Volume 3, Issue 10

17th June, 2010

Tax Alert
As proposed to be amended by the revised discussion paper

The existing Income‐tax Act of India was enacted way back in 1961. Prior to that, we had the Income‐tax Act, 1922. Thus, historically, the first Income‐tax Act was operational for almost 40 years and the existing one has been in place for almost 48 years now.

Over the years, the tax laws have become more and more complicated and tiresome. Litigation is at an all time high in the country with tribunals and courts swamped with tax disputes being challenged by the tax payers and/or by the tax department. The present Income‐tax Act (the Act) contains morethan 400 sections and even more sub‐sections, Provisos and Explanations. For a common man, it is virtually impossible to decipher the Act.

The Indian Government is seeking to initiate radical tax reforms by proposing to enact a new Direct Tax Code which will replace the existing Income‐tax Act with effect from 1st April, 2011 i.e. w.e.f. F.Y. 2011‐12. The Direct Taxes Code Bill, 2009 (Code) was placed by the Finance Minister for public debate and discussion on 12th August, 2009. The Code seeks to combine the law relating to all direct taxes i.e. Incometax and Wealth‐tax under one roof.

The proposed DTC has been designed with the objective of simplification of the provisions of tax laws by having a fresh look at the provisions of the Act. After taking into consideration the representations received on the proposed provisions of the DTC, the Government has now proposed to modify the DTC and has issued a revised Discussion Paper to this effect on 15th June. This Tax Alert (running into a series of Issues) is prepared to place in your hands the salient changes proposed in the Code after taking into consideration the amendments mentioned in the revised Discussion Paper. The Direct Tax Code seeks to take a fresh look at the taxation of all heads and sources of income. In the existing Income‐tax Act, the entire mechanism of taxation revolves around various heads of income under which there would be different sources of income. This is graphically depicted as under:

The new DTC, there is a new schema for computing income. First, of all, the sources of income are divided into two categories – Ordinary Sources and Special Sources. Under each Source, there would be different Heads of Income. And under each Head of Income, there could be various Sources of Income. This can be graphically depicted as under:

The steps for computing income under the DTC are as under:

The abovementioned Steps 1 to 3 would also be applicable for Income from Special Sources. At the end of the Step 3, one would have the Gross Total Income from Special Sources. The aggregate of this gross total income for all the special sources would constitute the Total Income from Special Sources.

Thereafter, the following step needs to be followed:

These changes pertaining to the computation of income, however, comprise only a fraction of the many changes proposed in the new Direct Tax Code. To know more about other significant aspects of the proposed overhaul in the Indian taxation system, watch out for our forthcoming tax alerts in this special series on the DTC.