Vol. 4 Issue 8.17 August 31, 2010 About BMR Advisors | BMR in News | BMR Insights | Events | Contact Us | Feedback DTC 2010 – BMR Analysis Keeping to its commitment, the Government presented the revised Direct Taxes Code, 2010 (“revised Code”) in the Parliament on Monday. The revised Code takes over from the Revised Discussion Paper (“RDP”) released in June 2010 which made significant changes to proposals in the 2009 version of the Direct Taxes Code Bill (“original DTC Bill”). The revised Code retains the basic philosophy and objectives of the Government in overhauling the extant tax regime. As anticipated, the revised Code not only improvises on 11 critical issues identified in the RDP, the latest version amends some of the other key proposals in the 2009 version of proposed legislation. The key rationalisation proposed in the revised Code are – tax rates for corporate and individual taxpayers; re-alignment of Minimum Alternate Tax levy with respect to book profits; grandfathering of tax incentives for SEZ units; taxation of capital gains; introduction of settlement commission mechanism; taxation of non-profit organisations; rationalisation of anti-avoidance rules in line with proposals made by RDP. The Cabinet’s nod for introduction of the revised Code with effect from April 1, 2012 is objective thinking as the extended transition period should provide taxpayers sufficient time to gear up to new legislation. Direct Taxes Code Bill, 2009 – click here for BMR analysis Revised Discussion Paper on Direct Taxes Code Bill, 2009 – click here for BMR analysisKEY PROPOSALS UNDER THE REVISED CODE TAX RATES The comparative analysis of the income tax rates as proposed by the original DTC Bill and the revised Code is as following: a) In case of individual taxpayer (not being a senior citizen) : Original DTC BillRevised CodeIncome slab (INR)Tax ratesIncome slab (INR)Tax ratesUpto 160,000* Nil Upto 200,000 Nil •Private Equity International India Forum, October 5-6, 2010, Mumbai, India•BMR rated Great Place to Work 2010; Great Place to Work Institute •BMR ranked Tier 1 Tax Planning and Tax Transactional Firm in India, International Tax Review’s online poll 2010•BMR Advisors ranked second most active transaction advisor (Private Equity) in 2009, Venture Intelligence League Table•BMR is Transfer Pricing Firm of the Year and wins India Case of the Year award, International Tax Review Asia Awards, 2009•ai Bobby Parikh, Mumb +91 22 3021 7010 [email protected]•Delhi Mukesh Butani, New +91 124 339 5010 [email protected]•Rajeev Dimri, New Delhi +91 124 339 5050 [email protected]•angalore Abhishek Goenka, B
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ol. 4 Issue 8.17 August 31 About BMR Advisors | BMR in News | BMR Insights | Events | Contact Us | Feedback
C 2010 – BMR Analysis
eping to its commitment, the Government presented the revised Direct Taxes Code,0 (“revised Code”) in the Parliament on Monday. The revised Code takes over from the
vised Discussion Paper (“RDP”) released in June 2010 which made significant changesproposals in the 2009 version of the Direct Taxes Code Bill (“original DTC Bill”).
e revised Code retains the basic philosophy and objectives of the Government inrhauling the extant tax regime. As anticipated, the revised Code not only improvises oncritical issues identified in the RDP, the latest version amends some of the other keyposals in the 2009 version of proposed legislation. The key rationalisation proposed inrevised Code are – tax rates for corporate and individual taxpayers; re-alignment ofimum Alternate Tax levy with respect to book profits; grandfathering of tax incentives for
Z units; taxation of capital gains; introduction of settlement commission mechanism;ation of non-profit organisations; rationalisation of anti-avoidance rules in line withposals made by RDP.
e Cabinet’s nod for introduction of the revised Code with effect from April 1, 2012 isective thinking as the extended transition period should provide taxpayers sufficient time
ear up to new legislation.
ect Taxes Code Bill, 2009 – click here for BMR analysis
vised Discussion Paper on Direct Taxes Code Bill, 2009 – click here for BMRalysis
Y PROPOSALS UNDER THE REVISED CODE
X RATES
e comparative analysis of the income tax rates as proposed by the original DTC Bill andrevised Code is as following:
a) In case of individual taxpayer (not being a senior citizen):
Original DTC Bill Revised Code
Income slab (INR) Tax rates Income slab (INR) Tax rates
Upto 160,000* Nil Upto 200,000 Nil
• Private Equity International IndForum, October 5-6, 2010,Mumbai, India
• BMR rated Great Place to Wo2010; Great Place to Work Ins
der the original DTC Bill, relief from Dividend Distribution Tax (“DDT”) was proposed foran holding companies, ie a domestic company which is not subsidiary of another
mpany, in respect of dividends received from a subsidiary company which has already beject to DDT.
posal under the revised Code
der the revised Code, the condition that the domestic company is not a subsidiary of anyer company is done away with. Thus, if the domestic company:
• distributes dividend to its shareholder being a company; and
• the domestic company has received dividend from its subsidiary (where thesubsidiary as paid DDT on such distribution)
n the domestic company distributing dividend to its shareholder would not be liable toT on dividend so received from its subsidiary.
pact analysis
e revised Code proposes to do away with the cascading effect of DDT; as per the revisedde, even the intermediate holding domestic companies would be eligible for exemptionm DDT on dividends received from their subsidiary companies which have paid DDT.
x on income distributed by mutual fund or life insurer
posal under the original DTC Bill and the RDP
e original DTC Bill proposed that mutual funds and life insurers would have tax pass-ough status, ie income of the mutual funds and life insurance companies would not bele to tax in their hands. Further, the income paid by the mutual funds / life insurers to theestors / policy holders would not be subject to DDT. Investors would be taxed in respectsuch income received from the mutual funds / life insurance companies.
posal under the revised Code
proposed that income distributed by mutual funds and life insurer shall be subject to taxhe rate of 5 percent.
e provisions pertaining to deposit of taxes on income so distributed, interest implicationsnon-deposit within the time limit, etc have been aligned with the provisions of DDT underh the Income tax Act, 1961 ("IT Act") and original DTC Bill.
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y of tax on distribution of income could hurt marginal taxpayers.
x on income received from Venture Capital Company and Venture Capital Fund
posal under the original DTC Bill and the RDP
der the original DTC Bill, tax pass-through status was proposed for Venture Capitalmpanies (‘VCCs’) and Venture Capital Funds (‘VCFs’). Further, the income paid byCs / VCFs to the investors would not be subject to dividend distribution tax. VCFs which
e set up in the form of trusts but were not registered with Securities Exchange Board ofa would not be eligible for tax pass-through status.
posal under the revised Code
der the revised Code, provisions pertaining to tax on income paid by VCCs / VCFsmain unchanged. Further, the said provisions (including the definition of ‘venture capital
ertaking’) under the revised Code have been aligned with the current provisions of theAct.
pact analysis
tus quo
nimum Alternate Tax
posal under the original DTC Bill and RDP
e original DTC Bill proposed to levy Minimum Alternate Tax (“MAT”) on a company at thee of 2 percent on ‘gross assets’ (for the banking sector, a lower rate of 0.25 percent wasposed). The RDP proposed to realign MAT levy with respect to book profits of the
mpany.
posal under the revised Code
proposed in the RDP, the MAT levy has been re-aligned with the extant provisions of theAct. MAT shall be levied at the rate of 20 percent on book profit of the company. Bookfit to be computed as per books of accounts prepared in accordance with the provisions
Parts II and III of Schedule VI to the Companies Act, 1956.
dit of MAT paid in excess of the normal income-tax shall be allowed to be carriedward for 15 financial years immediately succeeding the financial year for which tax creditomes allowable. However, the revised Code is silent on eligibility of the taxpayer tory forward and claim credit of MAT currently available under the IT Act.
pact analysis
y of MAT on book profit as against ‘gross assets’ based tax is a positive change, and isly to be rejoiced by the industry. The revised Code provides for carry forward of MATdit for 15 years, an important relief which was not envisaged under the original DTC Bill.ecifically, the proposal could potentially reduce the tax incidence for infrastructure,ncial and similar high capital intensive industries.
sidence of a foreign company
posal under the original DTC Bill
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e original DTC Bill proposed ‘partial’ control and management test for determining thedence of a company in India. The RDP proposed ‘place of effective management’OEM”) to be the decisive test for ascertaining the residential status of a company ina.
posal under the revised Code
e revised Code proposes test of POEM as envisaged in the RDP and provides thatEM at any time in the financial year will satisfy the residency test for a company
orporated outside India. POEM has been defined to mean the following:
• The place where the board of directors of the company or its executive directors, asthe case may be, make their decisions; or
• In a case where the board of directors routinely approve the commercial andstrategic decisions made by the executive directors or officers of the company, theplace where such executive directors or officers of the company perform theirfunctions.
pact Analysis
oduction of the term “at any time in the year” significantly expands the scope of
dence of a foreign company and potentially even a single instance of activity ascified above may result in a foreign company being construed as tax resident in India.
xation of Business income
posal under the original DTC Bill
e original DTC Bill had proposed substantial changes to the manner in which the incomem business was to be computed, as compared to the provisions of IT Act. The originalC Bill proposed that every distinct and separate business will constitute a separaterce of income for which, the corresponding income will have to be computed
ependently.
posal under the revised Code
anges proposed in the original DTC Bill have by and large been retained in the revisedde. Some of the notable changes in the revised Code as compared to the original DTCare as under:
• Income from sale of carbon credits has been specifically included in the list ofincome taxable as business income.
• A separate schedule of ‘deferred revenue expenditure’ has been introduced forgranting allowance in respect of expenditure in the nature of non-compete fee,premium for obtaining any asset on lease, business reorganization expenses, etc.The original DTC Bill provided for a fixed percentage of depreciation on these
expenditure.
• In respect of income that is taxed from sale of a license /right /benefit that has beensold during the year, it has now been specifically clarified that the cost of thelicense /right /benefit shall now be allowed as a deduction.
• Deduction in respect of expenditure incurred for issue of debentures has beenrestricted to only issue of convertible debentures as against issue of all debenturesas provided in the original DTC Bill.
• Specific provisions have been introduced for splitting the deduction for capitalallowance to a predecessor and a successor of a business in the case of business
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reorganizations.
• Key changes for determination of income on presumptive basis:
- With respect to business eligible for presumptive taxation (at the rate of 8 percentof turnover or gross receipts), additional conditions have been specified foradopting presumptive basis of taxation. This basis of taxation will apply only toresident assesses who are individuals, HUFs or a firm (other than LLP).
- In respect of the non-resident’s business of (a) providing services or facilities in
connection with the prospecting for, or extraction or production of, mineral oil ornatural gas and (b) supplying plant and machinery on hire, used or to be used, inthe prospecting for, or extraction or production of, mineral oils or natural gas,presumptive taxable income has been enhanced to 14 percent from 10 percent ofgross receipts.
- In respect of non-resident’s business of operation of ships and aircrafts, thepresumptive taxable income has been enhanced from 7.5 percent to 10 percent(for ships) and from 5 percent to 7 percent (for aircrafts) of gross receipts.
• Provisions relating to tax incentives
- All profit linked incentives are proposed to be withdrawn, as also proposed in theoriginal DTC Bill.
- One of the key changes in the tax incentives provisions is introduction of taxincentives for units operating in a SEZ.
- The revised Code proposes to grandfather income based tax holiday for SEZunits which become operational on or before March 31, 2014. Further, theinvestment linked incentives are proposed to be extended for SEZ units set upafter March 31, 2014.
- Also, the revised Code proposes grandfathering of income based tax incentivesfor SEZ developers if the SEZ is notified on or before March 31, 2012, as againstMarch 31, 2010 as per the original DTC.
• Adjustment of losses
- Provisions in the original DTC Bill pertaining to adjustment of losses are notproposed to be changed. The concept of classifying income under ‘Income fromSpecial Sources’ (‘special source’) and ‘Income from Ordinary Sources’ (‘ordinarysource’) continues.
- Loss under ordinary source, whether from specified or non-specified business,can be set off in the same year against any other ordinary source. Anyunabsorbed loss can be carried forward for any number of years and be set offagainst income from ordinary sources in the subsequent years.
- Further, for carry forward of losses, taxpayer must submit the return of tax bases
within the prescribed due date.
pact analysis
e provisions for computation of business income under the revised deal are broadly onsame lines as proposed in the original DTC Bill. Extension of investment based tax
entives to SEZ developers and SEZ units is highly encouraging, especially for IT-ITES Real Estate industry.
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xation of Capital gains
posal under the original DTC Bill and the RDP
e original DTC Bill proposed several changes to the taxation of capital gains such asation of capital gains at normal tax rates [with no special regime for Foreign Institutionalestors (“FIIs”)], alignment of holding period for securities and other assets, removal ofmption for gains realized from transactions in listed equity shares / units of an equity
ented mutual fund, abolition of securities transaction tax, etc. The RDP, based onmments received through the public consultation process rationalized the changesposed in the original DTC Bill.
posal under the revised Code
• The RDP had provided that capital gains arising from the transfer of equity sharesand units of equity oriented mutual funds which are held for more than one year(long term) and have been subjected to Securities Transaction Tax (“STT”) shall becomputed after allowing a deduction at a prescribed rate. The revised Codeprescribes a 100 percent deduction, therefore, effectively reducing the income-taxon such capital gains to zero. Any losses arising on such long term investmentassets shall not be available for set off / carrying forward.
• The revised Code prescribes a 50 percent deduction where such equity shares orunits of an equity oriented mutual fund are held for less than a year (short term);however, have been subjected to STT. In case of losses arising on such short terminvestment assets, only 50 percent of such loss will be eligible for set-off and carryforward.
• In light of the deductions provided for computing capital gains from transactions inequity shares and units of equity oriented mutual funds, securities transaction taxhas been reinstated. The rates at which securities transaction tax have not beenenumerated.
• The revised Code defines ‘investment asset’ as:
- Any capital asset which is not a business capital asset;
- Any security held by a FII;
- Any undertaking or division of a business.
• Thus, income earned by such FIIs from transactions in securities has beencategorized as income from capital gains;
• Section 5 of the original DTC Bill which pertains to income which is deemed toaccrue in India inter alia specified that ‘income shall be deemed to accrue in India,if it accrues, whether directly or indirectly, through or from the transfer, directly orindirectly, of a capital asset situate in India’. In the revised Code, the term ‘directly
or indirectly’ appearing after the word ‘transfer’ has been deleted.
• The revised Code provides a computation mechanism to tax income on transfer ofshares or interest in a foreign company in proportion of the fair value of the assetsof the foreign company situated in India vis-à-vis fair value of its total assets. Therevised Code carves out an exception in respect of foreign companies where thefair value of their Indian assets constitute less than 50 percent of its total assetscontinuously during the preceding 12 month period.
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• The following provisions appearing in the IT Act have been introduced in therevised Code:
- Exemption for conversion of a sole proprietorship into a company.
- Exemption for conversion of a company into a limited liability partnership andconsequent exemption for transfer of shares in the company by the shareholders.
- Exemption for transfer of an investment asset by a holding company to its whollyowned subsidiary or vice versa (the recipient company necessarily being an
Indian company), provided that the holding company does not dilute itsshareholding in the subsidiary and the recipient company does not treat suchinvestment asset as stock in trade within 8 years.
- Addition of condition that 3/4th of the shareholders in the amalgamating / demerged foreign company should become shareholders in the amalgamated / resulting foreign company for such amalgamation /demerger to be exempt fromincome-tax.
- Exemption for transfers by a banking company to a banking institution, if thetransfer is effected under a scheme of amalgamation sanctioned by theGovernment.
- Exemption for transfer of shares of predecessor co-operative bank by a
shareholder in a scheme of business organization, if the transfer is made inconsideration of the allotment to the shareholder of shares in the successor co-operative bank.
- Exemption for transfer of an investment asset being land of a sick industrialcompany made under a scheme sanctioned under section 18 of the SickIndustrial Companies (Special Provisions) Act, 1985 where such company isbeing managed by its worker co operative.
• The revised Code provides that the following other transfers shall be exempt:
- Transfer of any investment asset in a transaction of reverse mortgage under ascheme notified by the Government; and
- Transfer of any beneficial interest in a security by a depository.
• The revised Code provides that full value of consideration for land and buildingshall be the stamp duty value regardless of the actual transaction value.Consequently, the provisions in relation to reference to a valuation officer havebeen deleted.
pact analysis
ppears that the Government has proceeded on the basis that the current provision underIT Act and the provision under the revised Code give sufficient authority to the Indian
venue to bring to tax indirect transfer of capital assets situated in India.
emains to be seen how the Government seeks to implement Section 5 of the revised
de in connection with income deemed to accrue in India, especially with regard to
hore transfer of shares. The proposal to exclude income on transfer of shares or interest
oreign companies where Indian assets comprise less than 50 percent of their total assets
welcome change, though.
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e 100 percent deduction for capital gains realized from transactions in listed equityres and units of equity oriented mutual funds (which have been subject to STT) will bringer to investors.
e revised Code brings clarity in the characterization of income earned by a FII fromnsactions in securities. However, it remains to be seen whether it would be possible totend that the deeming fiction under the revised Code cannot be extended to the tax
aties; that income earned by FIIs from transactions in securities, based on certainameters, should be characterized as business income; that such income ought not to be
le to tax in India so long as such FII does not constitute a permanent establishment ina under the relevant tax treaty.
AA vis-a-vis domestic law
posal under the original DTC Bill and the RDP
e original DTC Bill provided that the provisions of the domestic law or Agreement foroidance of Double Taxation (“DTAA”) whichever is later in time shall prevail. Thisposal received immense criticism both from domestic as well as international investorssuch a provision would make the DTAA’s entered prior to enforcement of DTCundant.
e RDP proposed to revert to the existing position under the IT Act with certaineptions. It was proposed that the DTAA will not have preferential status over the
mestic law in the following circumstances:
• where the General Anti Avoidance Rule is invoked; or
• when the Controlled Foreign Corporation provision is invoked; or
• when branch profits tax is levied.
posals under the revised Code
the basis of input received from the public and as proposed in RDP, the revised Code
provided that domestic law or DTAA whichever is more beneficial to the taxpayer shallvail. However, in circumstances wherein General Anti Avoidance Rule is invoked orntrolled Foreign Corporations (“CFC”) rule is applied or branch profit tax is levied, thevisions of the domestic law would prevail over DTAA.
e revised Code has also widened the scope to cover within the ambit of DTAA, wealth-in addition to the income tax, a principle not extant in the IT Act.
pact analysis
e revised proposal for limited treaty override is in line with the international best practicesinstituting anti-avoidance measures in the domestic law. Also, the reversal of general
aty override principle as proposed in the original DTC Bill would be welcomed by non-
dent taxpayers.
neral Anti Avoidance Rule
posal under the original DTC Bill and the RDP
e original DTC Bill introduced General Anti Avoidance Rule (“GAAR”) to serve as anective deterrent and compliance tool against tax avoidance. It provided sweeping powersthe Commissioner to treat any transaction to be a tax avoidance transaction. A
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nsaction would be regarded tax avoidance transaction, if the transaction is undertakenh the main purpose of obtaining a ‘tax benefit’ or if it is not at arms length or its lacksmmercial substance or if it misuses or abuses the provisions of the DTC or it is not for
afide business purpose .
e representations were made to ensure proper administration and exercise of power byCommissioner.
posal under the revised Code
proposed in the RDP, the revised Code proposes that the Central Board of Direct TaxesBDT”) would issue guidelines on the circumstances in which GAAR could be invoked that the taxpayers, in whose case GAAR is invoked, could approach Dispute
solution Panel (“DRP”) to resolve the dispute.
e revised Code proposes that an Assessing Officer, who has received a direction fromCommissioner applying GAAR in the case of a taxpayer, is required to prepare a draftessment order and serve it on the taxpayer. The taxpayer could apply to the DRP
ainst such draft order and represent its case.
pact analysis
now, a taxpayer could apply to the DRP only if a transfer pricing variation is proposed inassessment or if the taxpayer is a foreign company. This proposal further opens theors of DRP for taxpayers, domestic or foreign, to apply to the DRP. The effectiveness of
proposal would be tested at the stage of implementation because GAAR provisions arebe invoked by a Commissioner and the remedy for the Commissioner’s direction is now
DRP, which is a Collegium of three Commissioners. Given the parity of ranks of thehorities involved, the effectiveness of DRP in cases where GAAR is implemented, may
me under closer public scrutiny.
ntrolled Foreign Corporation rules
posal under the original DTC Bill and the RDP
ilst the original DTC Bill did not contain any rules relating to Controlled Foreignporations (“CFC”), the RDP proposed to introduce CFC rules/ provisions as an anti-idance measure.
e CFC rules/ provisions as proposed in the RDP provided that any passive undistributedome earned by a foreign company which is controlled directly or indirectly by a residentndia shall be deemed to have been distributed and consequently, would be taxable ina in the hands of resident shareholders as dividend received from the foreign company.
posal under the revised Code
y provisions of CFC regime under the revised Code are as under:
• The rules seek to tax undistributed income of a CFC under the head ‘income fromresiduary sources’. The rules provide that if any income has already been taxedunder the CFC rules, it will not be again taxed on actual receipt.
• The income attributable to a CFC under these rules is to be included in the totalincome of a resident in the financial year during which the accounting period of theCFC ends. The accounting period is defined to be a period of 12 months ending onMarch 31 if not otherwise specified by the CFC, in which case such other datedetermines the end of the accounting period.
• The attributable income of a CFC is computed as per the prescribed formula.
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• A CFC is a foreign company that satisfies the following conditions:
- Is a tax resident of a territory with a lower rate of taxation – Tax residency isdetermined based on place of incorporation or place of management of thecompany, with prescribed tie breaker rules if it is a tax resident of more than oneterritory. Territory with lower rate of taxation is one where the tax payable on CFCincome is lower than 50 percent of the tax payable on such income computedunder the revised Code.
- Its shares are not traded on a stock exchange of such territory
- One or more Indian residents exercise control over it – Control is determined basedon satisfaction of prescribed thresholds, ie 50 percent or more of the voting poweror capital or ability to get income / assets, or dominant influence, or votes toinfluence a shareholder meeting.
- Is not engaged in active trade or business – Active trade or business test isdetermined based on active participation in industrial, commercial or financialundertakings or that less than 50 percent of its income is either passive income(like dividend, interest, royalty, etc) or is under the head residuary sources.
- Its specified income (computed as prescribed) exceeds INR 2,500,000
• Under the rules, a resident is required to furnish prescribed details of investment
and interest in any entity outside India.
pact analysis
ile the experts and taxpayers alike would continue to debate whether the introduction ofC is premature in Indian context, the objective formula prescribed for computing CFCome is a positive move. However, for effective implementation of CFC regime adequateministrative guidelines should be prescribed in due time.
vance ruling and dispute resolution
posal under the original DTC Bill and the RDP
ilst the IT Act restricts the Revenue authorities or Tribunal to decide any issue pendingore the Authority for Advance Rulings (“AAR”) in case of resident applicants; the originalC Bill proposed to extend this to non-resident applicants as well.
ther, the original DTC Bill proposed that all tax payers would be allowed to seekections of the DRP; under the provisions of the IT Act, DRP will issue directions only ines involving transfer pricing disputes and disputes of foreign companies.
posal under the revised Code
e revised Code proposes to significantly expand the scope of the AAR to resolveputes arising in the case of a public sector company (“PSC”) and has been appropriately
amed as the Authority for Advance Rulings and Dispute Resolution (“Authority”). A PSCbeen defined to mean any corporation established by or under any Central, State or
vincial Act or a Government company. It is proposed that a PSC or a Commissioner willw file an appeal to the Authority against orders of lower authorities rather than to thepellate Tribunal. Most importantly, the orders passed by the Authority shall be final andding on both the parties.
e DRP as prevalent under the IT Act will continue to exist. However, the proposal in theinal DTC Bill to allow all taxpayers to seek its directions has been dropped; the revised
de provides that apart from transfer pricing cases and foreign companies, only cases in
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ch GAAR has been applied and other prescribed cases will now be able to approach theP.
pact analysis
panding the scope of the AAR to finalise tax disputes for PSCs is a welcome sign touce the tax burden of courts; the Government will however, have to adequately resourceAuthority to meet this additional burden and achieve the objectives sought.
stricting the DRP’s purview to foreign companies, transfer pricing cases and GAAR will
w the DRP to focus and act as a specialized forum for resolving complex tax disputes.
tlement of cases
posal under the original DTC Bill and the RDP
der the original DTC Bill as well as the RDP, there was no reference to settlement ofes before the Settlement Commission.
posal under the revised Code
der the revised Code, settlement provisions have been introduced, whereby the
payers who did not disclose their income chargeable to tax, may come clean, discloser income and pay the appropriate taxes.
ch erring taxpayers would apply to the Settlement Commission and seek immunity fromalty and prosecution for taxes evaded so far. However, such settlement is a one time
air for the taxpayer in cases where search and seizure has been carried out.
the provisions related to constitution of Settlement Commission, procedure for applyinghe Commission, the eligibility criteria for the taxpayer, manner of hearing and disposal ofcases are identical to the current provisions of the IT Act.
pact analysis
vival of settlement commission mechanism under the revised Code should provideedy resolution route for long pending /litigated tax disputes.
xation of Non-profit organizations
posal under the original DTC Bill and the RDP
e original DTC Bill provided for a specific scheme for taxation of income earned by non-fit organizations (instead of the exempt status provided under the IT Act).
posal under the revised Code
e Government acknowledged inputs received through its public consultation process andhe revised Code has made the following amendments:
• Basic exemption limit of INR 100,000 provided for, beyond which income computedas prescribed will be liable to income-tax at the rate of 15 percent.
• Based on input received on the original DTC Bill, the term ‘charitable purpose’ hasbeen reinstated instead of ‘permitted welfare activity’. While the definition is largelythe same, it has been clarified that object of general public utility shall not includethe carrying on of trade, commerce or business or the rendering of services if
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income from such activities exceeds INR 1 million irrespective of how such incomeis applied. This clarification exists under the IT Act but was not appearing in theoriginal DTC Bill.
• Companies registered under Section 25 of the Companies Act, 1956 will need tofollow mercantile system of accounting (cash system will apply for other non-profitorganizations).
• Public religious trusts / institutions will not be liable to income-tax under the revisedCode provided, inter alia , they apply their income wholly for public religiouspurposes. Presumably, therefore, public religious-cum-charitable trusts will be liableto income-tax even on income generated from religious activities, though this
aspect is not specifically evident from the revised Code.• Amounts received in the in the last month of a financial year can be deposited in
specified deposit account such as post office savings bank accounts, accounts withscheduled banks, government securities, etc and applied in the following year.
• Anonymous donations received in excess of 5 percent of total donations receivedor INR 100,000, whichever is higher shall be liable to tax in the hands of the non-profit organizations at the rate of 30 percent (instead of 15 percent that otherwiseapplies).
pact analysis
e changes included in the revised Code are largely based on inputs received through theblic consultation process following the original DTC Bill. However, there is limited clarity
the implications for religious-cum-charitable trusts.
ome from residuary sources
posal under the original DTC Bill and the RDP
e original DTC Bill proposed to widen the scope of residuary income to include accrualseceipts of various nature.
posal under the revised Code
e revised Code proposes certain withdrawals and inclusions to the scope of residuary
ome.
y withdrawals:
• reimbursement of any expenditure not included under the head “income frombusiness”.
• any amount exceeding INR twenty thousand received as loan / deposits orrepayment thereof in specific circumstances.
• withdrawals from the Capital Gains Savings Schemes.
• interest received on compensation or enhanced compensation.
• the value of any specified property, being an immovable property received withoutconsideration by an individual or a Hindu undivided family.
• the value of any specified property, being an immovable property received without
consideration by an individual or a Hindu undivided family.• amount received on account of remission or cessation of any liability and not
included under the head “Income from business”.
• any amount of attributable income of a controlled foreign company to a resident inaccordance with the Twentieth Schedule (the dividends received by the residentfrom the controlled foreign company which has been taxed in India would beallowed as a deduction).
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pact analysis
e revised Code seeks to broaden the scope of residuary income by including value ofres in a closely held company received by a firm or a company (whether closely held not ) by way of gift or for inadequate consideration. As a consequence, even gift or
nsfer of shares (for inadequate consideration) of a closely held company to a listedmpany shall be taxable as other income.
T v EEE scheme of taxation
posal under the original DTC Bill and the RDP
e Exempt-Exempt Exempt (“EEE”) scheme of taxation of saving instruments prescribeder the RDP has been provided in the context of contributions, accumulations/ accruals withdrawals towards the Government Provident Fund, Public Provident Fund and
cognized Provident Fund and Pension Scheme administered by the Pension Fundgulatory and Development Authority, along with approved pure life insurance products annuity schemes. For this purpose, only such life insurance policies are eligible wherepremium payable for any year is 5 percent or less.
posal under the revised Code
e EEE scheme of taxation for above contributions, accumulations/ accruals andhdrawals towards said Schemes/Funds has been retained. The revised Code proposesncrease the aggregate investment amount available for deduction by providing twoarate limits (i) INR 100,000 in respect of contributions to approved funds and (ii) INR000 in respect of life insurance premium, medical premium and tuition fee for children.
ther, life insurers distributing income from equity oriented life insurance schemes (beinginsurance schemes where more than 65 percent of the total premiums received are
ested by way of equity shares in domestic companies) will have to pay 5 percent tax onome distributed by them. There is no carve out provided in respect of existing insurancecies
pact analysis
e proposal under the revised Code for taxation of savings shall find favour with individualpayers as it partly restores the taxation mechanism currently under the IT Act.
anch Profits Tax
posal under the revised Code
der the revised Code, in case of foreign companies, in addition to the income tax (whichbeen pegged to 30 percent as against 25 percent as proposed under the Original DTC, the Branch Profits Tax (“BPT”) would be levied at the rate of 15 percent on branchfits.
e revised Code has provided that branch profits shall be the difference between theome directly or indirectly attributable to the permanent establishment or an immovableperty situated in India, which is included in the total income of the foreign company andincome-tax payable on such income.
pact analysis
e effective tax rate in case of a foreign company (including BPT) would be 40.5 percentagainst the effective tax rate of 39.13 percent (including DDT) for domestic companies.
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e mere fact that under the revised Code, the foreign companies would be liable to payat a rate higher than the domestic company cannot be regarded as a basis for
crimination against foreign company.
peals, Revision and Refund
posals under the original DTC Bill vis-à-vis proposals under the revised Code
mmissioner (Appeals) [“CIT(A)”]
• The original DTC bill did not enable an appeal against pending rectificationapplication. However, the revised Code has specifically provides that if arectification application is not disposed off within six months, the assessee canprefer an appeal to CIT(A).
• Apart from above, umbrella of appealable orders under the original DTC bill isreplaced with the specific list of appealable orders. Sweeping powers of CIT(A),given under the original DTC bill, to take up any matter not arising out of appealwould continue to haunt the assessee under the revised Code.
pellate Tribunal (“ITAT”)
• The revised Code entrusts ITAT with more experienced personnel. The bar of
eligibility for being a President and Member has been raised significantly. Forexample, Chief Justice of High Court to preside over as a president of the ITAT.
• In case of for public sector companies, the appeal either by revenue or bycompany, shall lie before a separate dispute resolution authority constituted underthe revised Code [for details refer section on ‘Advance Ruling’].
• Reduced time period for disposing off the appeals, been retained in the revisedCode.
• ITAT, suo-moto , can amend any order passed by it within 4 years from the date oforder with a view to rectify any apparent mistake in such order. Such a power wasnot available to ITAT either in the IT Act or in the original DTC Bill.
h Court
• An appeal to National Tax Tribunal, introduced under the original DTC Bill, hasbeen replaced with the existing mechanism of appeal before High Court.
vision by Commissioner
• The revised Code specifically provides that an order passed pursuant to thedirections of DRP cannot be revised. However, the expanded circumstances underwhich an order can be revised by a commissioner continue under the revised Code.
• Also, CIT is entrusted with the powers to revise order which are not prejudicial toassessee. Such power was missing in the original DTC Bill.
fund
• No interest on refunds is payable if refund is less than ten percent of taxdetermined on intimation or on regular assessment.
• Revised Code retains the concept of interest on ‘interest on refund’.
pact analysis
e measures proposed by the revised Code reflect on the Government’s endeavors to
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(A), wider scope of revision by Commissioner, introduction of CFCs, GAAR etc wouldplify the litigation or not shall only be known with time.
nsfer Pricing
posal under the original DTC Bill and the RDP
e significant amendments proposed by the original DTC Bill to the transfer pricingvisions present in the IT Act were:
• Introduction of advance pricing agreements to agree on arm’s length price forinternational transactions upfront, for a maximum period of five years.
• Widening the scope of associated enterprises by lowering benchmark for equityparticipation from 26 percent to 10 percent and other changes.
• Rationalisation of the penalty provisions for not maintaining and filing transferpricing documentation.
• Risk assessment strategy for selection of transfer pricing cases for audit.
posal under the revised Code
e revised Code proposes the following significant departures from the original DTC Bill:
• The proposal in the original DTC Bill to widen the definition of associatedenterprises by lowering equity participation thresholds to 10 percent and similarother changes have been shelved; the limits specified in the IT Act have beenreinstated in the revised Code
• Two circumstances have however, been proposed in the revised Code forenterprises to qualify as associated enterprises in addition to the existingcircumstances specified under the IT Act:
- one where an enterprise influences the terms and price at which services areprovided to another enterprise; such a condition already exists in the IT Act forgoods; and
- second, where one of the enterprises is located in a specific or distinct location,as may be prescribed later.
• The proposal in the original DTC Bill to select cases for audit based on riskassessment has been withdrawn. The revised Code has reinstated the provisionsof the IT Act wherein the Assessing Officer will now select cases with prior approvalof the Commissioner.
• The revised Code does not provide any further details of the following transferpricing issues and the same are expected to be prescribed in due course:
- Methods to be used to determine the arm’s length price
- Manner in which the most appropriate method should be applied
- Safe harbor rules
- Advance pricing agreements
- Documentation to be maintained
- Specific or distinct location of the enterprises which will qualify parties as associatedenterprises
- Report of international transaction to be submitted to the Transfer Pricing Officer
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pact analysis
e revised Code carries forward the transfer pricing reforms by seeking to introduce safebor provisions and advance pricing agreements; once introduced, these will helppayers achieve certainty in resolving their transfer pricing disputes. The withdrawal of the
based strategy to select transfer pricing cases is however, disappointing and willonvenience taxpayers. The Government should also clarify its intent in introducing thevision to treat enterprises from specific or distinct location as associated enterprises.
scellaneous provisions
xation of house property income
xation of house property income proposed largely on the same lines as proposed in theP. Gross Rent to be computed with reference to the amount of actual rent received oreivable as proposed in the RDP; Concept of “Contractual Rent” and “Presumptive Rent”hdrawn as proposed in original DTC Bill.
alth tax
discussed in the RDP, the revised Code proposes to levy wealth tax on the specified
productive assets of all taxpayers except NPOs. Wealth tax will be levied in case “netalth” on the valuation date exceeds INR 10 million, as against the limit of INR 1.5 millioner the exiting Act and INR 500 million proposed under Original DTC Bill. Rate of wealthis proposed to be 1 percent as under the IT Act, as opposed to 0.25 percent proposeder the Original DTC Bill.
e scope of “assets” to be included in “net wealth” is widened to include the followingets as compared to provisions of the IT Act:
• Watches having value in excess of INR 50,000;
• In case of individuals and HUFs, deposit in a bank located outside India and in caseof other taxpayers any such deposit not recorded in books of account;
• Any interest in a foreign trust or any other body located outside India (whether
incorporated or not) other than a foreign company; and• Any equity or preference shares held by a resident taxpayer in a controlled foreign
company defined under the revised DTC Bill. Given this, equity shares of listedcompany, as is the case under the IT Act, will continue to be outside the scope of“assets”.
sessment Procedure
posal under original DTC Bill
e original DTC Bill proposed specific provisions in relation to selection of cases for audit,uance of draft assessment order, reopening of assessment, rectification of orders et al.
posal under the revised Code
y proposals under the revised Code are:
• Selection of cases for audit
- The revised Code seeks to dispense with the risk based selection strategyproposed under the original DTC Bill. It is proposed that in line with its current
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practice, the CBDT would continue to publish periodic guidelines for mandatoryselection of cases for audit.
- The Original DTC Bill provided that the tax base was deemed to have escapedassessment if the assessment was not in accordance with any order of theTribunal, High Court or Supreme Court prejudicial to the taxpayer, even if itconcerned any other person under the Income-tax law or any other law. Further, itprovided that the notice of reopening had to specify the reasons for reopening thecase.
• Draft Assessment Order
- The revised Code seeks to reinstate the extant position under IT Act wherein,every foreign company or taxpayer who has been subjected to an income variationunder an order of the Transfer Pricing Officer is considered to be eligible forreceipt of draft assessment order.
- Further, taxpayers in whose case any variation has resulted from an order of theCommissioner declaring an arrangement to be an impermissible avoidanceagreement under the GAAR would also be eligible for the draft assessment order.
- It is proposed that the taxpayers will continue to have the option of approachingeither the dispute resolution panel or the normal appellate remedies, as is the
current position.
• Reopening of assessment and rectification of order
- The revised Code seeks to dispense with the provision of deemed escapement ofincome in the case of any order of Tribunal, High Court or Supreme Court which isprejudicial to the taxpayer.
- On a similar footing, the revised Code has also done away with a similar proposalenabling the tax authorities to issue rectification orders in the advent of anysubsequent order of the High Court or Supreme Court, or any subsequentamendment to the Code concerning the taxpayer.
pact analysis
e withdrawal of proposals under the original DTC Bill providing wide powers to thevenue authorities are expected to bring greater certainty in scope and application of thesed Code.
duction of tax at source
• Provision of direct payment has been inserted in the revised Code wherein tax onthe income shall be payable by the assessee directly if:
- there is no provision for deduction or collection of income-tax at the time ofpayment; or
- income tax has not been deducted or collected in accordance with the provisionsof revised Code.
• It is pertinent to note that in a scenario where the assessee fails to pay such taxdirectly, the person who was responsible for deduction or collection of such tax onthe income shall be held to be assessee in default.
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Unlike provisions in the IT Act, the person responsible for deduction and paymentof tax would be held to be in default only if the assessee has not paid the taxdirectly.
• The revised Code has introduced a new section 195(4) which states that if thepayee is a non-resident and the rate of tax on specified payments is provided in theAgreement entered by Central Government with the Government of anothercountry, tax shall be deducted at the rate which is lower of the rate of tax providedin the revised Code or the Agreement
• Original DTC Bill provided for mechanism for obtaining certificate for no deductionof tax. The revised Code makes these provisions more useful and realistic byadding that certificate may also be obtained for deduction of tax at lower rate.Detailed rules in this respect would be prescribed by the CBDT.
• Revised Code has increased the limit in respect of certain payments to residentsupto which no taxes are required to be deducted, eg, payment to a contractor, rentpayments, compensation on compulsory acquisition of immovable property, etc.
• New provisions have been inserted in the revised Code regarding tax deduction onincome distributed by mutual fund on which income distribution tax has not beenpaid and amount paid by life insurer in respect of certain life insurance policies.
• The revised Code provides that no tax is required to be deducted on payment madeto non-resident, being a foreign institutional investor as consideration for sale oflisted securities.
tes for deduction of taxes at source
Nature of payment
Ratesproposedunderthe revisedCode
Income from employment
Average rate oftax onestimatedincome
Payment in respect of:
a. works contract
b. service contract
c. broad casting and telecasting
d. supply of labour for carrying out works/ service contract
e. advertising
f. carriage of passenger and goods by any mode oftransport other than by railways
2 percent
Dividend other than dividend on which DDT is paid 10 percent
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Interest 10 percent
Income distributed by mutual fund on which income distribution taxis not paid:
a. in case recipient is an individual or a HUF
b. any other deductee
10 percent
20 percent
Payment made by a life-insurer in respect of a life insurance policyexcept in case of certain payments
a. in case recipient is an individual or a HUF
b. any other deductee
10 percent
20 percent
Commission, brokerage, remuneration or prize for rendering ofany services
10 percent
Fees for professional or technical services 10 percent
Royalty payment or non-compete fee 10 percent
Payment for compensation on compulsory acquisition ofimmovable property other than agricultural land
10 percent
Rent -
a. for the use of machinery or plant or equipmentb. for the use of any land or building (including factory
building) or land appurtenant to a building (includingfactory building) or furniture or fittings
2 percent10 percent
Winnings from any lottery or crossword puzzle or card game orother game of any sort
30 percent
Winnings from any horse race. 30 percent
ere deductee/ payee is a non-resident:
Nature of payment
Ratesproposedby
the revisedCode**
Interest 20 percent
Dividend other than dividend on which DDT is paid 20 percent
Income distributed by mutual fund on which income distribution taxis not paid
10 percent
Fees for royalty or fees for technical services 20 percent
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Winnings from any lottery or crossword puzzle or card game orother game of any sort
30 percent
Winnings from any horse race. 30 percent
Payment to a non-resident sportsperson (not being a citizen ofIndia) in specified cases
10 percent
Payment by way of guarantee money to a non-resident sportsassociation or institution in relation to any game or sports played in
India
10 percent
Any other sum chargeable to tax 30 percent
Lower rate shall apply, if the non-resident is entitled to the benefit of such lower rate of as may be specified in a tax treaty signed by India [as per section 195(4) of the revised
de]
yment of advance tax, tax credit and payment of interest
y proposals under the revised Code are:
• The revised Code proposes to empower the Assessing officer to issue a notice ofdemand and require a person to make payment of advance tax in the prescribedmanner. The revised Code also empowers the assessee to file estimation ofincome to claim lower incidence of advance tax obligation.
• The revised Code has provided clearer provisions with respect to the availability offoreign tax credit than what was provided in the original DTC Bill. As per theseprovisions, in case of countries with which India has entered into an agreement, thecredit of taxes would be available as specified in the agreement. As regards othercountries with which no agreement has been entered into, the revised Codeprovided a detailed mechanism of computing the credit.
• As against the original DTC Bill, the revised Code provides detailed mechanism forcomputation of interest payable by the assessee for various defaults, excess refundand interest payable to the assessee on refund due.
MR Comments
he timely introduction of the revised Code for Parliamentary debate and approval is
couraging and re-emphasizes the Government’s commitment to usher in new tax
forms. Deferral of the proposed legislation by one full year would smoothen the hurried
sh for transition, as the extended time would hopefully enable trade and industry gear
p for the new law.
the interim, there is no gainsaying that the revised Bill is well intentioned to simplify
chaic IT Act with adequate flavour of international best practices. It would beasonable to pat the working group and the Finance Minister in particular for revealing
eletons hiding not springing any surprises with which the industry at large would not
ave been amused. Before a verdict can be passed, however, the right thing to do shall
e to analyse the revised Bill considering this is the future of the Direct tax law.
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sclaimer:
is newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express viewpert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a reany material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts andcumstances. This newsletter does not substitute the need to refer to the original pronouncements.
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