Direct Tax Code version 2.0… (ICICI DIRECT)

The government of India has come out with a revised draft of the DirectTaxes Code (DTC) that proposes several changes over the first draft to dealwith some of the major concerns raised in the first draft. It is open forpublic comments till June 30,,2010. The proposed changes in the reviseddraft, its impact and our views are mentioned herein below.
􀂃 MAT to be calculated on book profits as compared to gross assetsThe revised draft suggests that book profits rather than gross assets,as proposed in the first draft, should be used to calculate the minimumalternate tax (MAT). However, the tax rate as a percentage of the bookprofits has not been specified. Under the previous draft, it had beenproposed to calculate the MAT on gross assets (0.25% for banks and2% for all other companies). However, the revised draft also does notallow for carry forward of MAT paid.Our view: The revised provision is positive for companies that areeligible for MAT, as the calculation of MAT on gross assets, asprovided in the first draft, could have led loss-making companies,newly set up infrastructure companies and companies undergoingmajor expansions to pay very high taxes.
􀂃 Tax exemption on withdrawal for select saving schemesUnder the first draft, it was proposed that withdrawals towards savingschemes would be subject to taxation at the applicable marginal rateof tax (EET taxation). The revised draft now proposes complete taxexemption for government provident funds (GPF), public providentfunds (PPF), recognised provident funds (RPF), pension schemesadministered by Pension Fund Regulatory and Development Authority,approved pure life insurance and annuity schemes.Our view: The provisions are marginally positive for individualtaxpayers. However, the tax exemption on withdrawals applicableonly on pure life insurance schemes is negative as unit linkedinsurance plans (ULIPS) would be subjected to tax on withdrawal.Also, it will be negative for mutual funds as withdrawal from equitylinked savings schemes would be subject to tax post implementationof DTC. The new pension scheme will, thus, have an edge over theother market related savings instruments as it will be the onlyinstrument providing equity exposure (50%) and have thewithdrawals exempted.

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