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The draft Indian Direct Taxes Code Bill 2009 was released on 12^th August 2009 and should become operational by 1^st April 2011. The Code has made a number of changes and alterations to its predecessor. 

It lays emphasis on simplicity of language and structure, combining income tax, dividend distribution tax and wealth tax into a single unified direct taxes system, in order to make it more ‘accessible’ to tax payers and therefore encourage better compliance.

 

The Code also attempts to simplify the division of ‘years’ (currently ‘assessment year’ and ‘previous year’) and replace them with the single concept of ‘financial year’. Despite the changes however, the liability to pay tax will remain the same. There have been numerous changes within the code, the most relevant in the following two areas:

The Code wishes to enhance the ‘tax exempt slabs’ of income for individuals and in doing so it proposes an exemption of tax on income up to Rs.160,000. The rate between Rs.160,000 to Rs.1,000,000 will be 10% and for income above Rs.1,000,000 and up to Rs.2,500,000 the income tax rate will be 20%. For any income over Rs. 2,500,000 the tax rate will be 30%. The tax exempt income limit for women will be Rs.190,000 and for senior citizens Rs. 240,000. 

 

Although the enhancement of tax exempt income slab will reduce the tax occurrence at one level, items such as value of rent-free accommodation and medical reimbursements will be included in salary income and taxed accordingly. Foreign companies will also be subject to an additional branch profit tax of 15%.

 

The Code exempts capital gains arising from the transfer of personal effects and agricultural land from income tax. Other changes worth note occur in Capital Gains include the distinction between long-term and short-term capital gains has been removed, Securities Transaction Tax is suggested to be abolished, and gains from listed securities and mutual funds are sought to be brought under the capital gains tax net.

 

Finally, the Code seeks to introduce the idea of advance pricing agreements. The tax payer and the tax authorities can agree on an arm’s length price for international transactions. These agreements can be entered into for a maximum period of five years.