Major Changes Proposed in Direct Taxes Code Bill

by Anand Lakhotia 31. August 2009 08:56

                                       Income Tax Act, 1961                                                 Direct Tax Code Bill, 2009 (w.e.f 1.4.2011)        


At present there are two legislation i.e. Income Tax Act, 1961 and Wealth Tax Act, 1957.

Single code for Income Tax Act and Wealth Tax Act. The code consists of 285 sections.


There are three kind of Residential status i.e ‘Resident’, ‘Non Resident’ and ‘Resident but not Ordinarily Resident’.

Residential status of “Resident but not ordinarily resident” has been done away with.


There are ‘previous year’ and ‘assessment year’.

To eliminate confusion only ‘Financial Year’ will prevail.


Date of filing of tax return 31st July for non-business non-corporate assessee and 30th Sept for others.

Date of filing of tax return preponed to 30th June for non-business non-corporate assessee and 31st Aug for others


Individual tax rates in Income Tax Law (ITL) are as follows

Individual tax rates proposed in Direct tax code (DTC).



from Rs.160000 to Rs.300000

from Rs.160000 to Rs.1000000



from Rs.300001 to Rs.500000

from Rs.1000001 to Rs.2500000



from Rs.500001 and above

from Rs.2500001 and above


The corporate tax rate of domestic company is 30% and for foreign company, it is 40%. Business losses can be carry forward for 8 yrs. Dividend distribution is at 15%.

The corporate tax rate of all companies reduced to 25%. Business losses can be carry forward for unlimited period. Dividend distribution tax remains at 15%.


Wealth tax rate is 1% above Rs.30 lacs. Definition of wealth includes some specific assets excluding investments in shares. It was applicable to all assessee.

Wealth tax rate reduced to 0.25% above Rs.50 crore except for private discretionary trust, for which no threshold limit will be available. Definition of wealth has been expanded to include all assets, including investments. Further corporate assesses have been relieved from wealth tax.


MAT @ 15% is levied on ‘Book Profit’. Further MAT tax credit is allowed to be carried forward up to ten assessment year.

Basis for levy of MAT is 2% on gross assets. Carry forward of such MAT tax credit has been denied.



There is no such provision for to declare an arrangement as impermissible.

General Anti-Avoidance Rule to introduce to empower the Commissioner of Income Tax (CIT) to declare an arrangement i.e round-tripping, transaction through an intermediaries, self-canceling transaction etc as impermissible if the same has been entered into with the objective of obtaining tax benefit and which lacks commercial substance. Such arrangement can be invoked by CIT.


Tax incentives were based on location or on export turnover upto a specified period. Further capital investment were not allowed to amortized.

Export and Area/profit based exemption to be discontinued without affecting currently enjoying such incentive. Under the DTC, all capital investment and revenue expenditure (except land, goodwill and financial instruments) allowed to be amortized indefinitely and the period of such amortization will be called as ‘Tax Holiday’.


Income from Salary includes all perquisites such as house rent, leave travel assistance, children education allowances, encashment of unavailed earned leave on retirement, medical reimbursement and free/concessional medical treatment paid/provided etc is exempt up to a certain limit.

All such exemption withdrawn.


As per section 80C certain investment/savings upto Rs. 1 lac were deductible from taxable income.

Exempt-Exempt-Taxation (EET) method of taxation of savings/investment, will be applied on new contribution after commencement of the code. Limit for investment raised to Rs.300000 p.a. However deduction on investment in tax-saving mutual funds and fixed deposits have been abolished.


Self-occupied house property whose gross rent is taken as NIL, used to get deduction of interest on loan. Deduction for repair based on annual value in case of rented house property is 30%.

Self-occupied house property whose gross rent is taken as NIL, will not get deduction of interest on loan. Deduction for repair on annual value in case of rented house property is proposed to reduce to 20%.


Short term capital gain which attracts STT is taxed at 15%, Short Term Capital Gain which does not attract STT attract normal rate of tax. Long Term Capital Gain, which attracts STT, is exempt from Tax. Long Term Capital Gain which does not attract STT is subject to a tax rate @ 10% without indexation or 20% with indexation. Unabsorbed capital loss allowed to be carried forward up to 8 assessment years.

Since STT proposed to abolish, short term and Long term capital gain will form part of income, therefore all capital gain on transaction of equity shares/unit will attract normal tax. However indexation benefit of long-term capital gain will remain. Unabsorbed capital loss will be allowed to be carried forward indefinitely.


As per Income Tax Act, 1961 the assessing officer is never required to forward a draft order of assessment. Maximum amount of penalty is 300% of the amount of tax, but the same AO can waive the penalty. Appeal can be filed before ITAT against an order passed by the CIT directing revision of assessment. The appeal against ITAT order is eligible to be filed in the High Court.

The assessing officer is required to forward a draft of the proposed order of assessment in case the variation to the returned income is in excess of prescribed limit. Maximum penalty for willful under-reporting of tax can be 200% of tax but no income tax authority shall have the power to waive penalties. No appeal shall lie to the ITAT against an order passed by the CIT directing revision of assessment. The appeal against ITAT order lies with National Tax Tribunal and not High Court.


There is no such provision for upfront determination of the arm’s length pricing or pricing methodology.

Transfer Pricing matter will be well settled under proposed Advance Pricing Agreement (APA), under which an agreement between the taxpayer and the tax authorities for the upfront determination of the arm’s length pricing/pricing methodology of an international transaction will be made but shall not be effective for more than five consecutive years.


As per Income Tax Act, 1961 there is no such provision.

Every business will constitute a separate source and will be computed separately.


As per Income Tax Act, 1961 loss on Sale of business capital assets will be treated as Short term capital loss and will be allowed to be carried forward up to 8 eight assessment year.

As a disincentive to asset stripping and loss manipulation, the loss on sale of business capital assets will be treated as intangible asset and depreciation will be allowed at the same rates applicable to the relevant block of assets, therefore allowing a fraction of the loss every year.


There is Provision of choice between Income Tax Act and Double Taxation Avoidance Agreement; whichever is beneficial to the assessee. 

The code states that neither a Double Taxation Avoidance Agreement (DTAA) nor the code shall have a preferential status by reason of its being a DTAA or law. However in case of a conflict between the code and DTAA, the one that is later in point of time shall prevail.


Presumptive tax system wherein assuming 8% of turnover as taxable profit were available to retail business having turnover upto Rs.40 lakhs.

The limit of turnover for such presumptive tax system for retail business is raised to turnover upto Rs.100 lakhs.


Carry forward and set-off of losses of unlisted companies in the hands of amalgamated company will lapse with change in shareholding of 50% or more.

Such carry forward and set-off of losses will not lapse even with change in shareholding of 50% or more.


Income Tax

10 Rules for Investors

by Dhiraj Chawla 14. August 2009 09:11

10 Rules for Investors

By Bob Farell, Source :

*               Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.


*               Excesses in one direction will lead to an excess in the opposite direction

Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.


*               There are no new eras - excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it - human nature - is never different.


*               Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.


*               The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.


*               Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”





*               Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.


*               Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound - the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.


*               When all the experts and forecasts agree - something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.


*               Bull markets are more fun than bear markets

Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.




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