|
Narayan
Jain, LL.M. and Deepak Jain, LL.M.
Advocates
The
Finance Minister Mr. Pranab Mukherjee has unveiled the draft of a new Direct Tax
Code (DTC), which will replace the five-decade old Income-Tax Act, 1961. In his
recent Budget speech, finance minister had said, “Tax reform, like all reforms,
is a process and not an event.” As a step towards such reform, the FM fulfilled
his promise of releasing the draft direct tax code, which provides a blueprint
for the future of direct tax regime. One positive aspect of the new tax code is
the relative simplicity of the language used. On the structural side, the
elimination of numerous provisos and explanations is another welcome step. The
new code will make the common man feel happy at least on Income tax front. It
will completely overhaul & simplify the existing tax provisions for not only
individual tax payers, but also corporate houses & foreign residents. The AOPs
and BOIs will be adversely affected as these entities will be treated at par
with partnership firms and not at par with Individuals. Some of the provisions
contained in the draft DTC are analysed here below:
1.
Tax Slabs and Tax Rates
1.1
For Individuals and HUFs
The new
DTC has given Common man more than what he had expected. There is a drastic
reduction on the overall amount of taxes most of the employed people and other
individuals will pay.
New
Tax rates: (For Ordinary source of income)
| Slab Income
Between |
Tax rate in New Code |
| 1 Upto Rs.1.60 Lakhs
|
NIL |
| 2 Rs.1.60 Lakhs to Rs.10
Lakhs |
10% |
| 3 Rs.10 Lakhs to Rs.25
Lakhs |
20% |
| 4 Above Rs.25 Lakhs
|
30% |
For
Female taxpayers, second slab begins from Rs.1.90 Lakhs and for Senior citizen
it begins from Rs.2.40 Lakhs. But by the time the DTC is enacted, the exemption
limits for individuals and HUFs may go up further. The new tax slabs are
significantly liberal and it will reduce the tax burden and increase the
disposable income in the hands of the individuals.
Currently, there is no tax for general individuals upto Rs.1,60,000 of income in
a year. However, there is a 10% tax on income between Rs 1,60,000 and Rs 3 lakh,
20% between Rs 3 lakh and Rs 5 lakh, and 30% beyond Rs 5 lakh.
1.2
Tax Rates for Corporate taxpayers:
(a)
Companies’ tax rate is proposed to be changed from 30% to 25%. However a new
kind of MAT will be levied on value of gross assets as against book profits now.
Such MAT will be 0.25% of value of gross assets for banking companies and 2% of
value of gross assets for other companies. The value of gross assets will be the
value of the gross block of fixed assets, value of capital work in progress and
book value of all other asset, less accumulated depreciation on fixed assets and
debit balance of Profit & Loss account.
(b) As a
result, the loss making companies will also be required to pay Tax based on the
gross value of their assets. No provision has been made for reduction of debts
owed by the company in computing the gross assets. This levy is likely to affect
companies that undertake capital intensive projects and which are highly
leveraged. The companies with multi-tier holding structures will also be
adversely hit because the tax will be levied at each level, which will
effectively result in multiple taxation. Such situations need to be avoided and
the draft DTC needs to be modified to ensure that loss making companies are not
required to pay any such tax. Otherwise, many loss companies and sick units will
collapse and may be compelled to wind up. It will include even the PSUs and
other State Run corporations.
(c) MAT
credit carry forward will not be allowed in the new regime. The non-availability
of MAT credit will result in MAT being a permanent cash outflow. Presently it is
permitted to be carried forward for 10 years.
2.
Changes in Capital Gains
The
draft of the new direct taxes code aims to bring about significant changes in
taxation of capital gains which will have a strong bearing on the stock market.
The new code will make life of a common investor much more difficult as they
will be adversely affected. Let us analyse some of the provisions contained in
Sections 44 to 53 of the draft code.
(a)
No Distinction between long-term and short-term capital assets:
As per
the new code, the distinction between long-term and short term capital assets
has been dispensed with. At present, the long-term capital gains in case of
listed shares and securities are exempt and short-term capital gains on such
shares on which the Securities Transaction Tax (STT) is paid are charged at a
concessional rate of 15 per cent.
However,
the said benefit is not provided in the new code. From 1st April, 2011, tax on
capital gains will be charged uniformly at the normal rate. It will be treated
as part of the total income. In the new regime, tax on short-term capital gains
will not pinch those having income up to Rs.10 lakh, as they will be required to
pay tax at the rate of 10 per cent. And since the STT is going to be abolished,
such a taxpayer would doubly benefit.
(b)
Benefit of Indexation:
At
present, the indexation benefit is available only in respect of capital assets
held for one year in case of certain shares and securities and three years in
other cases. In Section 49 of the new code, the benefit of indexation is sought
to be provided in respect of all assets transferred after holding the same for a
year from the end of the year in which it is purchased. The reduction in period
will be beneficial to investors at large.
(c)
The base year for calculation of capital gains tax moved from April, 1981 to
April, 2000:
In case
any asset has been acquired prior to April 1981, the taxpayer, at present, has
the option of replacing the actual cost by fair market value as on April 1,
1981. In the new code, this cutoff date is being changed to April 1, 2000. It
will help reduce the liability on capital gain tax.
The
indexation base has also been moved from April 1, 1981 to April 1, 2000. For
computing capital gains, the indexed cost will be taken, but the fineprint of
Section 49 reveals that instead of the cost inflation index of the year in which
the asset was purchased, the cost inflation index of the financial year
immediately following the financial year in which the asset was acquired or for
the financial year beginning on April 1, 2000, whichever is later, will be
considered. Thus, the taxpayers will be adversely affected to some extent.
(d) A
minor benefit has however been retained as capital losses can be set off against
capital gains.
(e)
Reverse Mortgage may be considered as taxable transfer
As per
present provisions, transfer of capital assets in a scheme of reverse mortgage
is not considered as taxable transfer. Such exemption is not provided in the new
code. As a result, the transfer of capital assets in case of reverse mortgage
may be treated as taxable capital gain.
(f)
Loss on Depreciable Assets
At
present, loss on depreciable assets is treated as short term capital loss but as
per the provisions of new code, loss on transfer of business capital assets,
where no asset remain in a particular block of assets, will be treated as an
intangible asset and it will be eligible for depreciation resulting in set-off
of only a part of the loss every year. This has been done to provide a
disincentive for asset stripping or manipulation of loss.
(g)
Valuation by Stamp Duty Valuation Authority
And last
but not the least, at present, Section 50C of the Income Tax Act 1961 provides
for charging capital gains tax on transfer of immovable assets by the investors
on the basis of stamp duty valuation. Further, stamp duty valuation is defined
as the value adopted or assessed or the value which the stamp valuation
authority would have adopted if it were referred for the purpose of stamp duty.
Further,
the present provisions allow for an appeal against the valuation made by stamp
duty authority and on such appeal if the valuation is reduced, the lesser amount
is considered for charging tax. But Section 48(2)(j) of the new code now
provides for considering the higher of the stamp duty value of the asset and the
value of the asset ascertained on reference , if any, to the valuation officer.
It is apprehended that there is some error, since the lower amount should really
be considered. Otherwise what is the use of an appeal or reference?
It seems
that the government has been experimenting with the taxpayers in so far taxation
of capital gains is concerned. Sometimes they exempt capital gain and then
introduce STT and now they are taking a U-turn by treating all capital gains as
taxable. What is intriguing is that there is no rationale for the shifting stand
which only brings in uncertainty. The Hon’ble FM is urged to review the issue.
3.
Changes in Income from Salary/ Employment
Under
the Code, the salary will now be computed under the new head “Income from
employment”.
3.1
The Salary will include the following under the new regime
The
Salary has been defined in an inclusive manner in section 284(244) of the new
code. It includes the following -
(a) the
value of rent free, or concessional, accommodation provided by the
employer irrespective of whether the employer is a Government or any other
person; (earlier nominal value was considered for Government Employees)
(b) the
value of any leave travel concession (LTC);(earlier exempted up to 2 journey in
four year block)
(c) the
amount received on encashment of unavailed earned leave on retirement
or otherwise; (earlier exempted for 30 days for each year of service or maximum
upto Rs. 3 Lakhs)
(d)
medical reiumbursement; and
(e) the
value of free or concessional medical treatment paid for, or provided by the
employer.
(f) The
value of rent-free accommodation (Such value will be determined for all
employees in the same manner as is presently determined in the case of employees
in the private sector).
3.2
Deductions permissible from salary :
The
following deduction will be available u/s 22 of the new Code from salary income
:
(a)
amount of professional tax paid;
(b)
transport allowance to the extent prescribed;
(c)
prescribed special allowance or benefit to meet expenses wholly and exclusively
incurred in the performance of duties, to the extent actually incurred;
(d)
compensation under voluntary retirement scheme (VRS);
(e)
amount of gratuity received on retirement or death;
(f)
amount received on commutation of pension; and
(g)
pension received by gallantry awardees.
Further
the deduction in respect of Items at Sl. Nos. (d) to (f) would be available to
the extent the amounts are paid to, or deposited in a Retirement
Benefits Account. The amounts received from an approved superannuation fund,
hitherto exempt from income tax, will henceforth also be treated in the same
manner.
3.3
HRA and some other allowances – not to be exempt under the Code:
There
will be no exemption for House rent Allowance (HRA) (like HRA as per present
provisions). Further exemption for following allowances, which is available
under the 1961 Act, shall no longer be available -
(a)
entertainment allowance
(b)
children education allowance
(c)
children Hostel allowance
The list
is not exhaustive but we can say that other than deduction specifically
prescribed in the new Code, no deduction from salary income is allowed.
4.
Income from House Property – changes:
Significant changes have been made in computing income from house property.
4.1
“Gross rent” :
Section
25(1) of the new Code provides that “gross rent” in respect of a property shall
be the higher of the amount of contractual rent and presumptive rent, for the
financial year. Further it has been stated that “presumptive rent” shall be 6
per cent of the ratable value fixed by any local authority in respect of the
property or the cost of construction or acquisition of the property if no such
value has been fixed by the local authority.
The
computation of income on the said “presumptive rent” method is likely to
adversely affect those owners/ landlords whose tenants are old and the rent
amount is moderate. In those cases if the actual rent is lower than presumptive
rent, then the higher amount will be considered. The gross rent of one
self-occupied property will be deemed to be nil, as at present. In addition, the
gross rent of any one palace in the occupation of a ruler will also be deemed to
be nil, as at present.
4.2 The
advance rent will be taxed only in the financial year to which it relates.
4.3
Deductions: The following deductions will be admissible against the gross rent:-
(i)
Amount of taxes levied by a local authority and tax on services, if actually
paid.
(ii) 20
per cent of the gross rent towards repairs and maintenance.
The
existing presumptive deduction of 30% of rent for repairs, collections charges
etc. will stand reduced to 20% bringing an additional 10% of rent to tax.
(iii)
Amount of any interest payable on capital borrowed for the purposes of
acquiring, constructing, repairing, renewing or re-constructing the property.
(iv)
self-occupied property : In the case of a self-occupied property where the gross
rent is deemed to be nil, no deduction for taxes or interest will be allowed.
The
present deduction for interest upto Rs.1.5 lakh paid on loans for self occupied
houses or flats, will no longer will be available under the new Code. Taxpayers
will now have to pay interest on home loans from tax paid income with no
corresponding benefit of interest deduction. The denial of benefit of interest
on housing loans is likely to adversely effect the housing sector, which is
otherwise in a difficult position.
It may
also be noted that the principle amount of installments of certain housing loans
which are now considered u/s 80C shall not get any benefit under the new Code.
(v) The
income from property shall include income from the letting of any buildings
along with any machinery, plant, furniture or any other facility if the letting
of such building is inseparable from the letting of the machinery, plant,
furniture or facility.
5.
Computation of Income from Business
5.1
Every business will constitute a separate source and, therefore, income will be
computed separately for each business. With a view to reducing the scope for
litigation, a business will be treated as distinct and separate from another
business if there is no interlacing or interdependence or unity embracing the
two businesses.
5.2
There are two models for computation of income under this head.
The
first model is where the taxable income is equal to business profits with
specified adjustments. However, this model does not provide for items of
receipts which form part of business profit and deductions to be made therefrom.
As a result, there are frequent disputes about taxability of receipts and
deductions for expenses.
The
second model is the income-expenses model which is now followed in countries
like U.S.A., Canada, Australia and most Asian countries. The computation of
income from business under the Code will be based on the income-expenses model
where the taxable income under this head will be equal to gross income minus
allowable deductions. To the extent possible, the items of receipts and
deductions for expenses are enumerated in the new Code to reduce the scope for
litigation.
5.3 The
new framework for computation will be as follows:
(i) All
assets will be classified into business assets and investment assets. The
business assets will be further classified into business trading assets and
business capital assets.
(ii) The
income from transactions in all business assets will be computed under the head
‘income from business’. The income from transactions in all investment assets
will be computed under the head ‘capital gains’.
(iii)
The profits from business will be equal to gross earnings from the business
minus the amount of business expenditure incurred.
(iv)
Income from business will be equal to the profits from business.
(v)
Ordinarily, all accruals and receipts derived from, or connected with, business
will form part of the ‘gross earnings’ irrespective of whether they are derived
from business trading assets or business capital assets. These will, inter-alia,
include the following:-
(a)
Profit on sale of business capital assets. (This will no longer be treated as
capital gains).
(b)
Profit on sale of an undertaking under a slump sale. (This will no longer be
treated as capital gains).
(c) The
reduction or remission of any liability by way of loan, deposit or advance
(other than those which are received by an individual from his relative, as
defined).
(d)
Consideration accrued or received in respect of transfer of any business asset
self generated in the course of the business.
(e)
Amount accruing to, or received by, the assessee on account of the cessation,
termination or forfeiture of any agreement entered into in the course of
business.
(f)
Amount accruing to, or received by, the assessee, whether as advance or security
deposit or otherwise, from the long term leasing or transfer of the whole or
part of, or any interest in, any business asset.
(g)
Amount accruing to, or received by, the assessee as reimbursement of any
expenditure incurred by him.
(vi) The
following items which are to be excluded from ‘gross earnings from business’
are:-
(a)
income by way of interest other than the interest accruing to permitted
financial institutions. (This will be treated as income from residuary sources).
(b)
income from letting of any property consisting of any building or lands
appurtenant thereto, of which the assessee is the owner, other than income from
letting of any property in the course of running a hotel, convention centre or
cold storage. (This will be treated as income from house property).
(vii)
Business expenditure is classified into three mutually exclusive expenditure
categories: (i) operating expenditure; (ii) permitted financial charges and
(iii) capital allowances.
(viii)
Operating expenditure is defined to include all expenditure laid out or expended
wholly and exclusively for the purposes of business. This category covers all
expenses which do not fall under ‘permitted financial charges’ or ‘capital
allowances’. The provision also contains a positive list of items of business
expenditure which shall be treated as operating expenditure and a negative list
of items of business expenditure which shall not be treated as operating
expenditure.
(ix)
“Permitted financial charges” are defined as expenses on account of interest
payable on borrowed capital. These include interest payable to any creditor,
discount on bonds/ debenture etc. and also other incidental charges payable for
obtaining any loan. The deduction in respect of interest payable to
banks/financial institutions shall continue to be allowed on ‘actually paid
basis’.
(x)
“Capital allowance” relates to deduction in respect of capital cost. It includes
depreciation and initial depreciation on business assets and allowance for
scientific research and development.
(xi)
Depreciation on business capital assets will be allowed with reference to the
adjusted written down value of the block of assets. The rates of depreciation
presently prescribed in the Income-tax Rules will be specified in the Schedule
to the Code. Further, the depreciation regime will also be extended to expenses
hitherto amortised.
(xii)
Scientific research and development allowance will be allowed with reference to
expenditure on scientific research and development since such expenditure
generates positive externalities. The salient features of the allowance are:
(a) 100
per cent deduction for any revenue expenditure laid out or expended on
scientific research related to the business.
(b) 100
per cent deduction for any capital expenditure, other than expenditure on land.
(c) 150
per cent deduction for any expenditure (both revenue and capital) incurred on
in-house research and development by a company, excluding expenditure on land.
(d) The
scope of the weighted deduction of 150 per cent will be extended to all
industries.
(e) The
term ‘scientific research’ will be comprehensively defined.
(xiii)
Loss on sale of business capital assets, which is treated as capital loss under
the 1961 Act, will be treated as intangible asset and depreciation will be
allowed at the same rates applicable to the relevant block of assets.
Effectively, therefore, a taxpayer will be allowed to set off only a fraction of
the loss every year. This will, accordingly, serve as a disincentive for asset
stripping and loss manipulation.
(xiv)
The determination of profit of certain businesses on presumptive basis will
continue. These include :-
(a)
Business of civil construction.
(b)
Business of supplying labour for civil construction
(c)
Business of plying, hiring or leasing of heavy goods vehicle.
(d)
Business of plying, hiring or leasing of light goods vehicle.
(e)
Business of retail trading.
(f)
Business of civil construction in connection with a turnkey power project
approved by the Central Government in this behalf.
(g)
Business of erection of plant or machinery or testing or commissioning thereof,
in connection with a turnkey power project approved by the Central Government in
this behalf.
(h)
Business of providing services or facilities in connection with the prospecting
for, or extraction or production of, mineral oil.
(i)
Business of supplying plant and machinery on hire used, or to be used, in the
prospecting for, or extraction or production of, mineral oils.
(j)
Business of operation of ships (including an arrangement such as slot charter,
space charter or joint charter)
(k)
Business of operation of aircraft (including an arrangement such as slot
charter, space charter or joint charter)
(xv)
Separate income determination regimes are provided for the following:-
(a)
Business of insurance.
(b)
Business of operating a qualifying ship.
(c)
Business of mineral oil or natural gas.
(d)
Business of generation, transmission or distribution of power.
(e)
Business of developing a special economic zone.
(f)
Business of operating and maintaining a hospital.
(g)
Business of processing, preserving and packaging of fruits or vegetables.
(h)
Business of developing, or operating and maintaining, or developing, operating
and maintaining, any infrastructure facility.
6.
Expenditure not allowable
6.1
Under the new Code, the following expenditure will not be allowed as a deduction
u/s 17 in the computation of total income :-
(a) any
expenditure attributable to income which does not form part of the total income
under the new Code and determined in accordance with the method as may be
prescribed; (refer present section 14A). The code has hardly left any scope for
tax exempt income other than dividend. It would have been better if Dividend is
also made taxable in the hands of the recipient, so that the dispute regarding
disallowance of expenses relating to such exempt income would have come to an
end.
(b) any
expenditure incurred for any purpose which is an offence or which is prohibited
by law; [refer present proviso to section 37(1)]
(c) any
provision made by a person for any liability if the liability remains
unascertained by the end of the financial year; and
(d) any
expenditure where the source of funds for such expenditure is unexplained;
(e) any
expenditure incurred by a non-resident in respect of,-
(i)
royalty;
(ii)
fees for technical services; or
(iii)
any income which is liable to tax at the special rate of income-tax specified in
Part II of the First Schedule.
6.2
Further, in the computation of business income, the following operating
expenditure will not be allowed as an expenditure u/s 33(4) of the new Code:-
(a)
personal expenses of the person;
(b)
capital expenditure including expenditure in respect of which capital allowance
is allowable under section 35;
(c)
finance charges;
(d) any
unascertained liability of the person;
(e)
remuneration payable to any sleeping participant;
(f) any
expenditure incurred by a person on advertisement in any souvenir, brochure,
tract, pamphlet or the like published by a political party;
(g)
wealth-tax; and
(h) any
rate or tax,-
(i)
levied on the profits of any business ;
(ii)
assessed at a proportion of , or otherwise on the basis of, the profits of any
business; or
(iii)
paid which is eligible for relief of tax under section 206 or section 258, as
the case may be; and
(i) any
dividend declared or distributed.
Any
amount of expenditure or deduction referred to in sub-section (1) or subsection
(2) or under section 34 or under section 35, which is not allowable by reason of
the fact that the expenditure is in violation of the condition, if any, or is in
excess of the amount, if any, specified therein, shall not be allowed as a
deduction under clause (xliii) of sub-section (2) only on the reasoning that it
is laid out or expended, wholly and exclusively, for the purposes of business.
7.
Tax incentives
The
erstwhile terms “Deductions under Chapter VI A” will be termed as Tax incentives
in the new Code.
7.1
Deduction on savings increased to Rs. 3 lakhs but with EET:
You get
an omnibus Rs.3 lakh as deductible amount u/s 66 of the new Code to cover
investments in Savings like provident funds, superannuation funds, the new
pension scheme, and life insurance premia.
But the
said deduction under the new Code comes with the introduction of EET methodology
(Exempt - Exempt - Tax). E = exempt at the time of Investment; E = Interest,
bonuses, increments during the period of investment will not be taxed at the
time of accreation; T: full amount (including interest etc.) received at the
time of Maturity is taxable in the hands of assessee.
The
investment will be exempt when invested. The investment is exempted till it
remains invested. The investment and accreations will be taxed as and when it is
withdrawn. Also, investments will be considered for tax incentive only if those
will be invested through savings intermediaries approved by PFRDA (Pension Fund
Regulatory and Development Authority). Such savings intermediaries may in turn
invest in ELSS mutual funds, Government securities, Public sector securities,
etc. All such savings will be governed directly by Government by an appointed
depository (an independent agency). Principal as well as Returns on such
investments, that are deductible under the new Code, will be taxed on
withdrawals or at maturity, as the case may be.
However
the amounts lying in PPF or other saving schemes as on March 31, 2011, and
withdrawn after March 31, 2011 have been spared and thus will not be taxed. But
the interest accruing after 31st March, 2011 on amount lying in such PPF account
is likely to be taxed as such interest has not been exempted.
7.2
Other important Deductions/ Tax Incentives :
In
addition to an aggregate deduction of Rs.3 lakh u/s 66 for savings (as discussed
above), the following deductions will also be available under the new Code -
(a)
deduction in respect of children’ education actually paid by an individual or
HUF for tuition fee to any university, college, school or other educational
institution situated within India for full time education of any 2 children
(section 67)
(b)
Deduction for Interest on loan for higher education of the individual or his
relative without any limit. It will be available for the initial year and 7
subsequent financial years or until the full interest is paid, whichever is
earlier. (section 68)
(c)
Deduction for health insurance premia of Rs.20,000 paid for such insurance of
senior citizens and Rs.15,000 in other cases. (section 69)
(d)
Deduction in respect of amount actually paid for medical treatment actually paid
by an individual for prescribed dieses or ailment upto Rs.60,000 per annum in
respect of specified person being a senior citizens and Rs.40,000 in other cases
subject to obtaining certificate from doctor working in a Government Hospital.
It may be noted that insurance claims reimbursed will not be eligible. (section
70)
(e)
Deduction in respect of maintenance, medical treatment, nursing or training and
rehabilitation of a disabled dependant upto Rs. 1 lakh in case of severe
disability and Rs.50,000 in other cases (section 71)
(f)
Deduction in case of a person with disability upto Rs,. 1 Lakh if he is a person
with severe disability and Rs.50,000 in other cases (section 79)
(g)
Deduction for donation to certain funds and non-profit organizations (NPO) to
the extent of 125%, 100% and 50% as specified in 16th Schedule to the new code.
The donations to general approved NPOs will be entitled to 50% deduction only
subject to 10% of gross total income. At present such donations are entitled to
50% deduction. (section 72)
(h)
Apart from above there are deductions in respect of royalty income on books and
patents, political contributions; interest income form certain bonds; trade
unions, income of primary co-operative society and other co-operative society
from banking, deduction for expenditure for promoting family planning and
preventing HIV-aids as mentioned in sections 73 to 78 and 80 to 82 of the new
Code.
8.
Taxation of Non-Profit Organisations (NPOs) and Other Trusts
8.1
The Code has replaced the phrase “charitable purpose” by the phrase “permitted
welfare activities”, which have been defined under section 96(g) of the New Code
to mean 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.
However,
as per section 96(b) of the new Code, advancement of any other object of general
public utility will not include any activity in the nature of trade, commerce or
business, or any activity of rendering any service in relation to any trade,
commerce or business, for a fee or for any other consideration, irrespective of
the nature of use, application or retention of the income from such activity.
8.2
The new regime for NPOs:
(a) The
regime will uniformly apply to all NPOs irrespective of the nature of their
activities.
(b) An
organization shall be treated as a non-profit organization if,-
(i) it
is established for the benefit of the general public;
(ii) it
is established for carrying on permitted welfare activities;
(iii) it
is not established for the benefit of any particular caste;
(iv) it
is not established for the benefit of any of its members;
(v) it
actually carries on the permitted welfare activities during the financial year
and the beneficiaries of the activities are the general public;
(vi) it
does not intend to apply its surplus or other income or use its funds or assets
or incur expenditure, directly or indirectly, or for the benefit of any
interested person;
(vii)
the funds or the assets of the non-profit organisation are not invested or held
in any associate concern or in any prescribed form or mode;
(viii)
it maintains such books of account and in such manner, as may be prescribed;
(ix) it
obtains a report of audit in the prescribed form from an accountant before the
due date of filing of the return in respect of-
(A) the
accounts of the business, if any, carried on by it; and
(B) the
accounts relating to the permitted welfare activities; and
(x) it
is registered with the I.T. Department under the Code.
8.3
Tax liability: The tax liability of a NPO shall be 15% of the aggregate of the
following:-
(i) the
amount of surplus generated from the permitted welfare activities; and
(ii) the
amount of capital gains arising on transfer of an investment asset, being a
financial asset;
The
“amount of surplus generated from the permitted welfare activities” shall be the
“gross receipts” as reduced by the “outgoings”.
The “gross receipts” shall be the aggregate of the following:-
(i) The
amount of voluntary contributions received during the financial year;
(ii) Any
rent received in respect of a property consisting of any buildings or lands
appurtenant thereto;
(iii)
The amount of any income derived from a business which is incidental to any of
the permitted welfare activities;
(iv)
Full value of the consideration received from the transfer of any investment
asset, not being a financial asset;
(v) Full
value of the consideration received from the transfer of any business capital
asset of a business incidental to its permitted welfare activities;
(vi) The
amount of any income received from any investment of its funds or assets; and
(vii)
All other incomings, realizations, proceeds, donations or subscriptions received
from any source.
The
amount of outgoings shall be the aggregate of-
(i)
voluntary contributions received during the financial year by the NPO made with
a specific direction that they shall form part of the corpus of the NPO;
(ii) the
amount actually paid during the financial year for any expenditure, excluding
capital expenditure, incurred wholly and exclusively for earning or obtaining
any “gross receipts”;
(iii)
the amount actually paid during the financial year for any expenditure,
excluding capital expenditure, on the permitted welfare activities;
(iv) the
amount of capital expenditure actually paid during the financial year in
relation to-
(a) any
business capital asset of a business incidental to any of the permitted welfare
activities; or
(b) any
investment asset, not being a financial asset.
(v) any
amount actually paid during the financial year to any other NPO engaged in a
similar permitted welfare activity;
(vi) any
amount applied outside India during the financial year if the amount is applied
for an activity which tends to promote international welfare in which India is
interested and the non-profit organisation is notified by the Central Government
in this behalf.
The
surplus generated from permitted welfare activities will be determined on the
basis of cash system of accounting. Capital gains arising on the transfer of an
investment asset, being a financial asset, will be computed in accordance with
the provisions under the head “Capital gains”.
8.4
Prohibitions: A NPO will be prohibited from investing any of its funds or
holding any of its asset in any associate concern or in any prescribed form or
mode.
8.5
Registration: It will be mandatory for every non-profit organisation to register
with the Income-tax Department by making an application u/s 93 of the Code to
the Chief Commissioner or Commissioner concerned. The Chief Commissioner or
Commissioner will be required to pass an order within 3 months from the end of
the month in which the application is received. If the order is not passed
within 3 months or registration is refused, the applicant shall have the right
to appeal before the Income Tax Appellate Tribunal (ITAT). The registration,
once granted, shall be valid from the financial year in which the application is
made till it is withdrawn.
8.6
Deduction for Donations to NPO: The donations made to a NPO will be eligible for
deduction in the hands of the donor at the appropriate rates of 125%, 100% or
50% as specified in 16th Schedule of the Code.
8.7
Higher Income Tax @ 30% on Net Worth in certain situations: A NPO shall be
liable to income-tax @ 30% in respect of its net-worth if-
(a) it
converts into any form of organization which does not qualify as a non profit
organization;
(b) it
ceases to be a NPO in the relevant financial year and any two financial years
out of four financial years immediately preceding the relevant financial year;
or
(c) it
fails to transfer, upon its dissolution, all its assets to any other NPO.
8.8
Special treatment for Trusts/Institutions established under religious endowment
Acts of Central and State Governments: The income of any trust or institution
recognised/registered under the religious endowment Acts of the Central
Government or the State Governments shall be fully exempt from income-tax.
However, donations to such trusts or institutions will not enjoy any deduction
in the hands of the donor.
8.9 The
new regime shall not apply to any person who-
(a)
holds any business under trust, notwithstanding a specific direction that the
business shall form part of the corpus of such person or a specific direction
that the income from the business shall be applied only for permitted welfare
activities;
(b)
carries on the permitted welfare activity involving the relief of the poor,
advancement of education, provision of medical relief, preservation of
environment or preservation of monuments or place or objects of artistic or
historic interest and also carries on a business which is not incidental to the
aforesaid permitted welfare activity; and
(c)
ceases to be a NPO at any time during the financial year.
9.
Assessment on the basis of “Financial Year” :
Concept
of Assessment year and previous year is abolished. Only the “Financial Year”
terminology will exist for the purpose of the new Direct Tax Code. It is a
welcome measure.
10.
Due date for filing Returns
In
return for simplifying your tax life, you have to file your returns a month
earlier than usual:
New
due dates for Tax Returns for financial year 2011-12:
| Sl. Type |
Date |
First filing
(under DTC) |
1 Non-Business /
Non-Corporate |
30th July
|
30th June, 2012 |
| 2 Others
|
30th Sept.
|
31st Aug., 2012 |
11.
Wealth Tax :
The Code
has proposed to tax net wealth in the following manner:-
(a)
Wealth-tax will be payable by an individual, HUF and private discretionary
trusts. The companies have been omitted for the purpose of wealth tax. But a
kind of MAT based on asserts of the companies has been introduced.
(b)
Wealth tax cap to be hiked from Rs.30 Lakhs to Rs. 50 Crores. This increase in
threshold limit will take a significant number of existing wealth taxpayers out
of the ambit of wealth tax.
(c) The
threshold limit of Rs. 50 crore will not apply to a private discretionary
trust.
(d)
Wealth to be taxed on all assets. The assets chargeable to wealth-tax will mean
all assets, including financial assets and deemed assets, as reduced by
specifically exempted assets. This new method of defining assets reverts back to
the wealth tax regime that existed before 1993. Since 1993 method for
introducing wealth tax on specified assets was introduced. The idea behind this
reversal in the New Code in unclear.
(e) The
valuation of financial assets will be at cost or market price, whichever is
lower.
(f)
Wealth tax to be on net basis, i.e. after deduction on debt in relation to
taxable asset;
(g) The
net wealth of an individual or HUF in excess of Rupees fifty crore will be
chargeable to wealth-tax at the rate of 0.25 per cent (in place of present rate
of 1 per cent on amount exceeding Rs.30 lakhs)
(h)
Wealth tax liability to be discharged by payment within due date for filing the
return
Now the
tax experts as well as public may make suggestions and then this draft Tax code
will be discussed in Parliament in the winter session and if it gets the green
signal, it will be implemented for the Financial Year 2011-12. However, people
feel that the new tax regime as proposed in the new draft Code at least for the
individual taxpayers may be implemented w.e.f. F.Y. 2010-11 itself. Lower tax
rates - sooner the better. Such a step will usher in much desired tax culture in
our country.
[Source
: Paper presented in two days National Tax Conference held at Jamshedpur on
29-30 August, 2009]
|