Some cheer for individual taxpayers

Mayur Shah

The much awaited Revised Discussion Paper (RDP) on the draft Direct Taxes Code (DTC) which is meant to respond to the major concerns and comments received from various stakeholders on the draft DTC and the Discussion Paper (released on August 12, 2009) was released by the Government on June 15, 2010, for public debate and comments.

Manisha Paul, an IT professional, is wondering how the RDP would affect her salary income and correspondingly her tax liability. For those like Manisha, the following are some of the relevant changes brought in by the RDP to DTC.

The dilution of several provisions of the DTC should address many concerns of individuals and the salaried although the RDP leaves many questions unanswered, including relating to the tax rates and tax slabs.

Under the RDP, the Government has proposed the exempt-exempt-exempt (EEE) method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF), Recognised Provident Fund (RPF) and pension scheme administered by Pension Fund Regulatory and Development Authority.

Similarly, approved pure life insurance products and annuity schemes have also been proposed to be subject to the EEE method of taxation as opposed to the exempt-exempt-tax (EET) method proposed earlier.

Social security

It is pertinent to note that most countries that follow the EET method of taxation for retirement benefits have robust social security system in place. The RDP recognised that in the absence of a universal social security system in India, the proposed EET method of taxation of permitted savings would be harsh on the taxpayers as they would require some flexibility in making withdrawals in lump-sum without being subjected to tax.

Also, people may need lump-sum funds on retirement for various family obligations and, hence, continuation of the EEE regime is a welcome move. Further, the RDP acknowledges the fact that it is unlikely to have a social security system in place in the near future. Accordingly, the continuation of the EEE regime is a welcome step taken by the Government. It has also been proposed that the investments made, before commencement of the DTC, in instruments presently enjoying the EEE method of taxation would continue to be so eligible, for the full duration of the financial instrument. However, there seems to be an anomaly with regard to the tax treatment on the contributions/investments made to the financial instruments existing before the implementation of DTC, which we believe would be clarified once the DTC legislation is enacted.

However, what is not stated explicitly in the RDP is whether popular instruments such as equity-linked savings schemes and unit-linked savings schemes will continue with the EEE method of taxation when the DTC comes into force. Also, the RDP does not say either if the authorities propose to adopt the EET regime at a later date, once a solution is found to the administrative, logistical and technological challenges. Or would the EET regime be held in abeyance till universal social security system is in place, which, in any case, will take several years.

Retirement benefits

Further, the RDP also proposes that retirement benefits in the nature of gratuity, voluntary retirement scheme, commuted pension linked to gratuity and leave encashment receipts at the time of superannuation are proposed to be exempt for all employees, subject to specified monetary limits.

The tax exemption for retirement benefits is a welcome move and will mitigate undue hardship to employees as in the absence of adequate social security benefits, the social and economic norm is to use retirement benefit amounts for savings as well as for social expenditure.

The continuation of the exempt-exempt-exempt regime is a welcome step taken in the Revised Discussion Paper on the Direct Taxes Code.

(The author is Associate Director, Ernst & Young. )