Ministry of Finance rationalizes the strategy behind the New Direct Tax Code as:

“…Any complex tax legislation increases the cost of compliance as well as administration. Given that the cost of compliance is essentially regressive in nature, this undermines the equity of the tax system. Similarly, high cost of administration is wasteful….”

“….Any further rationalization of the tax rates may not be feasible without corresponding increase in the tax base. Broadening of the base is important to enhance revenue productivity of the tax system and to improve its horizontal equity…..”

The ministry’s strategy is three-fold:
a) to minimize exemptions,
b) to eliminate ambiguity in the law which facilitates tax avoidance, and, lastly
c) to check erosion of the tax base happening through tax evasion. With the above rationale and strategy, the new tax code is quite up to the task.

The average annual tax outgo for a taxpaying unit will not be impacted significantly, but for an individual, the tax impact could be significant, depending on the proposed changes in new tax code. The various factors which can change the tax outgo of an individual are:

1. If the individual is a salaried employee, who is taking benefit of various allowances such as HRA, LTA, etc, his/her tax outgo would be marginally impacted. The caveat is that one has to now save up to Rs. 3 lakh to avail the deductions, whereas previously only Rs. 1 lakh savings were allowed. These additional savings may not be possible for individual tax payer.

2. The individuals who have purchased self-occupied house property in recent years will stand to lose due to disallowance of deduction of home loan interest.

3. The individuals who invest in capital assets may see a change in their tax outgo due to change in the concept of long-term and short-term capital gains

4. The self-employed individuals will stand to gain significantly due to lowering of tax rate up to Rs. 10 lakh. This will happen because self-employed individuals (professionals, agents, sole proprietors, etc.) do not have any allowances such as HRA, LTA. Hence, lowering of tax rate will have direct (positive) impact on their tax outflow.

5. Indefinite carry forward of losses will benefit everyone, especially the companies involved in projects with long gestation periods. In our opinion, the new code achieves its stated goals and objectives, the most important being increased compliance through decreased complexity. Though the taxpayers will have to adjust their income sources, expenditures and savings pattern to optimize the tax structure, the new code will not drastically change the tax outgo for majority of taxpayers.

The more detailed analysis is being conducted by the Taxation Team at TaxSpanner. If you have any specific inputs, please feel free to ask or post a query at our website: www.taxspanner.com

About the author

Ankur Sharma worked at Intel Corporation for six years in several positions before joining taxspanner. His last two roles at Intel were Senior Finance Analyst and Business Development Manager. In his finance role, Ankur drove key initiatives influencing financial decision making at business groups having annual revenue in excess of billion dollars. He brings a unique experience of finance and business development. In addition to MBA degree from UCLA, he has earned Masters in Computer Applications from University of Delhi.