TAX NEWS - JUNE 2010

India Tax: CAG suggests changes in individual tax payer provisions

The Comptroller and Auditor General of India (CAG) Vinod Rai has suggested to Finance Ministry certain changes in Direct Taxes relating to individual tax payers, recommending that the proposed Direct Tax Code (DTC) needs to incorporate these to improve its efficacy. It cites examples of this nature, while welcoming the general tenor of the cardinal principles adopted by Indian taxation system, namely 'a low rate, broad based income tax with simpler provisions'. These details have been given in a communication addressed by Mr Rai to Finance Minister Pranab Mukherjee.

For instance, costs incurred towards renovation and improvement of properties have not been proposed in the cost of construction and acquisition of property towards determining the presumptive rent. There is also a need for indexation of the costs towards determining the presumptive rent. Mr Rai says deduction under Section 66 of the Direct Tax Code (DTC), which deals with deduction for savings, is limited to Rs three lakh even if an additional amount is deposited. However, when the sum is withdrawn, the additional amount would be subject to double taxation.

Under the Direct Tax Code (DTC), medical reimbursement is taxable, even if it is in the nature of reimbursement of expenditure which has actually been incurred. If the payment is made by the employer or insurance agencies directly to the health service provider, there is no effective way for bringing such payment under the tax net. The Direct Tax Code (DTC) has been a matter of considerable discussion and public debate in the last few months.

The Comptroller and Auditor General of India (CAG) says the code is important for improving tax administration. The Comptroller and Auditor General of India (CAG) letter outlines a host of audit concerns on various issues relating to direct taxes, as pertains to both corporate entities, NGOs and other sections covered under the Direct Tax Code (DTC), such as charitable trusts.

Mr Rai notes that the Direct Tax Code (DTC) seeks to simplify the existing Acts on various direct taxes.

"We feel that it is a welcome step which goes a long way in simplifying and demystifying the existing Acts drafted in a rather complex manner and will in the long run lead to better tax compliance," he says.