislature;

(ii) any Act of a Legislature subject to the condition that such Act is reproduced or published together with any commentary thereon or any other original matter;

(iii) the report of any committee, commission, council, board or other like body appointed by the Government if such report has been laid on the Table of the Legislature, unless the reproduction or publication of such report is prohibited by the Government;

(iv) any judgement or order of a court, tribunal or other judicial authority, unless the reproduction or publication of such judgment or order is prohibited by the court, the tribunal or other judicial authority, as the case may be;

So the text of an Act is copyrighted, but the rules produced under it, and published in the Gazette are not.

This is odd, to put it politely. Why should the text of a law, one of the basic building blocks of  a modern state, not be freely available to anyone, without cost?

(Even if you can make an argument that laws should be covered by copyright, shouldnt that copyright rest with Parliament, which ‘creates’ laws, rather than the government?)

The Parliament Standing Committee on Human Resource Development is currently studying the Copyright (Amendment) Bill, 2010, which has already achieved a certain amount of fame, for the changes it makes to the rights of lyricists and music composers.  But perhaps the Committee should also consider recommending an amendment to 52(1) of the Copyright Act, allowing not just laws, but all works funded by the government, and by extension the taxpayer, to be freely available to all.

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Discussion on budgets and functioning of Ministries

March 18th, 2010 3 comments

Parliament has announced the ministries whose Demands for Grants will be discussed in detail in the Lok Sabha (after April 12 when Parliament reconvenes).  They are:

Defence

Rural Development

Tribal Affairs

Water Resources

External Affairs

Road Transport and Highways

Together these ministries have asked Parliament for a total of  Rs 289,938 crore (Rs 175,772 crore for Defence alone) – which is slightly over a quarter of the total expenditure budgeted by the Central Government for 2010-11.

The Rajya Sabha does not discuss demands for grants but has announced a list of ministries whose functioning it will review after the recess.  They are:

Home Affairs

Tribal Affairs

Defence

Power

Chemicals and Fertilizers

Petroleum and Natural Gas

Youth affairs and Sports

Women and Child Development

Consumer affairs, Food and Public Distribution

Housing and Urban Poverty Alleviation

How is a law enacted in Parliament?

March 17th, 2010 No comments

Because of the interest in the Women’s Reservation Bill and the Civil Liability for Nuclear Damage Bill, we’ve received a number of queries about the process by which a bill becomes an Act.

We have a more comprehensive primer on the subject, but here’s the process in brief:

• The ministry drafts a text of the proposed law, which is called a ‘Bill’, after calling comments from other ministries, and even from the public.  The draft is revised to incorporate such inputs and is then vetted by the Law Ministry. It is then presented to the Cabinet for approval.

• After the Cabinet approves the Bill, it is introduced in Parliament. In Parliament, it goes through three Readings in both Houses.

• During the First Reading the Bill is introduced. The introduction of a Bill may be opposed and the matter may be put to a vote in the House.

• After a Bill has been introduced, the Bill may be referred to the concerned Departmentally Related Standing Committee for examination.

• The Standing Committee considers the broad objectives and the specific clauses of the Bill referred to it and may invite public comments on a Bill. It then submits its recommendations in the form of a report to Parliament.

• In the Second Reading (Consideration), the Bill is scrutinized thoroughly. Each clause of the Bill is discussed and may be accepted, amended or rejected. The government, or any MP, may introduce amendments to the Bill.  However, the government is not bound to accept the Committee’s recommendations.

• During the Third Reading (Passing), the House votes on the redrafted Bill.

• If the Bill is passed in one House, it is then sent to the other House, where it goes through the second and third readings.

• After both Houses of Parliament pass a Bill, it is presented to the President for assent.   He/She has the right to seek information and clarification about the Bill, and may return it to Parliament for reconsideration. (If both Houses pass the Bill again, the President has to assent)

• After the President gives assent, the Bill is notified as an Act.

Parliament: What happens during the recess

March 16th, 2010 1 comment

Parliament is set to go into recess this week and will convene again on April 12th.  Before going into recess, both houses will have completed general discussions on the budget.

Once the recess begins, it’s time to go beyond the big budget numbers and into greater detail.   The detailed estimates by various ministries (sometimes running into a few hundred pages), of their budgeted expenditures in the next financial year (April 2010-March 2011) will be examined by the various Parliamentary Standing Committees.

When Parliament reconvenes, the Committees will table their reports on these demands for grants and the Lok Sabha will then begin more detailed discussions.  Due to lack of time however, such detailed discussions take place only for 3-4 ministries – the rest are voted on without discussion.

For a more detailed overview of the entire budget process, see our document “The Union Budget – A Primer”

For an overview of the budget documents, as well as a guide to finding the information that you want, see “How to Read the Union Budget”

A CRS Report on Parliamentary Questions

February 12th, 2010 1 comment

Unlike the Parliamentary system, the concept of ‘question hour’ or ‘question time’ doesn’t really exist in the American legislature.  Here’s an interesting report done by the Congressional Research Service on the possibility of a question time in the US.

From our point of view, the report is interesting because it reviews the existing provisions for a Parliamentary Question Time  in different countries (India isn’t mentioned), and considers the pros and cons of such a system.

The report concludes:

“Whether the question period would be successful in a system of separated powers depends in large part on the attitude of its participants and on the format the question period ultimately assumes. The question period has the potential of involving more rank-and-file Members in the policy-making process, and improving the means of communication between executive departments and the Congress. It also could harden relations between the Congress and the Executive, and might increase the level of partisan controversy in Congress.”

There’s even an online petition among a few american bloggers to push for a question time in the US.  Read about it here.

In this country of course, parliamentary questions are an established feature of the work of Parliament. Parliamentary questions cover a huge range of topics and can be an mine of information and data about government policy. The Lok Sabha and Rajya Sabha sites put the complete text of all parliamentary questions (and the responses to them) online.