Source based taxation is a process in which the income tax is calculated on the basis of the source of income whereas residence based taxation calculates income on the basis that individuals are taxable in the country or tax jurisdiction in which they are residing.
What does the proposed Direct Taxes Code hold for the common man? A look at visible effects and implications of the proposals on our monies.
The draft of the Direct Taxes Code bill 2009 and the Discussion paper have been made public recently. In the words of the Finance Minister “the thrust of the code is to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base”. A very valuable input from the Finance Minister has been “It will specially meet the aspirations of our young and professionally mobile population. So what exactly is all the excitement about and will it really “change” things as they are?
What does it say about income tax rates?
The most remarkable point which would be a great cheer for all individuals is the revision in the income tax rates. The change is not only in terms of the slabs but also the simplicity in calculations. The Code proposes to create 4 slabs for the sake of income tax calculations.
For Men
Slab 1: Total income is lesser than Rs 1, 60,000/-
The income tax for the above slab is proposed to be nil. This is what currently exists and hence does not in any way change anything for individuals earning below 1.6 Lakhs
Slab 2: Income is between 1, 60,001/- and Rs 10, 00,000/-
This is the most drastic change proposed. The tax for the above slab is proposed to be 10 percent of the amount by which the total income exceeds 1, 60,000/-. Meaning, if your income is 5, 72,000/- then, the income tax would be 10% of (Rs 5, 72,000-Rs 1, 60,000/-). Although for individuals who were earlier earning between 1.6 lakh to 3 lakh this does not bring about any change, it brings great cheer for individuals earning between 3-5 lakh as they straight away save 10% of any income that exceeds 3 lakh but is lesser than 5 lakhs. Today they have to pay 20% on this amount!
For individuals who are today earning above 5 lakhs, this would bring even more cheer as they save a flat Rs 20,000,plus 20% of any amount above 5 lakh and lesser than 10 lakhs!
Example: Ram’s income today is Rs 7, 00,000/-
Income tax as per present rates =1, 18,450 (excluding surcharges and any cess)
Income if new code comes into effect=54,000/- a saving of Rs 61000/-
Slab 3: Income is between 10,00,001 and 25,00,000
The code proposes the income tax for this slab to be Rs 84,000/- (10% of 8,40,000/-) plus 20% of any amount above 10,00,001 but lesser than 25,00,000. This would also bring about happy tidings for people who are currently earning above 10 lakh as they save around Rs 1,00,000/- plus 10 percent of any income which exceeds 10,00,000/-
Slab 4: Income exceeds 25,00,000/-
The code proposes the income tax for this slab to be Rs 3,84,000/- plus 30% of any amount exceeding Rs 25,00,000/-. People currently earning above 25,00,000 would expect savings of over 40% of their current tax liabilities.
Away with “assessment and previous year”
The new code has proposed to do away with the concept of using “previous year” to denote the year in which you earned the money and “assessment year” the year in which you pay the self assessment tax and file your return. The new proposal is to use the simpler terminology of Financial Year (FY). For example if you earned income in FY09-10 then, your pay advance tax in FY09-10 and any balance tax and returns in FY10-11.
Source of income defined:
The income is proposed to be bifurcated into “special sources” and “ordinary sources”. The special sources include items like lotteries, games and non residents etc which will be charged on the basis of a rate schedule. Thus while calculating the total income we will have to add total income from ordinary sources and total income from special sources.
Source based versus Residence based taxation:
Source based taxation is a process in which the income tax is calculated on the basis of the source of income whereas residence based taxation calculates income on the basis that individuals are taxable in the country or tax jurisdiction in which they are residing.
The debate has been for long on which methodology to use. The new code proposes to use residence based taxation for residents and source based taxation for non-residents. It states “a resident in India will be liable to tax on his worldwide income and a non-resident will be liable to tax in India only in respect of receipts in India. What this means is that if you have been out of India for more than 183 days you would be treated as a non-resident and you need not pay tax on income which has already been taxed in the country where you get the income from and also if it’s not taxed there. But, in case of residents the income which has not been taxed in another country will be taxed in India upon repatriation.
Capital gains
The new code proposes two important ideas.
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The concept of long term and short-term defined by the period of holding of a capital asset will be removed. Instead, for any capital asset which is transferred, to get a gain , anytime after one year from the end of the financial year in which it was acquired, the cost of acquisition and cost of improvement wil be adjusted on the basis of cost inflation index to reduce the inflationary gains?
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The base date for calculation of cost of acquisition of a capital asset has been proposed to be shifted from 01-01-1981 to 01-04-2000. This would be a big disadvantage to people who had brought the assets very long ago. The reason is that you would have brought it for very low prices but the capital gains will be calculated based on the price of the asset on 01-04-2000.
The above discussions are some of the very visible proposed changes in the Direct Taxes Code which would affect individuals. The idea behind the whole exercise is for the public to give their feedback regarding their views before the discussion document is presented to the parliament.
If you have any comments/suggestions you could mail to the IT department at: directtaxescode-rev@nic.in and hopefully the Finance Minister might consider it important to be a part of the new code!