17-11-2012, 05:28 PM
THE DIRECT TAXES CODE
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INTRODUCTION
The draft Direct Taxes Code (DTC) along with a Discussion Paper was released in August, 2009 for public comments. Since then, a number of valuable inputs on the proposals outlined in these documents have been received from a large number of organisations and individuals. These inputs have been examined and the major issues on which various stakeholders have given their views have been identified. This Revised Discussion Paper addresses these major issues. There are a number of other issues which have been raised in the public feedback, which, though not part of this Discussion Paper, will be considered while finalising the Bill for introduction in Parliament.
MINIMUM ALTERNATE TAX – GROSS ASSETS VIS-À-VIS BOOK PROFIT
Chapter XIII of the Discussion Paper on the DTC deals with Minimum Alternate Tax (MAT). As stated in the Discussion Paper, a company would ordinarily be liable to tax in respect of its total income. However, owing to tax incentives, the liability on total income, in many cases, has been found to be extremely low or even zero. Internationally, a variety of economic bases and methods are used to calculate presumptive income so as to overcome the problem of excessive tax incentives. These presumptions could be based on net wealth, value of assets used in business or gross receipts of the enterprise.
The DTC has proposed a Minimum Alternate Tax (MAT) on companies calculated with reference to the "value of gross assets". The economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets, hence it provides an incentive for efficiency.
It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies. The MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.
TAXATION OF INCOME FROM HOUSE PROPERTY
Chapter VIII of the Discussion Paper on the draft Direct Taxes Code (DTC) deals with the computation of income from house property. “Income from house property” is one of the five heads under which accruals or receipts relating to ordinary sources of income are to be classified. The Discussion Paper states that income from house property, which is not occupied for the purpose of any business or profession by its owner, is to be taxed under this head.
TAXATION OF CAPITAL GAINS
Chapter X of the Discussion Paper on the Direct Taxes Code (DTC) provides that income from transactions in all investment assets will be computed under the head "Capital gains”. The DTC provides that gains (losses) arising from the transfer of investment assets will be treated as capital gains (losses). These gains (losses) will be included in the total income of the financial year in which the investment asset is transferred. The capital gains will be subjected to tax at the rate of 30% in the case of non-residents and in the case of residents at the applicable marginal rate.
Under the Code, the current distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset will be eliminated.
In general, the capital gains will be equal to the full consideration from the transfer of the investment asset minus the cost of acquisition of the asset, cost of improvement thereof and transfer-related incidental expenses. However, in the case of a capital asset which is transferred anytime after one year from the end of the financial year in which it is acquired, the cost of acquisition and cost of improvement will be indexed to reduce the inflationary gains.