>Direct Tax Code version 2.0… (ICICI DIRECT)

The government of India has come out with a revised draft of the Direct
Taxes Code (DTC) that proposes several changes over the first draft to deal
with some of the major concerns raised in the first draft. It is open for
public comments till June 30,,2010. The proposed changes in the revised
draft, its impact and our views are mentioned herein below.

􀂃 MAT to be calculated on book profits as compared to gross assets
The revised draft suggests that book profits rather than gross assets,
as proposed in the first draft, should be used to calculate the minimum
alternate tax (MAT). However, the tax rate as a percentage of the book
profits has not been specified. Under the previous draft, it had been
proposed to calculate the MAT on gross assets (0.25% for banks and
2% for all other companies). However, the revised draft also does not
allow for carry forward of MAT paid.

Our view: The revised provision is positive for companies that are
eligible for MAT, as the calculation of MAT on gross assets, as
provided in the first draft, could have led loss-making companies,
newly set up infrastructure companies and companies undergoing
major expansions to pay very high taxes.

􀂃 Tax exemption on withdrawal for select saving schemes
Under the first draft, it was proposed that withdrawals towards saving
schemes would be subject to taxation at the applicable marginal rate
of tax (EET taxation). The revised draft now proposes complete tax
exemption for government provident funds (GPF), public provident
funds (PPF), recognised provident funds (RPF), pension schemes
administered by Pension Fund Regulatory and Development Authority,
approved pure life insurance and annuity schemes.

Our view: The provisions are marginally positive for individual
taxpayers. However, the tax exemption on withdrawals applicable
only on pure life insurance schemes is negative as unit linked
insurance plans (ULIPS) would be subjected to tax on withdrawal.
Also, it will be negative for mutual funds as withdrawal from equity
linked savings schemes would be subject to tax post implementation
of DTC. The new pension scheme will, thus, have an edge over the
other market related savings instruments as it will be the only
instrument providing equity exposure (50%) and have the
withdrawals exempted.

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