The Hindu Business Line : Code concerns for individuals

The Direct Tax Code (DTC) aims to minimise exemptions, reduce ambiguity and litigation, and increase compliance. In this context, the DTC proposes to make significant changes, including few structural ones, in the tax regime.

From an individual perspective, the substantial increase in the slab rates is a welcome step which would benefit individuals, both salaried employees and self-employed, and is expected to increase compliance as well.

Though these appear beneficial, there are many points which would limit or minimise the benefits.

Change in residency rules

The new Code has proposed a significant change in respect of determination of residential status of the individual, wherein the erstwhile provision relating to not-ordinarily residents has been removed. This would particularly impact foreign nationals coming to India on deputation and non-resident Indians planning to settle in India.

They are likely to become residents and taxable in India on their global income when they cross 60 days in a particular tax year, and where they have stayed in India for 365 days or more in the preceding four tax years.

In many cases, in spite of the Double Taxation Avoidance Agreements (DTAAs) being in place, incomes such as capital gains, etc., could be liable to tax in both home as well as host countries, which effectively put individuals to hardship in terms of cash outflow, even though foreign tax credit may be available. Further, in many cases, complete credit is not available due to difference in tax laws in the two countries.

In this context, separate provisions may be considered for foreign nationals coming to work in India to ensure that they are not taxable in India for at least 3-4 years on their global income, except salary income.

Allowances, exemptions

Few allowances/exemptions (house rent allowance, for instance) do not find any mention in the DTC, which effectively means that the entire HRA would be treated as salary and subject to tax.

Similarly, the exemption/benefits for leave travel concession, medical reimbursements, etc., would now form part of salary and be taxable. Similarly, other benefits/perquisites provided by the employer to the employee, subject to the new rules to be prescribed, may be subject to tax on a go-forward basis.

This would effectively increase the taxable income of the individuals and reduce the benefit of increase in tax slab rates.

Retirement allowances

It is pertinent to note that compensation received by an individual under voluntary retirement scheme, gratuity, commutation of pension and approved superannuation fund would be taxable unless the same is deposited in a retirement benefit account. This is again a significant departure from the existing provisions, wherein these benefits are generally tax-exempt subject to specified limits.

Further, even if the funds are deposited in Retirement Fund Account, withdrawals from the said Fund would be taxable in any case.

House property

One of the popular deductions made use of by the individuals is in respect of the interest paid on housing loan up to Rs 1.5 lakh in the case of a self-occupied property. Under the DTC, this deduction will no longer be available.

Further, even the repayment of the principal amount of the housing loan will not be eligible for claiming deduction from income. At present, the same is eligible for deduction under Section 80C up to Rs 1 lakh.

This provision requires a re-look as owning a house is still a dream for a majority of Indians. The deduction in this respect may be limited to the first house property bought by the individual, or at least this deduction should be made available to the women to bring in more socioeconomic parity.

Stock transfers

The difference between long term and short term capital gains is proposed to be eliminated and any gain arising from transfer of capital assets would now be liable to tax, subject to certain exceptions.

Short-term capital gain is levied at a concessional 15 per cent. However, it is now proposed that any capital gain whether long-term or short-term arising out of such transfer will be liable to capital gains tax at the personal marginal rate, that is, in the case of an individual in the highest tax bracket of 30 per cent, the capital gains tax will be taxable at 30 per cent.

This would substantially affect individuals who have invested in shares/mutual funds with a long-term perspective.

Deduction for savings

Currently, an individual is eligible for deduction up to Rs 1 lakh for various savings, investments, and expenditure incurred by him under the specified schemes.

It is now proposed to enhance the deduction limit to Rs 3 lakh, however the scope of investment avenues will be reduced to primarily children’s education expenses and investments made with savings intermediaries such as provident fund, superannuation fund, life insurer and new pension scheme.

It appears that no deduction would be available for bank fixed deposits and other investment avenues such as specified funds.

Impact on retired

The move to bring in all the saving instruments under the EET regime is in line with international practices. This, however, has to be considered keeping in view the socioeconomic reality in the country. In India, we do not have a comprehensive social security scheme.

In fact, a large majority of individuals do not even have access to good medical facilities in their old age.

In this context, if the intent is to tax all such benefits under the EET regime, then, two points may be considered. First, the age of senior citizens should be revised from 65 to 60 years; and, second, the minimum threshold limit for senior citizens below which their income should not be liable to tax should be increased from Rs 2.4 lakh to Rs 6 lakh.

No doubt the DTC is a move in the right direction to simplify the tax provisions and enhance compliance. However, few aspects should be reconsidered not just from the tax perspective but also from the socioeconomic situation in the country.

(The author is Executive Director, KPMG.)