The good, the bad and the ugly

A look at how the provisions of the revised Direct Taxes Code will impact your finances.

Babar Zaidi        Print Edition: October 2010

It has been described as wallet-friendly by pink newspapers, pro-investor by TV channels and pragmatic and prudent by tax professionals. None of these epithets used for the revised Direct Taxes Code (DTC) really fit the proposed legislation.

The new DTC is a watered down version of the original draft that had promised sweeping changes in the tax structure. It displays neither the reformist zeal nor the longterm vision required to break free from the archaic provisions of the Income Tax Act.

It is no different from the existing Act, only bulkier with 23 additional sections and 8 more schedules. There are some obvious reasons for the praise showered on the DTC after it was tabled in Parliament. The basic tax exemption has been hiked to Rs 2 lakh a year and the tax slabs have been raised.

Also, tax exemption for long-term capital gains from stocks and equity funds has been restored, much to the joy of the markets. But this is just a sleight of hand by Finance Minister Pranab Mukherjee.

The tax slabs are much lower than those proposed under the original DTC. Besides, the web of exemptions and deductions will continue. "The main purpose of the DTC was to simplify the tax structure and eliminate the ifs and buts that have plagued direct tax compliance in India. But the new code has retained most of the ifs and buts," says Rajiv Deep Bajaj, vicechairman and managing director of Bajaj Capital.

Experts are disappointed by the difference between the original proposals and the ones that were eventually tabled.

To be fair, there are some investorfriendly aspects of the DTC that need to be underlined. For instance, a life insurance policy will be eligible for tax deduction only if the cover is at least 20 times the annual premium. This will probably stop the purchase of life insurance policies as a tax-saving tool.

Over the next few pages, we shall look at this as well as the other changes that the DTC will bring about in our financial lives.

Tax Exemptions

Reforms on the backburner

Key provisions

  • Exemption limits raised. Nothing extra for females.
  • Maze of tax-free allowances to continue.
  • LTA, LTC to be taxed. Retiral benefits not to be taxed.
  • Approved annuity plans to be tax-free.

According to an estimate, India loses 75 lakh mandays every year to tax exemptions. This is because nearly 1 crore salaried taxpayers spend about 30 minutes every month to claim various allowances. The entire process is farcical. Employees submit fictitious bills and companies happily reimburse them. This is tax evasion, but India Inc calls it tax efficiency.

The original DTC had proposed an end to this monthly circus by doing away with all exemptions and taxing everything as income. The impact on the taxpayer was cushioned by a generous raise in the tax slabs. By restoring the exemptions, the revised DTC takes us back to the world of fictitious bills and revenue leakages.

"If the basic purpose of the DTC is to make it easy for the taxpayers to comply with the tax laws, the web of exemptions needs to be done away with," says K.H. Vishwanathan, executive director, RSM Astute Consulting Group, a financial consultancy firm.

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