Most of you know that our tax system is going to replaced by Direct Tax Code (DTC), sooner or later. I just tried to understand what it means to the common man and the others and im sharing the details to my understanding level. First of all, I want to make it clear that, DTC is not another amendment for the existing taxation system, but it is completely new one. In simple words, DTC is going to replace of Income Tax Act, 1961. In other way, most of the auditors’ knowledge will get outdated soon, good news, right?

Though it had planned to introduce with the accounting year 2011-12, it had postponed to the 2013-14 due to delay caused by the working committee on it, at least they said so. Well, before entering into what it contains, I just want to discuss the need for new taxation system. 


Need for DTC:

The basic idea is very simple, it is very difficult to understand the current taxation system and it has many loopholes that can be exploited by the biggies (I mean, the corporates or HNI or somebody else who can afford an auditor to exploit). In Pranab Mukarjee’s words, “the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, simplify the language and lower tax litigations”, while submitting the draft. The analysts saying that those can be achievable by making some adjustments to the proposed DTC.

To say, the existing taxation system encourages dishonesty, I mean, non-disclosure of income by way of lower tax. Did you ever observe that the basic pay in any software industry is very less when compared to any government job, though the final package is far higher. This is one of the techniques used by the firms to reduce the tax burdens. To avoid such complications and to increase the honesty in disclosing the things, DTC has proposed. 


Major changes:

Individuals and salaried employees are going to be benefiting the most by the proposed taxation system. According to proposed draft, the taxation limits are,

No tax up to 1.8 L annual income

10% tax on 1.8L-10L annual income

20% tax on 10L-25L annual income and 30% for >25L annual income.

However, they are considering the changes in the slabs. The changes are,

No tax up to 3L annual income,

10% tax on 3L-10L annual income,

20% on 10L-20L annual income and 30% >20L annual income.

 Apart from these slabs they are suggesting some path breaking amendments including linking tax slabs to consumer price indexes to allow an automatic adjustments of rates. It proposed that there can be income tax savings up to 3L against 1L under 80C of the IT act. One more major issue with DTC is the tax on withdrawal of money. It means, if you withdraw your life savings at the age of 60, you need to pay tax on the amount withdrawn, irrespective of how you’ve saved. But in the Tax Code it is unclear if the employee’s contribution to PF and PPF will be taxed at the time of withdrawal or not.

The threshold limit for wealth tax will be raised to 50 crore against 30L in and tax rate will be reduced to 0.25 from 1 pc, seems stupid right. Here the catch is, to expand the scope of taxation, it included the financial assets like shares, corporate bonds etc.

The corporate tax has reduced to 25pc from 30pc, which will be major relief to the corporate world. But it proposes to do away with many tax exemptions that help lowering taxes. For example, there will be no financial incentives for any company if it has started a plant in backward area.

Though it has many implications to the different sectors, I don’t want to discuss all those as they article will go on forever. If you want know implications on any particular industry or sector, just reply to this article, I’ll try to  help you.. 

I can say after going through all the things they’ve proposed, the DTC is aimed to curb up the black money in the market. And it seems with the proposed system it can be possible to bring back the black money in to the system. Lets hope for the best out of it…