Tax code final draft misses date

The final draft of the direct tax code (DTC), which was expected to be unveiled on Tuesday, has been deferred.

Indefinitely? The jury’s out on that.

“From what we hear, the final draft is unlikely to see light of the day anytime soon. What could come up first is a discussion or “position paper” on nine issues that were identified by the government for a rethink in the first draft,” said a source familiar with the code’s background work.

“The position papers will invite comments. Only after these are assessed will the final draft be made,” the source added.
On the nine contentious issues the government will provide its rationale on whether they agree with the issue or why they are changing their current position.

The source said that position or the discussion paper will be out before the end of June. Given that the final draft of the direct tax code will take a while.

The direct tax code was first unveiled on August 12, 2009, and seeks to replace the Income Tax Act, 1961.

One of the controversial provisions of the tax code among the nine provisions identified for a relook was the exempt-exempt-tax (EET) provision on tax investments. What this means is that a taxpayer will be allowed an exemption when he invests money into his public provident account (or any other tax saving instrument) and when he earns interest on it.

But at maturity, the amount that he gets will be added to the income for the particular year and taxed accordingly.

Currently almost all tax saving instruments are tax free at maturity (except the New Pension Scheme) and hence follow the EEE (exempt, exempt, exempt) regime.

“The government is likely to go ahead with the EET regime, given that the next general election is nearly four years away. What they are likely to do is introduce some changes as the election date nears,” said the source.

The other contentious issue that might be relooked at is the capital gains tax. Currently there are no taxes on long term capital gains made on selling investments in equity, a year or more after investing.

Short-term capital gains are taxed at 15%.

The DTC removes any distinction between various kinds of income. So various kinds of income like salary, capital gain etc will all be lumped together and taxed according to the marginal tax rate.

“The stock market will collapse, if they don’t continue with the current regime,” said the source, hinting at the current regime continuing.

Meanwhile, a a member of the Institute of Chartered Accountants of India said the Central Board of Direct Taxes “has been very tight-lipped on the code for a while now.”

A partner with one of the Big Four auditing firms, however, said his sources told him the second draft could expected in June itself.
“No date is set, but the government wants to introduce the code in the monsoon session of the Parliament,” he said.

“There is a big team of CBDT involved and it has been made clear that the implementation date being looked at is April 1, 2011.”
Amarjit Chopra, president of Institute of Chartered Accountants in India, said, “We are hearing that everything is in time and on track.”