Small Scale industries are an important and crucial segment of the Indian industry sector.

The Indian Government has accorded high priority to this sector as it plays a vital role in balanced and sustainable economic growth. In the current context of rapid economic development, one must view taxation benefits in relation to the need for increasing investment in small-scale and ancillary industry. Here are a few key proposals of the Direct Tax Code, 2010, (DTC). Income Expense Model In terms of the DTC, besides the presumptive and special taxation regimes for specified businesses, the profits from all other business will be equal to the gross earnings from the business minus the amount of allowable deduction. Gross earnings from the business All accruals and receipts from the business, besides those derived from business assets; make up the gross earnings of the business of the tax payer. For instance, profit on sale of an undertaking under a slum sale; advance or security deposit on a long term lease of business assets; or reimbursement of any expenditure etc. Allowable deduction Generally, all operating expenses incurred essentially for all business purposes are deductible from gross total income. The requisite for deductibility of expenses is that expenses must be: wholly and exclusively incurred for business purposes; and incurred or paid during the previous year and supported by pertinent paper and records. Expenses of a personal and capital nature, remunerations payable to a non working participant, any unascertained liabilities etc. are not deductible. Expenditure incurred by way of land revenue, local rates or municipal taxes, sales tax duty, cess, fees, bonus or commission to employees, leave encashment id deductible in the financial year or by the due date of filing the return of tax bases

for that financial year. Otherwise it will be allowed in the financial year in which it is actually paid. Expenditure incurred by way of interest on loan or borrowing from permitted financial institutions is deductible in the year of accrual or payment, whichever is later. Depreciation business capital assets (including acquired by the lessee under financial lease) is calculated on the declining balance method and is based on the block of assets. The block of assets concept suggests aggregation of all assets with the same depreciation rate into a common block for calculation of depreciation. Depreciation is computed at varying rates as prescribed and in the year of purchase, is available for the full year if an asset is used for more than 180 days. In other cases, depreciation is allowed a half the normal rates. Besides depreciation, a manufacturer or producer of an article of thing is allowed initial depreciation on the new machinery and plant (except office appliances and assets not installed in the office premises, guest house, or any other residential premises) at the rate of 20% of the original cost of the asset for the full year if the asset is used for more than 180 days. In other cases, initial depreciation is allowed at half the normal rates. Deferred revenue expenditure by ay of non-compete fee, premium paid on lease or rental asset, amount paid to an employee under voluntary retirement scheme, expenses incurred by an Indian company wholly and exclusively, preliminary expenditure, etc., will be allowed deduction in six financial years starting the year of actual payment, or year of business reorganisation, or year of start of business, extension of business or set up of new business, as the case may be. Tax Holidays The DTC has granted, though restrictive, the tax holidays to all Special Economic Zone units for the unexpired period out of 15 years, including new such unit that start operations on or before 31 March 2014. The tax holiday will be computed on

the lines discussed in the above model with two exceptions, namely; capital expenditure and expenditure incurred prior to the start of the business. Unfortunately there is no exception for SEZ unites from MAT. Absence of MAT exemption under DTC would mean that SEZ unites would need to pay a minimum tax of 20% on book profits. Business reorganisation It covers transactions between two or more residents involved in amalgamation or de-merger. Reorganisation, ordinarily being tax neutral is subject to test of continuity of business, and other conditions are necessary to prevent abuse of the Code. The successor of business will pass the test of community business if he 1) Continuously holds at least 75% of the book value of the fixed assets of the predecessor acquired through business organisation for at least five financial years immediately succeeding the year in which the business reorganisation takes place 2) Continues the business of the predecessor for at least five financial years immediately succeeding the financial year in which the business reorganisation takes place, and 3) Meets other such conditions as may be prescribed o ensure the revival of the business of the predecessor or to ensure that the business reorganisation is for genuine business purpose. In the case of de-merger, the resulting company must issue only its equity shares to the shareholders of the de-merged company on a proportionate basis to avail of tax exemption and benefit of carry forward of unabsorbed tax losses. -Naresh Makhijani

Direct Tax vs Indirect Tax

Direct Tax You pay it on your income and property. 1. Income Tax 2. Corporate Tax 3. Wealth Tax ^ Direct Tax Code (DTC) seeks to consolidate them all in one book. Indirect Tax You pay it on the goods and services purchased. 1. 2. 3. 4. 5. Sales Tax VAT Customs duty Excise Duty Service Tax etc

^ Goods and services Tax (GST) seeks to combine them all in one book. Redistribution of wealth

Direct Tax follows the principle of redistribution of wealth in short it means: Tax the rich and use the money for the welfare of poors. You tax middle-class and rich-class, use that money to provide subsidized wheat for poor people = wealth is redistributed.

Why do we need Direct Tax Code?

(just covering the brief highlights without getting into details) All In ONE code

Right now weve different Codes for different taxes for ex. Under DTC, all the direct taxes will be brought under a single Code Simplify the language for aam-aadmi

So that even non-experts can interpretate the rules on their own, and no need to consult a tax-lawyer or Chartered Accountant every now and then. Provide stability in direct tax rates

At present, the income tax slabs and rate are changed in every budget, thus keep keeping people on their toes. Therefore, People have to keep making rounds here and there to tax-consultants and insurance agents to save themselves from higher-tax slabs, every year. DTC will provide stable brackets and rates for a longer time, (ofcourse they can be amended from time to time.) Increase Tax to GDP ratio.

It means the ratio of tax collection against the national gross domestic product (GDP). Right Governments tax collection is not optimum, because people get so many tax-exemptions. Under DTC, Men and women are treated same. Women would cease to enjoy income-tax exemptions Only senior citizens will get extra relief with tax exemption Tax exemption on LTA (leave travel allowance) is abolished. DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), House Loan principal repayment etc. Thus, Governments tax collection would increase, because there are less exemptions available. Plus, Government needs truckload of money for their inefficient schemes such as MNREGA and Food security bill, otherwise problem of fiscal deficit. In that sense too, DTC is very important for them.

Rates under DTC:

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh Other provisions of DTC

[Not covering everything in detail]

Tax exemption on Education loan is continuing. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished. Wealthtax cutoff increased

Right now youve to pay additional tax if you own farmhouses, shopping malls, jewellery, vehicles etc wealth above Rs.30 lakh. Under DTC, youve to pay wealth tax only if you own assets worth to Rs 50 core or above. Corporate tax rate 30% (no surcharge or cess)

[Earlier they had to pay educational cess.] means now theyve to pay less because there is no cess! Confused about what is Cess Then click me! Combine this with Stability point explained above, and Foreign players would feel attracted to invest in India.

Highlights of the Direct Taxes Code bill

Common threshold Income Tax exemption limit for men and women proposed at Rs. 2 lakh per annum (proposed), up from Rs. 1.8 lakh

10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh

Tax burden at highest level will come down by Rs. 41,040 annually Proposal to raise tax exemption for senior citizens to Rs. 2.5 lakh from Rs. 2.4 lakh currently.(NOTE:- Union budget 2011-12 already has proposed it.)

Corporate Tax to remain at 30 per cent but without surcharge and cess. MAT to be 20 per cent of book profit, up from 18.5 per cent. Proposal to levy dividend distribution tax at 15 per cent. Exemption for investment in approved funds and insurance schemes proposed at Rs. 1.5 lakh annually, against Rs. 1.2 lakh currently

Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act.

Once enacted, DTC will replace archaic Income Tax Act. However, many provisions in Income Tax Act will be a part of DTC as well. Mutual Funds/ULIP dropped from 80C deductions : Income from equityoriented mutual funds or ULIP shall be subject to tax @ 5%

Fringe benefits tax will be charged to the employee rather than the employer.

]Salient

features

DTC removes 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.

Only half of Short-term capital gains will be taxed Surcharge and education cess are abolished. For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.

Tax exemption on Education loan to continue. Tax exemption on LTA (leave travel allowance) is abolished. Taxation of Capital gains on listed securities held for more than a year will not be taxed. If held for less than a year, it will be taxed at 5%, 10% or 15%

Tax on dividends: Dividends will attract 5% tax. Under Sec 80C deduction of up to 1.5 lakh allowed

a) INR Rs.1 lakh on Pension, PF and Gratuity funds, b) Up to 50,000 for expenditure on tuition fees, pure life insurance premium and health cover

Medical reimbursement : Max limit for medical reimbursements has been increased to rupees 50,000 per year from current rupees 15,000 limit.