Good & bad news for the taxpayer

The revised discussion paper on the Direct Taxes Code (DTC) released by the Central Board of Direct Taxes (CBDT) has both good as well as bad news for the taxpayer.

First the good news: Public Provident Fund (PPF) and other employee provident funds will not be subjected to the much dreaded exempt-exempt-taxed (EET) system of taxation. In other words, your PPF and company PF will continue to remain tax-free as they are now. Also, EET would be applicable only prospectively, i.e. the maturity proceeds of any investment made under the current exempt-exempt-exempt (EEE) regime would remain tax-free.

In the case of house property, the original DTC bill had proposed to discontinue the Rs 1.50 lakh interest deduction on housing loans for self-occupied property. Also, rented properties were to be taxed on actual rent or a presumptive rent of 6% of ratable value, whichever was higher. Where no ratable value was available, 6% was to be calculated on cost of acquisition. In a move that will bring cheer to all taxpayers, both these provisions are proposed to be dropped.

Now for the flip side: There is an ad-hoc deduction proposed on long-term capital gains on equity and equity mutual funds. However, this deduction comes at a steep price. First, no indexation is to be allowed on cost. Secondly, the option of adopting the value as on April 1, 2000 instead of the actual cost is also not available. Thirdly, the Securities Transaction Tax (STT) that was proposed to be dropped has been retained — the rate may be modified but the fact is that STT would indeed be payable.    
Lastly, the proposed Capital Gain Savings Scheme (CGSS) will also not be introduced. The original DTC bill had a provision where capital gains form sale of assets held for over one year could be saved by investing in CGSS within a period of 60 days from the date of sale.

One can’t help but think that investors would have been better off paying a capital gains tax of 10% without indexation or 20% with indexation. At least then, they could have indexed their acquisition cost to allow for the time value of money and would also have had more options to save this tax than just investing in another property, as allowed by DTC.

Also, the original problem of doing away with the current blanket exemption limit remains to be addressed. There is a very clear and present danger that when investors wake up to the reality that the long-term capital gains tax on equity and equity MFs is scheduled to be withdrawn and going ahead there would be no tax-saving mechanism, shares would be sold en masse before the DTC becomes operational.

Such a fire sale is bound to eventually lead to a stock market crash. And since the change of law affects not only domestic retail investors but even FIIs, NRIs etc. alike, this crash could well go on to be the mother of all crashes. And since such a situation is undesirable not only for investors but even the government, any preventive measures need to be thought of from now on.

Last but not the least, the original DTC bill had proposed to impose extremely liberal tax slabs. For income between Rs 1.6 lakh and Rs 10 lakh, the tax rate was just 10%. The 20% rate was applicable for income between Rs 10 lakh and Rs 25 lakh and only those earning above Rs 25 lakh were to pay 30%. This had indeed come as a pleasant surprise and exceeded, I am sure, every taxpayer’s expectation. But sadly, when something seems too good to be true, in all probability it is.

The revised Discussion Paper cryptically states that the indicative tax slabs and rates (as well as monetary limits for exemptions and deductions) proposed in the DTC will be decided while finalising the legislation. Translated, this means that the liberal limits proposed originally are going to be significantly toned down.
As of now, just the discussion paper has been released, the Bill containing the actual fine print is awaited. Watch this space for further details.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com.