Direct Tax Code

How the new tax code impacts you

June, 25th 2010

The revised draft for the Direct Tax Code released on June 15, is currently a hot topic of discussion among people. The code is an attempt by the government to simplify the existing income tax laws in the country. Assuming there are no further roadblocks, the government expects to implement DTC on April 1, 2011, after it is passed by the Parliament.

However, there are several questions that bog us such as what will be the likely impact of the changes proposed on people's household budgets, or how will the proposed changes impact real estate sector?

Here is a list of some of the noteworthy changes proposed in the draft code that will impact the real estate segment.

Changes proposed in the draft code

Short-term capital gains. The government has revised the criteria for computing short-term capital gains. According to the proposals, any loss or gain made on the sale of an asset within a year of purchase will be taxed.

The loss or gain made will be factored in your income and taxed according to the income taxslabs of the investor. According to the existing tax laws, sale of asset before three years of purchase is considered short term.

Long-term capital gains. According to the proposed laws, any loss or gain made on the sale of an asset after one year of purchase is liable for long-term capital gains tax. Instead of indexation benefit, the government plans to introduce the concept of discounting based on which LTCG will be calculated. It has also revised the base date for determining the cost of acquisition.

According to the draft code, from April 1, 2011, April 1, 2000 will be considered for calculating the discount rate and not April 1, 1981, which is used currently. This is a good news for investors who have invested in property years ago, as the unrealised capital gains on such assets between April 1981 and April 2000 will not be taxed.

Earlier long-term gains were taxed at a flat rate of 20 per cent after indexing it for inflation. However, now it will be added to your income after indexation (wipe out the rise in property value on account of inflation) and be taxed at the marginal tax rate i.e., the rate will be dependent on the tax bracket you find yourself in.

This change will have a direct bearing on individuals in the higher income bracket as tax outflow will increase. So if you fall in the 30 per cent tax bracket, your gains will be taxed at 30 per cent.

Taxation on rental income. According to the earlier draft, the DTC had proposed that gross rent should be calculated at a presumptive rate of 6 per cent of either the market value or the cost of construction or acquisition, whichever is higher.

However, it has now decided to reinstate it to the actual rent received or receivable for the financial year. Doing away with the complex method of calculation of rent will prove to be beneficial for recent home owners letting out their house.

Interest on home loans. The draft DTC released in August 2009, proposed doing away with the taxdeduction on the interest paid on home loans.

But fortunately, the revised DTC intends to continue tax deduction on the interest paid on home loans up to Rs 150,000 for purchase or construction of residential property. This has come as a relief for first time home buyers.

Property not let out. This will be ignored from tax calculations and hence no deduction for taxes or interest will be allowed. Any one house property that has not been let out (treated as self occupied) will be eligible for deduction on account of interest to the tune of Rs 150,000.

Ambiguous areas. The discussion paper does not mention anything about the tax benefits on the principal amount paid on housing loans, while it clearly states that interest paid is deductible up to Rs 150,000. It has also not mentioned anything on the tax treatment of interest during the pre-construction period.

Changes proposed in the revised draft of the Direct Tax Code will cheer home owners and home buyers. While changes like tax deduction on interest paid on home loans and calculation of taxon actual gross rent are favourable for investors, changes in capital gains dampen enthusias

MAHARASHTRA TO LEVY 1% VAT ON HOMES

The Maharashtra Government has decided to levy one per cent Value-Added Tax on property sale from April 1, 2010 in its Budget for 2010-11. All sale agreements registered on or after April 1 will attract one per cent on the contract price of flats mentioned in the agreement of sale. For deals closed before April 1, the old method of computation at five per cent would be followed, subject to the Bombay High Court stay on collection being lifted, according to a Sales Tax officer. The officer pointed out, this time round, the State had brought in an amendment to VAT in the Assembly and hence there could be no further dispute on the matter. With the court stay in force, builders were depositing the VAT component in an escrow account pending the outcome of the case. Some of them were even accepting post-dated cheques and indemnity bonds for the amount from buyers. The Maharashtra Finance Minister, Mr Sunil Tatkare, said, while announcing the State Budget on Thursday, the levy was in accordance to the Supreme Court judgment which said “VAT becomes leviable on the sale of construction material used in the construction of flats,” Mr Pranay Vakil, Chairman, Knight Frank India, said the decision though prospective, ended an issue that was unclear till now. – www.thehindubusinessline.com

Budget Highlights 2010

TAX PROPOSALS

! The Centralized Processing Centre at Bengaluru is now fully functional and is processing around 20,000 returns daily. This initiative will be taken forward by setting up two more Centres during the year.

! The Income Tax department has introduced “Sevottam”, a pilot project at Pune, Kochi and Chandigarh through Aayakar Seva Kendras, which provide a single window system for registration of all applications including those for redressal of grievances as well as paper returns. The scheme will be extended to four more cities in the year.

! Automation of Central Excise & Service Tax, has already been rolled out throughout the country this year. Similarly, a Mission Mode Project for computerization of Commercial Taxes in States has been approved recently. With an outlay of Rs. 1133 crore of which the Centre’s share is Rs. 800 crore, the project will lay the foundation for the launch of GST.

! The income tax department to notify SARAL-II form for individual salaried taxpayers for the coming assessment year.

! Scope of cases which may be admitted by the Settlement Commission expanded to include proceedings related to search and seizure cases pending for assessment. Scope of Settlement Commission also expanded in respect of Central Excise and Customs to include certain categories of cases that hitherto fell outside its jurisdiction.

! Bi-lateral discussions commenced to enhance the exchange of bank related and other information to effectively track tax evasion and identify undisclosed assets of resident Indians lying abroad.

Direct Taxes
! Income tax slabs for individual taxpayers to be as follows

Income upto Rs 1.6 lakh Nil
Income above Rs 1.6 lakh and upto Rs. 5 lakh 10 per cent
Income above Rs.5 lakh and upto Rs. 8 lakh 20 per cent
Income above Rs. 8 lakh 30 per cent

! Deduction of an additional amount of Rs. 20,000 allowed, over and above the existing limit of Rs.1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government

! Besides contributions to health insurance schemes which is currently allowed as a deduction under the Income-tax Act, contributions to the Central Government Health Scheme also allowed as a deduction under the same provision.

! Current surcharge of 10 per cent on domestic companies reduced to 7.5 per cent.

! Rate of Minimum Alternate Tax (MAT) increased from the current rate of 15 per cent to 18 per cent of book profits.

! To further encourage R&D across all sectors of the economy, weighted deduction on expenditure incurred on in-house R&D enhanced from 150 per cent to 200 per cent. Weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research enhanced from 125 per cent to 175 per cent.

! Payment made to an approved association engaged in research in social sciences or statistical research to be allowed as a weighted deduction of 125 per cent. The income of such approved research association shall be exempt from tax.

! Benefit of investment linked deduction under the Act extended to new hotels of two-star category and above anywhere in India to boost investment in the tourism sector.

! Allow pending projects to be completed within a period of five years instead of four years for claiming a deduction of their profits, as a one time interim relief to the housing and real estate sector. Norms for built-up area of shops and other commercial establishments in housing projects to be relaxed to enable basic facilities for their residents.

! Limits for turnover over which accounts need to be audited enhanced to Rs. 60 lakh for businesses and to Rs. 15 lakh for professions.

! Limit of turnover for the purpose of presumptive taxation of small businesses enhanced to Rs. 60 lakh.

! If tax has been deducted on payment by way of any expense and is paid before the due date of filing the return, such expenditure to be allowed for deduction. Interest charged on tax deducted but not deposited by the specified date to be increased from 12 per cent to 18 per cent per annum.

! To facilitate the conversion of small companies into Limited Liability Partnerships, transfer of assets as a result of such conversion not to be subject to capital gains tax.

! “The advancement of any other object of general public utility” to be considered as “charitable purpose” even if it involves carrying on of any activity in the nature of trade, commerce or business provided that the receipts from such activities do not exceed Rs.10 lakh in the year .

! Proposals on direct taxes estimated to result in a revenue loss of Rs. 26,000 crore for the year.