Know about Direct Tax Code

THE CHANGE
The new Direct Taxes Code and the Goods and Services Tax, both of which are set to transform the direct and indirect tax structure.

THE INTENT
Both the reforms are aimed at improving compliance by simplifying the tax structure and lowering the tax rate. While the DTC seeks to remove the anomalies in the way we save tax, the GST intends to do away with the cascading impact of taxes on goods and services.

THE IMPACT
While the intent behind the DTC is laudable, the government seems to have lost the plot. There is a chasm between what the DTC was originally meant to be and what was eventually tabled in Parliament. The maze of exemptions will continue. The tax slabs are much lower than promised and the enhanced savings limit of Rs 3 lakh is a sham.

"(The intent) was to improve the efficiency of our tax system by eliminating distortions in the structure, introducing moderate levels of taxation and expanding the tax base." PRANAB MUKHERJEE Finance Minister

Even so, the DTC proposes to remove some of the problems that plague the existing income-tax rules. One of the most important changes relates to life insurance and will push people to buy policies for the right reasons. Most customers buy life insurance to save tax, not to cover themselves against risk. But the DTC says that tax benefits will be available only if an insurance policy offers a life cover of at least 20 times the annual premium.

The DTC has also harmonised the tax rates for various asset classes. While equities will continue to be pampered with exemption on long-term capital gains, the distinction between short- and long-term capital gains from other assets will be eliminated. This will remove the discrimination between asset classes.

Home owners too stand to benefit from the new tax regime. The DTC proposes to remove the presumptive tax on notional rental income from a vacant house. This should be a relief for those who own two or more residential properties but haven't rented them out.

Use of Saral II (ITR-1) Form The taxpayer can now use the two-page Saral II or ITR-1, instead of the 8-page ITR-2, even if his income includes rent from a house or tax-free capital gains.

They will no longer have to pay tax on income they haven't earned.

If the DTC proposes to cut your tax liability, the GST could bring down prices. Right now, service providers, manufacturers, dealers and retailers pay taxes levied by the Centre and state governments at every stage of the supply chain. This cascading effect of taxes pushes up the costs of products and services, which the consumer has to bear.

Under the GST regime, businesses will be allowed to set off the taxes they have paid on inputs. This refund will lower production costs and will, hopefully, result in lower prices. The deadline for rolling out these tax reforms has been extended. The GST will be effective from April 2011, while the DTC will be from April 2012.

Courtesy: Business Today