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CIVIL servants will see their perks being taxed on a par with private sector employees. Tax breaks on housing loans are proposed to be done away with. All savings schemes would come under EET, implying that they would face tax at the time of withdrawal. However, tax exemption would be available on the Public Provident Fund and other pension fund schemes on withdrawals of amounts accumulated up to March 31, 2011. Such a move would remove the tax disadvantage suffered by the New Pension System, which is already under EET, compared to other saving schemes.
The code further proposes abolition of the securities transaction tax. Capital gains on shares and securities have been proposed to be taxed as income, added to other income after indexation with base year 2000. "The capital gains regime is proposed to be simplified by eliminating the distinction between long-term and shortterm capital assets," said Vikas Vasal, executive director, KPMG.
Wealth tax provisions are proposed to be overhauled too. Net wealth, which would include all of an individual's wealth in excess of Rs 50 crore, will be chargeable to a tax at the rate of 0.25%. Wealth tax on shares had been abolished in 1993-94 by then finance minister Manmohan Singh. Assets owned by companies are liable to a MAT of 2% of their value (0.25% in the case of assets owned by banks).
One of the key changes suggested by the code includes giving supremacy to Indian tax laws in case of a dispute between provisions of a tax treaty and the code. The code also proposes introduction of a general anti-avoidance rule to combat tax avoidance.
This would help the tax authorities' deal with cases such as Hutch-Vodafone and prevent abuse of tax treaties. A massive overhaul is suggested for corporate taxation besides slashing of the corporate tax rate to 25%. The new rate would not have any surcharge or cess as is the practice now. Moreover, the current profit-linked tax incentives for businesses will be replaced with investment-linked incentives.
To put it simply, a company would be able to enjoy tax benefit only to the extent it invests. However, all the tax exemptions such as those available to special economic zones would be given time to adjust to the new regime. A minimum alternate tax on assets of companies is being proposed as it provides incentive for efficiency at the rate of 2%. It also proposes rationalisation of tax provisions for amalgamations and demergers so that tax remains neutral when businesses reorganise.
Dividend distributed by companies would be taxed at the rate of 15%. In a move that would have a major impact on foreign companies or companies that have made investments in foreign countries, the code proposes to treat a company as an Indian resident even if it is partly controlled in India. Currently, a company is treated an as Indian resident and taxed only if full control of that company lies here. The measure is primarily aimed at preventing tax avoidance. Entities such as mutual funds, venture capital funds and insurance companies will be treated as pass-through entities for purposes of taxation.
Multinationals would be allowed to enter into advanced pricing arrangements when they set shop here. The code also proposes to change the taxation of non-profit organisations.
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