- Wealth PMS (50L+)
The Income tax department has recently announced some proposed changes to the Direct Tax Code, as a discussion paper. I can’t seem to find the actual DTC – these are only a discussion paper, so a lot of actual figures are missing. Here’s a list of the changes, in random order.
Taxation on Withdrawal or EET diluted
In the original DTC, EET or Exempt-Exempt-Tax was proposed going forward, compared to EEE today. So when you withdrew the gains from long term tax saving instruments (insurance investments, PPF etc.) you would be taxed. This even applied to existing investments done before the DTC effectively a retrospective impact since you assumed when you invested that exit was tax free.
Arguments against it were that come on, how can you do this, types. Some of them make sense, but others are random explanations like “we don’t have social security”. I won’t discuss the merits of each, but it’s obvious the government has decided to soften the DTC stand, with wording that looks dangerously like “okay, not now, but we’ll try it again later”.
Impact: Expect HUGE ULIP Misselling
You will be bombarded with ULIP ads, like nobody’s business. And ELSS ads. The draft is kind to current and past investments, so it may not be a bad thing, except ULIPs are horrible products regardless of their tax saving status. The problem? I think the government has just put it off for a few years – after some years, all new products will be EET, so if they choose to remove the grandfathering, you’re still screwed. I’d consider that a valid risk, considering at that time, it won’t seem so bad (the share of EET product holders will be higher and they won’t complain).
Impact: Expect “Pure” insurance arbitrage
The way “Pure” is eventually defined may make some ULIP type products also classify as pure insurance. I like the idea of pure insurance returns being tax-free (if I die, I don’t want my next of kin to have to pay tax on the proceeds of insurance). But unless the definition is really tight, insurance companies will find a way to put investment products into the EEE bracket. Have to wait and see.
Retirement Benefits Account scrapped
VRS, Gratuity, Pension commutation and leave encashment – all retirement payouts – were supposed to be either fully taxed or placed in a “Retirement benefits account”, from which withdrawals would be taxed.
This will hurt people retiring next year, and tremendously. And the RBA is a pain to set up fast, for a government that is so slow in everything else. So it’s been scrapped, and retirement benefits are tax free.
Again, I think it’s temporary. They’ll do it another day. If you’re under 45, there will be risk that YOUR retirement benefits may be taxed at a later date.
Medical and Rent perquisites diluted
The Original DTC assumed, for employees getting rent free accomodation, rent at market value in the salary, and included medical treatment paid for by employer as a fully taxed perquisite. Government employees complained – they are the biggest losers in the change.
New policy – rents won’t be assumed at market value (we don’t know at what though) and some medical relief limits will be introduced. What can I say – the government takes care of its own. The rest of us will benefit too, even if it makes taxes a little more complex.
House rentals at 6% scrapped
Orig DTC: If you bought a house, and didn’t stay in it, you had to assume 6% of the cost as “rent” even if you didn’t get any rent. (reduced by 20% for maintenance, and by property taxes paid) Additionally all interest paid for that house – no limit – was deductible. But if you stayed in it, no deduction for principal or interest was allowed.
Orig DTC: Cap gains (appropriately indexed to inflation) would either get added to income or go into a cap gains account from which withdrawals would be taxed. Cap Gains on Equities are currently tax free after a year, but they’ll go into taxable mode under original DTC.
Cap Gains Account is too painful to do right now, so that’s scrapped.
All capital gains before 2000 will now be tax free. Inflation indexing starts from 2000.
Equity gains will continue to be taxable but at lower rates. A “discount” will be applied on equity gains, based on a rate they will tell us later. So if the discount rate is 50%, only 50% of your indexed gains will be added to your income. Some are saying the discount rate will increase if you hold the asset longer (so 10 years = 80%, 5 years = 50% and so on) – which I believe will be a good thing, but such a concept is not mentioned in the paper and it might be speculative.
Either ways, it means gains on equities are taxed at lesser, but are still taxed.Given the cost of selling and buying back is currently about 1-2%, would I still recommend you sell and buy back your ultra long term shares to avoid any tax from next year?
It gets complicated in that all gains befoer 2000 are free, and indexation from 2000, plus this “discount” rate means the answer is now subjective to a) when you bought the shares and what price the share was in 2000, b) how much profit have you made and c) what is the discount rate. But if confused and profits are large, sell and buy back. Won’t do you much harm.
Security Transaction Tax stays
Contrary to popular belief.
The Securities Transaction Tax (STT) is a tax on specified transactions and not on income. Accordingly, STT is proposed to be calibrated based on the revised taxation regime for capital gains and flow of funds to the capital market.
Wealth Tax Diluted
Orig DTC: Wealth tax at 0.25% of assets of people who are worth more than 50 cr. Change: Wealth tax act 1957 applies – I don’t know what that means – and only “unproductive” assets will be taxed. (I assume that’s liquid cash or multiple unoccupied properties and so on) What and how much? They haven’t said.
MAT charge on Book Profit, not on Gross Assets
The original DTC intended to charge a minimum tax of 2% (0.25% for banks) on gross assets. That makes little sense – for loss making companies for instance, and for a slew of reasons mentioned in the changes. The proposal is to move MAT to be based on book profit. How much? I don’t know.
Random other stuff
FIIs won’t pay TDS. NRIs will not pay capital gains at 30% – it gets added to their income like other people. (Why the F do we tax people differently based on their NRI status anyway?) Certain changes for non-profit organization and for company residence status have happened that I haven’t looked at yet (not important to me).
Current SEZ developers get unexpired profit linked deductions, that continues. But units operating in an SEZ are not going to see free profits. So anyone who owns an SEZ is good, anyone who will later buy a unit or operate one it is screwed.
The original DTC sorta overrode the double taxation agreements of countries, but the changes say we’ll let people choose whatever’s better for them except if they are trying to avoid tax and in two other situations.
Phew. Enough. Comments?