Amendments Proposed to Draft Direct Taxes Code

Legislation

Amendments Proposed to Draft Direct Taxes Code

Avinash - July 15, 2010 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assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor.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

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Explaining the recent ban on e-cigarettes

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Gayatri Mann - September 19, 2019 Comments

On Wednesday, the government promulgated an Ordinance to ban electronic cigarettes in India. In this context, we look at what are electronic cigarettes, what are the current regulations in place, and what the Ordinance seeks to do.

What are electronic cigarettes?

The Ordinance defines electronic cigarettes (e-cigarettes) as battery-operated devices that heat a substance, which may or may not contain nicotine, to create vapour for inhalation. These e-cigarettes can also contain different flavours such as menthol, mango, watermelon, and cucumber. Usually, e-cigarettes are shaped like conventional tobacco products (such as cigarettes, cigars, or hookahs), but they also take the form of everyday items such as pens and USB memory sticks.

Unlike traditional cigarettes, e-cigarettes do not contain tobacco and therefore are not regulated under the Cigarettes and Other Tobacco Products Act, 2003. This Act regulates the sale, production, and distribution of cigarettes and other tobacco products in India, and prohibits advertisement of cigarettes.

What are the international regulations for e-cigarettes?

India is a signatory to the WHO Framework Convention on Tobacco Control (WHO FCTC) which was developed in response to the globalisation of the tobacco epidemic. In 2014, the WHO FCTC invited all its signatories to consider prohibiting or regulating e-cigarettes in their countries. This was suggested due to emerging evidence on the negative health impact of these products which could result in lung cancer, cardiovascular diseases, and other illnesses associated with smoking.

Since then, several countries such as Brazil, Mexico, Singapore, and Thailand have banned the production, manufacture, and sale of e-cigarettes. Recently, the states of New York and Michigan in USA banned the sale of flavoured e-cigarettes. Whereas, in UK, the manufacture and sale of e-cigarettes has been allowed based on certain conditions. Further, the advertisement and promotion, and the levels of nicotine in e-cigarettes is also regulated.

Prior to the Ordinance, were e-cigarettes regulated in India?

In August 2018, the Ministry of Health and Family Welfare had released an advisory to all states requiring them to not approve any new e-cigarettes and restrict the sale and advertisements of e-cigarettes. Based on this advisory, 15 states including Delhi, Maharashtra, and Uttar Pradesh have since banned e-cigarettes. However, this advisory was challenged in the Delhi High Court in March 2019, which subsequently imposed a stay on the ban.

What does the Ordinance do?

The Ordinance prohibits the production, manufacture, import, export, transport, sale, distribution and advertisement of e-cigarettes in India. Any person who contravenes this provision will be punishable with imprisonment of up to one year, or a fine of one lakh rupees, or both. For any subsequent offence, the person will be punishable with an imprisonment of up to three years, along with a fine of up to five lakh rupees.

Additionally, storage of e-cigarettes will be punishable with an imprisonment of up to six months, or a fine of Rs 50,000 or both. Once the Ordinance comes into force (i.e., on September 18, 2019), the owners of existing stocks of e-cigarettes will have to declare and deposit these stocks at the nearest office of an authorised officer. Such an authorised officer may be a police officer (at least at the level of a sub-inspector), or any other officer as notified by the central or state government.

Note that, the Ordinance does not contain any provisions regarding possession or use of e-cigarettes. The Ordinance will be in force for the next six months, and must be approved by Parliament within six weeks of the commencement of the next session of Parliament. If it is not passed within this time frame, it will cease to be in force.

The Importance of Parliamentary Committees

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Sanat Kanwar - September 19, 2019 Comments

Last week, the Departmentally Related Standing Committees were reconstituted for the first year of the 17^th Lok Sabha. In this context, we discuss the functioning and role of Standing Committees.

The visible part of Parliament’s work takes place on the floor of the House. Parliament meets for three sessions a year i.e., the Budget, Monsoon, and Winter Sessions. This part of Parliament’s work is televised and closely watched. However, Parliament has another forum through which a considerable amount of its work gets done. These are known as Parliamentary Committees. These Committees are smaller units of MPs from both Houses, across political parties and they function throughout the year. These smaller groups of MPs study and deliberate on a range of subject matters, Bills, and budgets of all the ministries.

During the recently concluded first Session of the 17^th Lok Sabha, Parliament sat for 37 days. In the last 10 years, Parliament met for 67 days per year, on average. This is a short of amount of time for MPs to be able to get into the depth of matters being discussed in the House. Since Committees meet throughout the year, they help make up for this lack of time available on the floor of the House.

Parliament deliberates on matters that are complex, and therefore needs technical expertise to understand such matters better. Committees help with this by providing a forum where Members can engage with domain experts and government officials during the course of their study. For example, the Committee on Health and Family Welfare studied the Surrogacy (Regulation) Bill, 2016 which prohibits commercial surrogacy, but allows altruistic surrogacy. As MPs come from varying backgrounds, they may not have had the expertise to understand the details around surrogacy such as fertility issues, abortion, and regulation of surrogacy clinics, among others. The Committee called upon a range of stakeholders including the National Commission for Women, doctors, and government officials to better their understanding of the issues, before finalising their report.

Committees also provide a forum for building consensus across political parties. The proceedings of the House during sessions are televised, and MPs are likely to stick to their party positions on most matters. Committees have closed door meetings, which allows them to freely question and discuss issues and arrive at a consensus.

After a Committee completes its study, it publishes its report which is laid in Parliament. These recommendations are not binding, however, they hold a lot of weight. For example, the Standing Committee on Health made several recommendations to the National Medical Commission Bill in 2017. Many of these were incorporated in the recently passed 2019 Bill, including removing the provision for allowing a bridge course for AYUSH practitioners.

There are 24 such Departmentally Related Standing Committees (DRSCs), each of which oversees a set of Ministries. DRSCs were set up first in 1993, to ensure Parliament could keep with the growing complexity of governance. These are permanent Committees that are reconstituted every year. They consist of 21 Members from Lok Sabha, and 10 Members from Rajya Sabha, and are headed by a Chairperson. The DRSCs primarily look at three things: (i) Bills, (ii) budgets, and (iii) subject specific issues for examination. Other types of Standing Committees include Financial Committees which facilitate Parliament’s scrutiny over government expenditure. Besides these, Parliament can also form ad hoc Committees for a specific purpose such as addressing administrative issues, examining a Bill, or examining an issue.

To ensure that a Bill is scrutinised properly before it is passed, our law making procedure has a provision for Bills to be referred to a DRSC for detailed examination. Any Bill introduced in Lok Sabha or Rajya Sabha can be referred to a DRSC by either the Speaker of the Lok Sabha or Chairman of the Rajya Sabha. Over the years, the Committees have immensely contributed to strengthen the laws passed by Parliament. For example, the Consumer Protection Act, 2019, overhauling the 1986 law, was recently passed during the Budget Session. An earlier version of the Bill had been examined by the Committee on Food and Consumer Affairs, which suggested several amendments such as increasing penalties for misleading advertisements, making certain definitions clearer. The government accepted most of these recommendations and incorporated them in the 2019 Act.

Besides Bills, the DRSCs also examine the budget. The detailed estimates of expenditure of all ministries, called Demand for Grants are sent for examination to the DRCSs. They study the demands to examine the trends in allocations, spending by the ministries, utilisation levels, and the policy priorities of each ministry. However, only a limited proportion of the budget is usually discussed on the floor of the House. In the recently dissolved16^th Lok Sabha, 17% of the budget was discussed in the House.

Committees also examine policy issues in their respective Ministries, and make suggestions to the government. The government has to report back on whether these recommendations have been accepted or not. Based on this, the Committees then table an Action Taken Report, which shows status of the government’s action on each recommendation.

While Committees have substantially impacted Parliament’s efficacy in discharging its roles, there is still scope for strengthening the Committee system. In the 16^th Lok Sabha, DRSCs examined 41 Bills, 331 Demands for Grants, 197 issues, and published 503 Action Taken Reports.

However, the rules do not require that all Bills be examined by a Committee. This leads to some Bills being passed without the advantage of a Committee scrutinising its technical details. Recently, there has been a declining trend in the percentage of Bills being referred to a Committee. In the 15^th LS, 71% of the Bills introduced were referred to Committees for examination, as compared to 27% in the 16^th Lok Sabha.

With the DRSCs now constituted for the first year of the 17^th Lok Sabha, they will soon begin their meetings to select the subjects they are going to examine. Some Committees already have Bills to examine that were referred to them during the 16^th Lok Sabha. Some of these Bills are: (i) the Cinematograph (Amendment) Bill, 2019, (ii) the Allied and Healthcare Professions Bill, 2018, and (iii) the Registration of Marriage of Non- Resident Indian Bill, 2019. So far in the 17^th Lok Sabha no Bill has been referred to a Committee yet.

Amendments Proposed to Draft Direct Taxes Code

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