DEPARTMENT OF BUSSINESS ADMINISTRATION UNIVERSITY OF LUCKNOW

TERMPAPER ON TAX SYSTEM REFORM IN INDIA (Corporate Taxation)

Submitted To: Dr. Mohd Anees Submitted By: Adison Growar Satye MBA(finance) Sem-III Batch- 2011-2013

Acknowledgement
I take this opportunity to convey our sincere thanks and gratitude to all those who have directly or indirectly Helped and contributed towards the completion of this project. First and foremost, we would like to thank Dr. Mohd Anees for his constant guidance and support throughout this project. During the project, I realized that the degree of relevance of the learning being imparted in the class is very high. The learning enabled us to get a better understanding of the nitty-gritty of the subject which I studied. I would also like to thank my batch mates for the discussions that I had with them. All these have resulted in the enrichment of my knowledge and their inputs have helped us to incorporate relevant issues into my project.

TABLE OF CONTENT
Topic Page No.
Introduction....1 Direct Taxes Code..2 Why India Need Direct Tax Code..3 Impact Of Direct Tax Code.....4 Goods and Services Tax...5 Feasible Design of GST for India6 Conclusion7 Bibliography..........8

INTRODUCTION
Public administration in India during the latter half of the nineteenth centurysaw large shifts. In July 1860, James Wilson, the first Finance Member of the Governor-General-in-Council, quoted thus from the authority of Manu while introducing the act for levying income tax in the country. In 1919, with the introduction of the federal structure through Diarchy, taxes on income and some other taxes were made a central subject. In 1922, a paradigm shift occurred with the enactment of a new Income Tax Act that led to the setting up of a comprehensive taxation system with its own administrative machinery. In 1924, a Central Board of Revenue was created to administer central taxes. Indias tax system is based on the assignment of separate taxation rights to the Parliament in the Centre and to the legislatures in the states. These taxation powers are contained in List Ithe Union List and List IIthe State List of the Seventh Schedule to the Constitution of India, read with the relevant articles that provide the substantive power to levy and collect taxes. The evolution of the tax system over the last 60 years reflects the changes in Indias development strategy, tax legislation, the institutional structure of tax administration and the role of information technology. The subject of my presentation before you this evening will attempt to trace the initiatives for tax reform in India over the last decade. The major direct taxes levied by the Centre are tax on personal and corporate income excluding tax on agricultural income for which the authority to levy tax is with the statesand wealth tax. The indirect taxes levied and collected by the Centre are Central Excise Duty, customs duty and service tax. A fixed proportion of the taxes collected by the Centre devolves to the states, based on the recommendations of the Central Finance Commission. Taxation has been an important component of the central governments policy on macro-economic management, especially economic growth and its distribution. The tax policy has also been reviewed and guided at different stages by the reports of expert committees on tax reform instituted by the Government of India. These reports are a useful guide to the challenges faced by the countrys tax system and the responses to them over the last six decades.

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Direct Taxes Code

The Direct Tax Policy has been used to attempt to encourage savings and investment, reduce inequalities of income and wealth, and promote investment in underdeveloped regions and in specific priority sectors. DTC is proposed to remove most of the categories of exempted income. Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits. The Parliamentary panel on Direct Taxes Code in its report tabled in LokSabha today has suggested raising the income tax exemption limit to Rs 3 lakhs. The report of Standing Committee on Finance, which scrutinized the Direct Taxes Code (DTC) Bill, will pave the way for discussions and adoption of DTC by Parliament. DTC will replace the Income Tax Act, 1961. The Standing Committee also suggested that 10% tax will be levied on taxable income between Rs 3-10 lakhs, 20% between Rs 10-20 lakhs and 30% on over Rs 20 lakhs. At present, 10% tax is levied on income between Rs 1.8-Rs 5 lakhs, 20% on income between Rs 5-8 lakh and 30% above Rs 8 lakhs. The DTC is to proposed income tax exemption limit at Rs 2 lakhs, 10% tax for income between Rs 2-5 lakhs, 20% for Rs 5-10 lakhs and 30% above Rs 10 lakhs. The proposed Direct Tax Code is a combination of major tax relief and removal of most tax-exempted benefits. It is expected to usher in a new tax regime of transparency and greater compliance.

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WHY INDIA NEED DIRECT TAX CODE

There are several reasons behind the need of DTC as follows: Provides stabilities in direct tax rates Increase tax to GDP ratio Corporate tax 30%(no surcharge and cess) Wealth tax cut off increased

DTC bill has had its share of criticism post its proposal which has eventually been the reason for delay in applicability of it. Direct Tax Code was first meant to be applicable from 1st April, 2012 will now finally apply from 1st April, 2013. The Direct Taxes Code Bill which was introduced in Parliament last year proposes to replace the 50-year old Income Tax Act. Our Finance Minister Mr. Pranab Mukherjee has given several statements in the current year assuring of DTC going on roll from the beginning of the financial year 2012-13. Before finalizing, the draft was put to several invited memoranda containing views/suggestions from various Individuals/Experts/institutions/Organizations interested in the bill.

Major Deductions applicable under Tax Incentives for an individual:

1. 2. 3. 4. 5. 6. 7. 8. Investments through PFRDA approved agencies (Max of 3 Lakhs) Payment of tuition fees Medical treatment Health insurance Donation Interest on loan taken for higher education Maintenance of a disabled dependant Interest income on Govt. bonds

House Property:
1. No deduction for Housing loan repayment of Self-Occupying property. This includes interest as well as part of principal. 2. Only Let out properties are considered and the Gross rent and specified deductions are taken with simple calculations

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IMPACT OF DIRECT TAX CODE:

DTC has redefined the Tax Slabs which brought smile on the face of salaried class as Income tax exemption limit is now proposed at Rs2 lakhs per annum, up from Rs1.6 lakh. Following tax slab has been applied under the new direct tax regime.

Impact on Insurance:
The DTC will have a significant impact on insurance as it applied to existing policies too. According to the code, any amount you receive at maturity from an insurance policy (including bonus) will be taxed. However, this rule will not apply to policies where premium paid in a year is less than five percent of sum assured each year and the policy is kept till maturity. The DTC aims to nudge policyholders to take a long term view on investments. To be eligible for tax deduction under DTC, a policy should have a life cover of at least 20 times the annual premium.

Impact on Income Inequalities:

Greater tax revenue will be more utilized for uplifting poor provided lesser corruption & more education is there; hence will have negative effect on income inequalities.

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Goods and Services Tax:

The Goods and Services Tax (GST) will mark a very significant improvement over the existing system, as it will integrate the tax base across the value chain of supply of both goods and services in the economy. Not only will this enable the taxation of each stage of the value chain at a uniform rate, it will also enable the seamless pass-through of input tax credit so that the incidence is effectively borne at the stage of final consumption of goods and services. It is well accepted that such a tax system minimizes distortions in economic choice. The Empowered Committee of State Finance Ministers released its First Discussion Paper on the Goods and Services Tax in November 2009. This spelt out the features of the proposed GST and has formed the basis for discussion between the Centre and the states so far. The paper envisages a destination-based, dual GST with the Centre and the states simultaneously levying it on a common base. This tax will replace several indirect taxes currently levied by the Centre and the states, including Central Excise Duty, service tax, state VAT and Central Sales Tax. Input credit would flow seamlessly across the value chain in both the central and state components but not across these two taxes. Exports would be zero-rated. It will apply to all services barring a few to be specified. A common threshold exemption will apply to both the central and state components, and dealers with a turnover below it will be exempt from tax. An Integrated GST (IGST) would be levied on the inter-state supply of goods and services. This tax will be collected by the Centre so that the credit chain is not disrupted. Accounts will be settled periodically between the Centre and the states to ensure that the state GST component is transferred to the destination state where the goods or services are eventually consumed.

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Feasible Design of GST for India:

a state VAT transfers the entire power to tax to the provincial governments. The revenue balance in such a regime can be ensured by a reduction in the transfers to the provinces from the union government. However, there are two major difficulties in implementing such a regime. First, since one of the purposes of central transfers is to induce some redistribution of resources, a reduction in the transfers can reduce the leverage the union government has in effecting such regional redistribution. Second, since the strength of the Indian economy would lie in its forging a single common market, form of treatment and monitoring of interstate transactions would be critical in determining the success of such a regime. While destination principle is considered appropriate, success of a pure zero-rating mechanism is contingent on a reliable and timely information system to record and monitor inter-state transactions. It is possible to find solutions to the second problem.

some guidelines for dealing with services of such a nature:

1 .Passenger transport services are taxed according to the distances covered. Example: the price of a bus ticket for a trip from Poland to Austria through Germany will include Polish, German and Austrian VAT, proportionate to the distances travelled in each of these countries. 2 .The intra-Community transport of goods is taxed at the place of departure. If the customer is identified for VAT purposes in another Member State and provides the supplier with this VAT identification number, the service is however taxed in the Member State where the customer is identified. Example: When goods are transported by a French company from Germany to France, German VAT must be paid on the transport. If this service is rendered to a customer who is identified for VAT in the Netherlands, Dutch VAT will have to be paid, and by the customer himself. 3 .The ancillary services to an intra-Community transport of goods, such as the loading and unloading services, are taxable in the Member State where those services are physically carried out. If rendered to a customer who is identified for VAT purposes in another Member State and he provides the supplier with this VAT identification number of that other Member State, the service is instead taxed in the Member State where the customer is identified.

Apart from taking the reform process further, the two initiativesthe introduction of the Direct Taxes Code and the Goods and Services Taxpresent a great opportunity for synergizing the tax efforts of the central and state governments. Page -6

Conclusion
These are more in the nature of overarching themes that straddle initiatives in both the tax systems. Both these aspects are inextricably intertwined. The first is the definitive transformation in the basic role of our tax administrationfrom being an enforcement-driven system, it is being to transformed into a system driven by a facilitation motive, imbued with the spirit of providing service to the taxpayer community. The second aspect, seemingly contradictory but equally critical to the integrity of the reform effort, is to remain steadfast and firm in weeding out exemptions or incentives that are distortionary and have caused shrinkage in the tax base. The governments unwillingness to allow any further extension in the validity of the Duty Entitlement Passbook (DEPB) Scheme, beyond the three-month period necessary to work out the duty drawback terms, is also a measure aimed at protecting the tax base. As they say, the road to excellence is always under construction.

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Bibliography
http://www.ey.com/IN/en/Services/Tax/Direct-Tax-Code http://www.thehindubusinessline.com http://www.business-standard.com/india/news/dtc http://en.wikipedia.org/wiki/Direct_Taxes_Code www.icofp.org/asset/jan/impact_of_direct_tax_code

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