[Economy] Direct Tax Code (DTC): Meaning, Explanation, Basics

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Mansoor asked

I have read about DTC in other articles but finding it difficult to comprehend it. please explain.

First the Basics

Direct Tax vs Indirect Tax

Direct Tax

You pay it on your income and property.

1. Income Tax
2. Corporate Tax
3. Wealth Tax

^ Direct Tax Code (DTC) seeks to consolidate them all in one book.

Indirect Tax

You pay it on the goods and services purchased.

1. Sales Tax
2. VAT
3. Customs duty
4. Excise Duty
5. Service Tax etc

^ Goods and services Tax (GST) seeks to combine them all in one book.

Redistribution of wealth

• Direct Tax follows the principle of redistribution of wealth
• in short it means:
• Tax the rich and use the money for the welfare of poors.
• You tax middle-class and rich-class, use that money to provide subsidized wheat for poor people = wealth is 'redistributed'.

Why do we need Direct Tax Code?

(just covering the brief highlights without getting into details)

All In ONE code

• Right now we've different Codes for different taxes for ex.
• Under DTC, all the direct taxes will be brought under a single Code

Simplify the language for 'aam-aadmi'

• So that even non-experts can interpretate the rules on their own, and no need to consult a tax-lawyer or Chartered Accountant every now and then.

Provide stability in direct tax rates

• At present, the income tax slabs and rate are changed in every budget, thus keep keeping people on their toes.
• Therefore, People have to keep making rounds here and there to tax-consultants and insurance agents to save themselves from higher-tax slabs, every year.
• DTC will provide stable brackets and rates for a longer time, (ofcourse they can be amended from time to time.)

Increase Tax to GDP ratio.

• It means the ratio of tax collection against the national gross domestic product (GDP).
• Right Government's tax collection is not optimum, because people get so many tax-exemptions.
• Under DTC, Men and women are treated same. Women would cease to enjoy income-tax exemptions
• Only senior citizens will get extra relief with tax exemption
• Tax exemption on LTA (leave travel allowance) is abolished.
• DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), House Loan principal repayment etc.
• Thus, Government's tax collection would increase, because there are less exemptions available. 
• Plus, Government needs truckload of money for their inefficient schemes such as MNREGA and Food security bill, otherwise problem of fiscal deficit. In that sense too, DTC is very important for them.

Rates under DTC:

• 10 per cent tax on annual income between Rs. 2-5 lakh,
• 20 per cent on between Rs. 5-10 lakh,
• 30 per cent for above Rs. 10 lakh

Other provisions of DTC

[Not covering everything in detail]

• Tax exemption on Education loan is continuing.
• Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished.

Wealthtax 'cutoff' increased

• Right now you've to pay additional tax if you own farmhouses, shopping malls, jewellery, vehicles etc 'wealth' above Rs.30 lakh.
• Under DTC, you've to pay wealth tax only if you own assets worth to Rs 50 core or above.

Corporate tax rate 30% (no surcharge or cess)

• [Earlier they had to pay educational cess.]
• means now they've to pay less because there is no cess!
• Confused about what is 'Cess' Then click me!
• Combine this with "Stability" point explained above, and Foreign players would feel attracted to invest in India.

MAT (Minimum Alternative Tax)

• I already talked about that a year ago. Click me If you missed the MAT article

If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for income earned during the financial year 2012-13.