Direct Tax Code [Calculations & Updates]

The much-awaited Direct Tax Code (DTC) Bill was approved couple of days back and few more clarifications have come out – some positive, some negative.

In fact, there is difference of opinion among various analysts. Some say that the new DTC Bill is nothing but old wine in a new bottle, while other says that the government might try to recoup revenue shortfall from DTC from the proposed GST regime.

 

Updated Direct Tax Code Highlights

1. The most annoying one was that of pushing the effective date of DTC by a year to April 1, 2012. Most of us had almost discounted the roll-out date at April 1, 2011.
2. The long-term capital gains exemption on listed equities stays along with STT. This will ensure that long-term capital investments are not discouraged. And, the short-term capital gains will be taxed at half your slab rate in whichever taxable income bracket you fall in.
3. There is one negative news for women though – women could cease to enjoy income-tax exemptions over and above men get. Only senior citizens will get extra relief with tax exemption upto income of Rs.2.5 lakhs.

facts about the present tax slabs and Changes proposed

Earning groups and their tax slabs :

Present :	Proposed :
Rs. 0 to Rs. 1,60,000 : No tax, Rs. 1,60,000 to Rs 5,00,000 : 10% Rs. 5,00,000 to Rs. 8,00,000 : 20% Rs. 8,00,000 and above : 30%	Rs. 0 to Rs. 2,00,000 : No tax, Rs. 2,00,000 to Rs 5,00,000 : 10% Rs. 5,00,000 to Rs. 10,00,000 : 20% Rs. 10,00,000 and above : 30%

How it will effect the people paying taxes ??

1. Rs. 0 to Rs. 1,60,000 : No difference (Neither they paid earlier, nor would they now)
2. Rs. 1,60,000 to Rs 2,00,000 : Earlier they were paying 10% and they dont pay now
3. Rs. 2,00,000 to Rs 5,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%)
4. Rs. 5,00,000 to Rs. 8,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%)
5. Rs. 8,00,000 to Rs.10,00,000 : Earlier they were paying 30% and will now pay only 20%
6. Rs. 10,00,000 and above: No difference (They were paying and continue paying 30%)

Data crunching – how many people paid tax at what rate

1. Total number of tax payees during last year: 3.25 crore people (in 3 slabs of 10, 20 and 30%)
2. 95.25% of the total tax payees fall under Rs.1 lakh to Rs.5 lakh slab; contributing 30% of total taxes collected.
3. 2.05% of the total tax payees fall under 20% slab; and their contribution is 10% of all taxes collected.
4. 2.2% of the total tax payees fall under 30% slab; and their contribution is 60% of the total tax collected.

Interesting Observations:

The above figures indicate that vast majority of our fellow countrymen fall in the income range of Rs. 1,60,000 to Rs. 5,00,000 per annum. Though the successive governments drum up the fact that we are a middle-class economy, the facts state that we are infact a lower middle-class economy as 96% of our tax payees are at the lowest level and contribute only 30% of taxes while the cream of the society of 4% contribute 70% of the taxes.

Government and many international agencies claim that the middle class population in India is 300 million strong and is more than the entire population of Germany.

Now consider this – 300 million people means at least 60 million families i.e. 60 million heads of families (consider one family pays only one tax). Still our tax payees are only 3.25 crores. Why the other 2.75 crore people are not paying taxes? Are they farmers (as farm income is tax free)? Are they businessmen (a chunk of whom earn in black)? Are they politicians (who don’t declare their incomes)? Who are they?

Benefits to government due to Direct Tax Code (DTC)

Government by increasing the tax paying limit to Rs. 2,00,000 will effectively bring down the tax payers by almost 10-15% (those falling in the nominal Rs.1,60,000 and Rs.2,00,000) and consequently reducing its paper work.

Loss to government due to Direct Tax Code (DTC)

On the other hand, by raising the tax slab from Rs. 8,00,000 to Rs.10,00,000 at the rate of 20%, from earlier 30%; it will loose a decent chunk of its tax income as the segment of Rs.8,00,000 and above contributes around 60% of all taxes collected, though the numbers are only 2.2% of tax payees – this, assuming that the majority chunk of tax contributors likes at the lower band of a tax slab.

From the above, you can see that due to these changes very few income groups benefitted. I have a strong feeling that this exercise is to reduce the paper work of the tax department rather than to transfer benefits to people.

Instead what government could have done (Our 2 cents)

For transferring the benefits to people it is equally important to consider two factors.

1. Increase taxable slabs (of course, until a certain point), and
2. Reduce tax rates.

Since last decade, we have seen only the taxable slabs going up from Rs. 90,000 to the present Rs.2,00,000. This sure is a welcome gesture from government.

However, the other component is conveniently overlooked – while increasing taxable income ranges liable for paying taxes, the government could have brought down the effective tax rates from 10%, 20% and 30% to 8%,15% and 25% and, so on, gradually upto 5%, 10% and 15% for the above income groups (in line with many developed nations).

This way instead of only two groups of income groups, everybody could have benefited from the exercise.