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INCOME TAX - DRAFT DIRECT TAX CODE 2009

MEMBER'S COMMENTS

Tax code bitter for government employees and butter for the rich - Part II

Shri Govardhana Rao

I propose the following changes to the Direct Taxes Code Bill, 2009.

Section 6: The following income shall be deemed to be received in the financial year:

(a) any contribution made by the employer, in the financial year, to the account of an employee with any permitted savings intermediary referred to in sub-section (2) of section 66.

(b) any contribution made by the employer to any fund, other than an approved fund, or the interest thereon.

This section itself has to be deleted, since it is nothing but taxing the contribution of employer to the Contributory Provident Fund which is nothing but provident of the employee. In good faith this should not be included in Income.

Deductions from gross salary:

Section 22 (1): The deductions for the purposes of section 20 shall be the following:

(a) any sum paid on account of a tax on employment within the meaning of clause (2) of Article 276 of the Constitution;

(b) the amount received from his employer for journey by the person between his residence and office or any other place of work, to the extent prescribed;

(c) any such special allowance or benefit specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose;

(d) the amount due or received, directly or indirectly, from his employer, in connection with his voluntary retirement or termination of service or voluntary separation under any scheme framed for this purpose in accordance with such guidelines as may be prescribed;

(e) the amount of any gratuity received from one or more of his employers, subject to limits as may be prescribed, if the amount is received -

(i) on his retirement, or on his becoming incapacitated prior to such retirement, or on termination of his employment; or

(ii) by the spouse, children or dependants on the death of the person.

(f) the amount of any death-cum-retirement gratuity received under the Payment of Gratuity Act, 1972 or from the Central Government, State Government, local authority or any public sector company;

(g) the amount received in commutation of pension under a scheme of his employer, framed in accordance with the prescribed rules, to the extent of -

(i) one-third of the pension, in a case where he receives any gratuity; and

(ii) one-half of such pension, in any other case; and

(h) the amount of any pension received by an individual who has been in the service of the Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award as the Central Government may, by notification in the Official Gazette, specify in this behalf.

(2) The deduction under clauses (d) to (g) of sub-section (1) shall be allowed if the amounts referred to therein is paid to, or deposited in, a Retirement Benefits Account maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government in this behalf.

Section 22 (2) has to be deleted since it implies that tax will be levied on:

1. VRS Emoluments,
2. The amount of any gratuity,
3. The amount of any death-cum-retirement gratuity,
4. The amount received in commutation of pension,
if the amounts referred to therein is paid to, or not deposited in, a Retirement Benefits Account.

Section 22 (1) has to be amended in order to include following deductions without any condition.

o Value of LTC.
o Amount of encashment of un-availed Earned Leave.
o Medical Reimbursement.
o Value of concessional Medical Treatment paid for or provided by the employers.
o HRA as per salary or actual paid whichever is higher without any limitation.

Capital gains:

Section 44 (1): The income from the transfer of any investment asset shall be computed under the head “Capital gains”.

(2) The income under the head “Capital gains” shall, without prejudice to the generality of the foregoing provisions, include the following,-

(a) income from the transfer referred to in clause (c) or clause (d) of sub-section (1) of section 45, if,-

(i) the parent company, or its nominee, ceases to hold the whole of the share capital of the subsidiary company; or

(ii) the investment asset is converted by the transferee into, or treated by it as, its business trading asset;

(b) the income from the transfer referred to in clause (e) of section 45, if any of the conditions laid down in clause (16) or clause (81), as the case may be, of section 284 is not complied with;

(c) the amount of withdrawal referred to in sub-section (4) of section 53 to the extent determined in accordance with the formula -
A X B
C
Where A = amount of deduction claimed under section 53;
B = the amount withdrawn from the account under the capital gains deposit scheme, which is not utilised for the purposes of purchase or construction of the new investment asset within one month from the end of the month in which the amount is withdrawn;
C = the net consideration as a result of the transfer of original investment asset; and

(d) the amount of deposit referred to in sub-section (5) of section 53 to the extent determined in accordance with the formula -
A X B
C
Where A = amount of deduction claimed under section 53;
B = the balance in the account referred to in sub-section (5) of section 53, of the assessee, as on the first day of the financial year immediately following the three financial years from the end of the financial year in which the transfer of the original investment asset referred to in that section is effected;
C = the net consideration as a result of the transfer of original investment asset.

This section needs to be amended in such a way that the income earned from Security whether shares or Mutual Fund units which were held for a period of more than one year should not be treated as capital gain & not taxed to Income Tax. This will encourage public in general and employees in particular to invest in Stock Market and reap the Benefits.

Gross residuary income:

Section 56 (1): The gross residuary income shall include all accruals, or receipts, in the nature of income, which do not form part of,-

(a) income from special sources; and

(b) income under any of the heads specified in items A to D of section 14.

(2) The gross residuary income shall, regardless of anything to the contrary contained in Part-B to Part-E of this Chapter and without prejudice to the generality of the provisions of sub-section (1), include the following, namely:-

(a) dividends, other than dividends in respect of which dividend distribution tax has been paid under section 99;

(b) interest, other than interest accrued to, or received by, permitted financial institutions;

(c) income from the activity of owning and maintaining horses for running in horse race;

(d) any amount received from his employees as contributions to any fund setup for their welfare, if the income is not included under the head "Income from business";

(e) income from machinery, plant or furniture belonging to the person and let on hire, if the income is not included under the head "Income from business";

(f) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy;

(g) any amount received under a Keyman insurance policy including the sum allocated by way of bonus on such policy, if such income is not included under the heads "Income from employment" or "Income from business";

(h) the aggregate of any moneys and the value of any specified property received, without consideration, by an individual or a Hindu undivided family;

(i) the amount of voluntary contribution received by a person, other than an individual or a Hindu undivided family, from any other person;

(j) any amount received, or retained, on account of settlement or breach of any contract, if not included under the head "Income from business";

(k) any payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, if -

(i) the payment or aggregate of payments is in respect of any expenditure referred to in clause (a) of sub-section (1) of section 57;

(ii) the expenditure is allowable as a deduction in any financial year;

(iii) the payment or aggregate of payments exceeds a sum of-

(A) thirty thousand rupees if the payment is made for carriage of goods by road; and

(B) twenty thousand rupees in any other case; and

(iv) it has not been incurred in such cases and under such circumstances, as may be prescribed;

(l) any amount found credited in the books of an person maintained for the financial year, if -

(i) the person offers no explanation about the nature and source thereof; or

(ii) the person offers an explanation but fails to substantiate the explanation; or

(iii) the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory;

(m) the value of any investment made by the person in the financial year to the extent for which,-

(i) the person offers no explanation about the nature and source of the investments; or

(ii) the person offers an explanation but fails to substantiate the explanation; or

(iii) the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory;

(n) the value of any money, bullion, jewellery or other valuable article owned by the person to the extent for which,-

(i) the person offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article; or

(ii) the person offers an explanation but fails to substantiate the explanation; or

(iii) the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory;

(o) the amount of any expenditure incurred by the person in the financial year, if-

(i) the person offers no explanation about the source of such expenditure or part thereof; or

(ii) the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory;

(p) any amount received as loan or deposit, otherwise than by an account payee cheque or account payee bank draft, from any person, if the aggregate amount of such loan or deposit exceeds twenty thousand rupees;

(q) any repayment of loan or deposit, otherwise than by an account payee cheque or account payee bank draft, if the aggregate amount, including interest, due to the payee, either in his own name or jointly with any other person, on the date of such repayment exceeds twenty thousand rupees;

(r) any amount received, or withdrawn, under any circumstances, from any account maintained with any permitted savings intermediaries, referred to in sub-section (2) of section 66, representing,-

(i) the principal amount of the savings; or

(ii) interest, dividend, bonus, capital appreciation or any other form of return on the investment, by whatever name it may be called;

(s) any amount deemed to be the income under sub-section (6) of section 71.

(t) the value of the net assets, held by any person on the first day of the financial year in which the person ceases to be a non-profit organisation, determined in the prescribed manner.

(u) any consideration accrued, or received, in respect of transfer of any business asset, which is self-generated, if the consideration is not included under the head ‘income from business’;

(v) any amount accrued, or received, on account of the cessation, termination or forfeiture of any agreement entered by the person, if the amount is not included under the head ‘income from business’;

(w) any amount accrued, or received, as reimbursement of any expenditure incurred by the person, if the amount is not included under the head ‘income from business’;

(x) any amount received, or withdrawn, under any circumstances from the account maintained under the Capital Gains Savings Scheme representing the principal amount or any accretion thereto;

(y) any amount received, or withdrawn, under any circumstances from the Retirement Benefit Account referred to in sub-section (2) of section 22, representing the principal amount or any accretion thereto; and

(z) any amount accrued, or received, as advance, security deposit or otherwise, from the long term leasing or transfer of whole or part of, or any interest in, any investment asset.

The clauses (b) (d) (f) (r) (x) (y) to sub-section (2) to section 56 has to be deleted since the following items as Income from residuary sources will be taxed:

1. Interest, other than interest accrued to, or received by, permitted financial institutions;
2. Employees Contributory fund;
3. Life insurance policy Maturity Benefit;
4. Withdrawal from any account maintained with any permitted savings intermediaries including the principal amount of the savings, interest, dividend, bonus, capital appreciation or any other form of return on the investment, by whatever name it may be called;
5. Any amount received, or withdrawn, under any circumstances from the account maintained under the Capital Gains Savings Scheme representing the principal amount or any accretion thereto;
6. Any amount received, or withdrawn, under any circumstances from the Retirement Benefit Account referred to in sub-section (2) of section 22, representing the principal amount or any accretion thereto.

Deductions:

Section 57 (3): The amount of deduction referred to in clause (b) of sub-section (1) shall be the following -

(a) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, if -

(i) the premium payable for any of the years during the term of the policy does not exceed five per cent of the actual capital sum assured; and

(ii) the sum is received only upon completion of the original period of contract of the insurance or upon the death of the insured.

The section 57 (3) (a) has to be amended so that the limit contained therein that the premium payable for any of the years during the term of the policy does not exceed five per cent of the actual capital sum assured; and the sum is received only upon completion of the original period of contract of the insurance or upon the death of the insured is removed.

Section 57 (3) (b): The amount equal to thirty-three and one-third per cent of income or fifteen thousand rupees, whichever is less, in respect of family pension.

The section 57 (3) (b) has to be amended in order to increase the limit of Family Pension to at least Two Lakhs per Annum from Rs.15,000/- specified and the section 57 (3) (c) has to be amended in order to put no limit to the transaction from Rs.50,000/- specified.

Aggregation of income under the class ‘Income from Special Sources’:

Section 59 (1): The income from any special source referred to in Rule 3 of the First Schedule shall be the ‘current income from the special source’, for the financial year.

The section 59 (1) has to be amended in order to club the income under Sl. No. (4) (i) of table annexed to the Rule 3 of the First Schedule in the Income of person so that income by way of winnings from- (i) any lottery or crossword puzzle is taxed at normal rate & not at the enhanced rate of 30% as per table annexed to the Rule 3 of the First Schedule. For the same reason the Sl. No. (4) (i) of the table annexed to Rule 3 of the First Schedule has to be deleted.
The reason for proposal of this amendment is that a layman may win lottery by way of luck or win a prize because of some competition like cross word or quiz. It is unwise to tax it at peak rate of 30%.

Deduction in respect of health insurance premia:

Section 69 (1): A person, being an individual or a Hindu undivided family, shall be allowed a deduction in respect of any sum actually paid during the financial year to effect, or to keep in force, an insurance on the health of any specified person.

(2) The amount of deduction under sub-section (1) shall not exceed in the aggregate -

(a) twenty thousand rupees, if the amount is paid in respect of a specified person, who is a senior citizen; and

(b) fifteen thousand rupees, in any other case.

The section 69 (2) (b) has to be amended so that the limit is increased from Rs.15,000/- to at least Rs.30,000/. This is because the cost of medical treatment has increased and one has to insure for a higher sum in order to get proper treatment in case of need.
The section 69 (2) (a) has to be amended so that the limit is increased from Rs.20,000/- to at least Rs.50,000/. This is because the cost of medical treatment has increased and one has to Insure for a higher sum in order to get proper treatment in case of need.

Also if the Govt. really want to bring EET regime, than the maximum income tax that can be levied on:
1. Amount of encashment of un-availed Earned Leave,
2. Commuted pension,
3. Retirement gratuity,
4. VRS emoluments,
5. Matured value of GPF, LIC, PLI ULIP,
should not exceed the Wealth Tax rate of 0.25% because it is nothing but wealth for the unfortunate employee.

The documents DIRECT TAXES CODE BILL, 2009 and DISCUSSION PAPER can be downloaded by clicking the links below:

1. Direct Taxes Code Bill, 2009
2. Discussion Paper

I Request everybody to send their comments/protest directly to the Ministry of Finance or to referencer (login required - for members only) so that final outcome will be in our favour.

Shri Govardhana Rao, Superintendent of Customs, Bangalore (via e-mail) - 03-09-2009 (The author can be contacted at parakirao@gmail.com)

The views expressed in this article are those of the author and are not intended to represent the views of www.referencer.in

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