The Hindu Business Line : Issues in introduction of EET

The statement of the Finance Minister that certain vital aspects of the Direct Taxes Code (DTC) would be thoroughly looked into before presenting the same in Parliament is solacing and affirming in nature.

One of the vital areas identified relates to Exempt-Exempt-Tax (EET) method in respect of permitted savings. The new concept is set to replace the present Exempt-Exempt-Exempt (EEE) which has been in vogue for the past many decades.

Impact of EET

The Discussion Paper on DTC says that the contribution to approved savings and children education expenses are deductible from the taxable income as per Section 65. The maximum limit for deduction is Rs 3 lakh.

Section 66 prescribes the limit for deduction for investments in permitted savings made with ‘permitted savings intermediary’.

The term ‘permitted saving intermediary’ is defined in Section 284(201) and it covers (i) approved provident fund; (ii) approved superannuation fund; (iii) life insurers; and (iv) the New Pension System Trust.

These terms are again defined in Section 284 in alphabetical sequence.

The amount invested in permitted investments, including interest, dividend, bonus, capital appreciation or any other form of return by whatever name called, when actually received or withdrawn by the taxpayer is taxable as income under the head ‘residuary sources’ as per Section 56(2)(r).

The Discussion Paper says that withdrawal of any amount as on March 31, 2011, will not be subjected to EET method of tax and only new contributions after the commencement of the DTC would be governed by the said EET method of taxation.

Controversies

The difficulty in distinguishing the investments including accumulations under EEE regime vis-À-vis EET are:

(i) allocation of incomes accruing in respect of old contributions/accumulations and fresh investments/deposits; (ii) the manner of treating the withdrawals viz. whether on FIFO or LIFO basis to be adopted for identifying the withdrawals made out of investments/deposits.

Introduction of EET would completely change the investment choice and preferences amongst the taxpayers and the presentation strategies to be evolved by the permitted saving intermediaries. This could put both the taxpayers and institutions (permitting saving intermediaries) in discomfort in the initial years of the EET regime.

Way out

Instead of providing the cut-off date for changeover from EEE to EET system based on the investments made, including old commitments, it would be better if only the new investments and deposits committed on or after the introduction of the DTC is subjected to the EET method of taxation. This will also enable the various institutions to keep up their promises made for various schemes of investments and savings made by the public. Also, if EET is made applicable only for new insurance policies, fresh deposits/investments, commitments to units of mutual funds, etc., then the proposed central record keeping system could record and monitor efficiently the data from the onset of EET regime.

Definiteness in changeover to EET method of taxing only fresh investments and deposits is similar to the present Section 10(10D)(c) of the Income-Tax Act, 1961, which provides for taxing insurance policies issued on or after April 1, 2003, if the annual premium thereon exceeds 20 per cent of actual capital sum assured.

(The author is an Erode-based chartered accountant.)

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Issues in introduction of EET