Download Direct Tax Code 2019 Draft (Pdf)

Update: 23rd September 2019:

Task force on direct taxes recos lower personal I-T rates; sources say panel has proposed a 10% rate on incomes b/w Rs 5 lakh & Rs 10 lakh, & 20% on incomes b/w Rs 10 lakh & Rs 20 lakh

Task force on direct tax code submits draft report on Direct Tax Code 2019 to FM Nirmala Sitharaman

The Task Force appointed by the Government submitted its report to suggest amendments and overhaul the 60-year old Income Tax Act, 1961.

The Finance Ministry issued a tweet to mark the momentous occasion.

“Union Minister of Finance and Corporate Affairs Nirmala Sitharaman received the report submitted by Akhilesh Ranjan, Convenor of the Task force, constituted by the Government to draft the new Direct Tax Law, in New Delhi today (Monday),” it was stated.

Download Direct Tax Code 2019 Draft (Pdf)
Download Direct Tax Code 2019 Draft (Pdf)

Highlights of Direct Tax Code 2019

The draft of the Direct Tax Code 2019 has two parts:

The first part deals with recommendations while the second part has the draft Bill.

The Finance Ministry will make a pdf copy of the draft available for public suggestions and comments.

Recommendations

The task force has suggested changes in the slab for personal income tax as well as corporate tax.

Presently, the personal income tax structure has three categories – for people below the age of 60, for people above the age of 60 but less than 80, and the third for people of 80 years and above.

The first category has four slabs – nil tax on income up to Rs 2.5 lakh; 5 per cent tax rate for income between Rs 2.50 lakh and Rs 5 lakh, 20 per cent tax rate for income between Rs 5 lakh and Rs 10 lakh and 30 per cent for income above Rs 10 lakh.

The second category has the basic slab of Rs 3 lakh while the third category has ‘nil’ rate for income up to Rs 5 lakh.

The task force has recommended that the slabs be changed and a new rate between 5 and 20 per cent be introduced.

Corporate tax recommendations

Under the prevalent law, Companies with turnover up to Rs 400 crore attract tax at the rate of 25 per cent.

This covers 99.3 per cent of all the companies registered.

The task force has recommended that a detailed timeline be set out for lowering the tax rate from 25 per cent and that too for all the companies.

LTCG recommendation

The taskforce has also given its recommendation on three contentious issues for corporate assessees relating to tax on long term capital gain (LTCG), dividend distribution tax (DDT) and minimum alternative tax (MAT).

It has recommended that LTCG and DDT be abolished while MAT should be restructured.

These proposals in the Direct Tax Code 2019 Draft will bring lot of certainty for the investor community and lead to re-inventing the investment cycle.

The Direct Tax Code 2019 Draft seeks to replace the Income Tax Act 1961.

Due to rampant changes in the Finance Bill, the Income-tax Act has undergone many changes and has become very complicated.

Amendments Proposed to Draft Direct Taxes Code

In 2010, a draft Direct Tax Code had been submitted.

The draft Direct Taxes Code Bill sought to consolidate and amend the law relating to all direct taxes and replace the Income Tax Act, 1961.

The draft Bill, along with a discussion paper, was released for public comments.

Following inputs received, the government proposed revisions to the draft Bill.

A new discussion paper was issued to highlight the changes.

The Code 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, were reversed.

Personal savings in specified instruments (such as a public provident fund) continued to remain tax-free at all times.

The tax deduction on home loan interest payments, which was done away with by the Code, was restored.

However, the discussion paper did not specify whether certain other changes proposed by the Code (such as a broadening of personal income tax slabs), would apply.

Issue

Income Tax Act, 1961

Draft Direct Taxes Code Revisions

Proposed

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),

New Task Force

The process of creating the Direct Tax Code 2019 got fresh lease of life in September 2017, when Prime Minister Narendra Modi, during the annual conference of tax officers observed that the Income-Tax Act, 1961, was drafted more than 50 years ago and it needs to be redrafted.

Accordingly, a taskforce was constituted and Arvind Modi, author of DTC 2010, was made convenor.

The taskforce was assigned to draft direct tax laws in line with the norms prevalent in other countries, incorporating international best practices, and keeping in mind the economic needs of the country.

The panel was initially supposed to submit its report to the government, within six months, by May 22, 2018, which was extended till August 22 and after further extensions, a new deadline of August 16 was given.

In the meantime, Arvind Modi retired last September and the charge was handed over to Ranjan.

The Direct Tax Code 2019 report will be placed for stakeholder consultations and in Parliament as part of Union Budget 2020-21.

New Income-tax Bill: Key recommendations in Task Force’s Report

The task force is said to have submitted following recommendations in respect of new Income-tax law:

1. Incentives for start-ups

The task force has proposed a slew of incentives for start-ups in its report. With an emphasis on reducing litigation, the report has suggested that the tax treatment for start-ups should be separate.

2. Change in reassessment Rules

The task force has suggested major changes in reassessment provisions in a bid to reduce the litigation. The report has suggested various changes in the current provisions of sections 147 and 148 which empower the Assessing Officers to re-open the assessments. It is recommend to increase the threshold limit for re-opening of cases. Further, the pre-defined criteria to select cases for re-assessment should be more stringent.

3. Abolish Dividend Distribution Tax (DDT)

The task force has recommended to abolish the dividend distribution tax (‘DDT’). DDT is a tax which is required to be paid by the companies distributing dividends to its shareholders. It is recommended that instead of levying DDT on companies, the tax should be levied in the hands of shareholders.

4. Reduced 25% tax rates for all corporates

It is recommended to reduce the tax rates for all the corporates to 25%. The existing tax rates for a domestic company and a foreign company are at 30% and 40% respectively

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