20-Mar-2012 | 10:45 IST | edited by: Sharmila Maitra

The Standing Committee's report on the Direct Taxes Code (DTC) Bill, 2010, contains very significant as well as thorough observations and constructive recommendations.The committee, chaired by former finance minister, after considering various economic and other matters, including inflation and the imperative to leave more disposable income in the hands of the individual taxpayers, particularly in the hands of the lower income group, has recommended raising of the exemption limit for nil rate of tax to Rs 3 lakh from the current yearly limit of Rs 1.60 lakh.

Further, a recommendation is made that the slabs for the next two rates of taxation should be raised. Due to this exercise, the exemption limit would go a long way in minimising the compliance and transaction costs of the income-tax department, leaving the tax officials with adequate time to focus their attention on untaxed and concealed incomes.

Moreover, the recommendation also lists down the savings on account transition to investment-linked incentive schemes. It is noteworthy to mention that the committee has not recommended any change in the corporate tax rate of 30%.

The other significant recommendation are about some of the stringent provisions relating to international taxation such as the General Anti-Avoidance Rules (Gaar), controlled foreign companies (CFC) and Branch Profits Tax that have been criticised in view of the unfettered discretion given to the tax authorities in the Bill.

The committee has further desired that the genuine apprehensions of stakeholders should also be addressed while finalising the Bill.

Another salutary recommendation of the committee is to suggest that the tax officials should be made accountable for their actions and disciplinary action be taken against officials responsible for irrational assessments.

However, if accepted, then these recommendations will increase disposable incomes in the hands of taxpayers, encourage savings and levy a higher tax on the rich, besides reducing compliance costs for the income-tax department.

At present, the Bill provides many triggering points for invoking CFC regulations that should be changed to a cumulative or combined trigger of two or three criteria.

However, modifications will be made in the DTC bill during the Finance Budget 2012 through the finance bill.

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Direct Taxes Code (DTC) is said to replace the existing Indian Income Tax Act, 1961. If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for income earned during the financial year 2012-13. Although below expectations, experts see proposals as largely positive.

Branch profits tax was put in law in 1986 to reduce the disparity in US income tax treatment of foreign corporations that conduct businesses in the US through branches and foreign corporations that conduct such business through subsidiaries. It is a 30% tax on a foreign corporation's profits derived from the operation of businesses in the US and not reinvested in those businesses.

Controlled Foreign Company (CFC) tax regime applies, broadly, to companies controlled from the UK but resident in an overseas territory in which they are subject to a lower level of tax (less than 75 percent of the tax which would have been charged had the company been UK resident).  

The General Anti-Avoidance Rules

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