Tax code bill to retain most draft proposals

The government may not introduce too many changes in the Bill on the Direct Taxes Code, except in a few contentious areas such as taxation of special economic zones, capital gains and unit-linked insurance plans. The Bill is likely to be placed in Parliament towards the end of the ongoing monsoon session.

A major part of the Bill has been drafted by the Task Force on DTC. The drafted portions are being vetted by the law ministry so that it can be placed on the floor of the House before the session ends on August 27. Only a few issues are still pending, which are being discussed with Finance Minister Pranab Mukherjee.

"All the concerns were addressed in the second discussion paper. So, there won't be major changes in the DTC Bill which will be tabled in Parliament. In case of SEZs, capital gains, Ulips, and the rate of taxation on income, we are yet to arrive at a decision," a finance ministry official told Business Standard.

The proposals in the second discussion paper on Double Taxation Avoidance Agreement, concept of residence in case of a company incorporated outside India, and General Anti Avoidance Rules are unlikely to be changed in the DTC Bill.

Besides, proposals on the Minimum Alternate Tax, taxation of income from employment, retirement benefits and perquisites, taxation of income from house property, taxation of non-profit organisations and wealth tax may not see any major changes.

"A significant part of the Bill has been drafted and it is more or less what was proposed in the second discussion paper," confirmed another ministry official on condition of anonymity.

In the draft DTC, the finance ministry had proposed withdrawing exemptions on investment in SEZs after April 2011. Last month, the finance minister had said units which start functioning after the SEZ is developed would be allowed tax concessions for some more time beyond April 2011.

At present, units in SEZs enjoy 100 per cent tax exemption on their income for the first five years, 50 per cent in the next five years and another 50 per cent on re-invested profits in the following five years.

SEZ developers get 100 per cent tax exemption on profits for 10 years, which can be used in the first 15 years. Due to these tax sops, the finance ministry had to forgo revenue of Rs 5,266 crore (RS 52.66 billion) in 2009-10.

The DTC had also proposed to treat capital gains from stocks and equity funds as part of ordinary income. At present, no capital gains tax is paid on long-term gains. Income arising through sale and purchase of securities to foreign institutional investors was also proposed to be taxed under capital gains. This suggestion was opposed by FIIs because currently it is treated as business income of a foreign company.

Another widely opposed proposal of the draft DTC was to impose tax on unit-linked insurance plans. It had proposed to tax exempt provident fund, new pension system, approved pure life insurance products and annuity schemes at the withdrawal stage, but Ulips were kept out of this exemption.