India Draft New Tax Code

The intent is for this legislation to come into force effective 1 April 2011. The draft legislation and a discussion paper can be viewed DIRECT TAXES CODE, 2009. This is a 256 page document. Will I be able to read and understand the whole document? I am not sure.

I have a confused view related to increase in tax slabs. The number of people earning above 10 lakhs is very less in population compared to the rest of Indian population. I am not able to understand the rationale behind making income to 10 % for income till 10lakhs and 20% for income slab between 10 lakhs and 25 lakhs and 30% above 25 lakhs.  Can some one explain? I see a lot of salaried people looking the increase in tax slabs as positive step. Is the new tax code going to be friendly for poor people? How can I find whether this is friendly to poor people or low income families?. How is government going to take feedback on draft proposal?

I have tried to learn the new tax proposal impact for my investment style(as individual ), the industry I work and have summarized the below that might affect salaried individuals like me.

1.EET regime for all approved provident funds, approved superannuation funds, life insurance and New Pension System trust from April 1, 2011. Your PPF contribution every year will not keep up with inflation and on the returns you are forced to pay taxes. This is same as the New Pension Fund introduced earlier this year. But the good news is that the money deposited towards these instruments after 2011 will be taxed and not on the investments which are in place already. Hence if you want to invest in Public Provident Fund, please do the same in next 2 years.

2. The new code proposes to allow for exemptions on savings up to Rs 3 lakh rather than the Rs 1 lakh now allowed under Section 80C of the I-T Act. But it also eliminates several exemptions and reliefs with respect to benefits; this includes partial deductibility on home loans and tax free home rent allowances. I feel that this is going to affect the house purchase power of low income families. On other hand, it might increase the black money involved with house transactions and in addition would make it difficult for low income group people to buy a house. Bank Loans would still be needed as the price of houses are going to be high and one cannot afford with less income..

3. Long term capital gains tax will be re-introduced for listed securities which were previously exempt where securities transaction tax was paid.An investor in stocks is disadvantaged as the benefit of compounding is not available because gains are taxed on each exit. A mutual fund has no tax on portfolio churn. they do not pay taxes on gains – only the unit holder pays tax at the time when gains are realized. A good idea might be to keep this in mind while making the decision to invest in mutual fund or directly in stocks.

4. Factories, Business Processing Units and software development firms inside Special Economic Zones (SEZ) will lose all income tax benefits

5. The exemption granted to charitable institution is being revisited. The term charitable purpose is being replaced by permitted welfare activities, which means, “any activity involving relief of the poor, advancement of education, provision of medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility”- well the definition remains the same despite change in nomenclature. The bill proposed to tax the “surplus” and “capital gains” from permitted welfare activities at the rate of 15%. This appears to be somewhere between full exemption and full taxation. More detailed explanation can be found here