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KPMG IN INDIA
26 AUGUST 2009
Direct Taxes Code Bill, 2009Direct Taxes Code Bill, 2009Key provisions impacting foreign businessesKey provisions impacting foreign businesses
1© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Setting the context
2© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Tax framework in India
The existing tax framework is decades old (Current
Income tax legislation was passed in the year 1961)
Frequent amendments have made the current tax
legislation complex and ambiguous
Government committed to ushering a new era in
tax compliance and administration, primarily by
way of:
New Direct Tax legislation
Shift to the Goods and Service Tax regime (GST)*
Government introduced the new Direct Taxes Code Bill, 2009 (‘DTC’) for public discussion on 12 August 2009
*Timeline of Year 2010 reaffirmed in the Union Budget 2009
3© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Direct Taxes in India
4© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Increased focus on Direct taxes
1.6 1.8 1.8 2.2 2.6
2.6 2.83.5
4.14.3
5.45.6
5.8
5.96
0
2
4
6
8
10
12
14
2004-05 2005-06 2006-07 2007-08 2008-09
Personal Income Tax Corporate Tax Indirect Tax
Tax to GDP ratio Increasing contribution of direct taxes
Source: Economic Survey 2008-09; KPMG Analysis* Budgeted Estimate@ For FY 2008-09 (as per news reports)
6.05.46.94.2
2008-092004-052008-092004-05
Indirect Taxes(in percent)
Direct Taxes(in percent)
*
Direct tax collections@- USD 64.5 Bn
Indirect tax collections@- USD 50.7 Bn
Shift of focus towards direct taxes and ensuring enhanced compliance
Years
Rat
e
5© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Corporate tax rates in BRIC countries – A Comparison
Source: KPMG Corporate Tax Rate Survey, 2008; information in public domain
20
25
34 34
25
05
101520253035
Russia China Brazil India
Present Proposed
Perce
nt
China has also reduced its rate from 33% in 2008
6© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
New Direct Taxes Code Bill: The Rationale
7© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Reduction in corporate tax rates – in line with global trends
Ambiguities causing conflicting judgments on same issues by courts
Rationale for the new code
Direct Taxes Code Bill, 2009Income Tax Act, 1961
Interpretation issues leading to litigation
and controversies
Increased cost of compliance and administration
Numerous amendments - perplexing for the tax payers
Attempt to minimize litigation / tax controversies
Proposals to increase the tax base
Simple and easy to comprehend
8© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Some Significant Amendments - An Overview
9© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Tax Rates and new taxes
Reduction in Corporate tax rates
Move in line with International trend
Additional Branch profit tax on Foreign Companies @ 15 %
34.80
9.80
25Proposed
9.60Effective Dividend distribution tax
43.60
34CurrentParticulars
Effective Corporate tax rate
TOTAL TAX
Current effective rate
34%Proposed rate
25 %
36.25
11.25@
25Proposed
Nil
42.23
42.23Current
Domestic company Foreign Company
Transfer to reserve rules have been ignored@ 15%*(100-25)= 11.25 Branch not defined
10© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Tax residence of a foreign company
Residence of a company determines its tax obligation in India
Partial Control and Management of a
foreign company in India at any time during the year
Current Status
Proposed Status
Non residentTax on India sourced
income only
ResidentTax on worldwide
income
Partial control and management not defined
11© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Expansion of source rule
Source Rule – Taxability where income is earned / Asset is situated
Current position: Services utilized in India but rendered outside argued as not taxable
Proposed: All services utilized in India sought to be taxed
Current position: Ambiguity in taxation of overseas transfers having underlying interest in India
Proposed: Gains arising on indirect transfer of capital assets in India to be taxed
Will Impact Cross border M&A transactions
Place of rendition of services not
relevant anymore
12© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Treaty override and implications
India has entered into tax treaties with 75 countries
Current position: Tax treaties supersede domestic law to the extent more beneficial to the tax payer
Proposed: - Treaty and Domestic tax provisions brought at par- Provisions later in point of time to prevail in case of conflict- Tax residency certificate required to claim treaty benefits
13© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Royalty / Fees for Technical Services (FTS)…
Scope of definitions widened
Royaltyto include consideration for use / right to use of:
- Transmission by satellite, cable, optic
fiber or similar technology
- Ship or aircraft- Live coverage of any
event
FTS to include:
- Development and transfer of design,
drawing, plan, software or similar
services
Withholding tax rate (on gross basis) increased from 10% to 20%
14© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
…Impact analysis- An Illustration
Specific exclusions from the definition of royalty in tax treaty between India - the Netherlands / Belgium
− Right to use of any industrial, commercial or scientific equipment
− Films or tapes for radio or television broadcasting
Wider definition in DTC coupled with treaty override provisions may render these
beneficial provisions redundant
15© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
General Anti-Avoidance Rule - Setting the context
Historical perspective
- Tax havens such as Mauritius extensively used for tax planning – Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI
- Various developed countries (including the Netherlands and Belgium) have anti abuse provisions giving power to disregard transactions entered solely for obtaining tax benefit
- The DTC has introduced anti-avoidance provisions in line with international standards
*as per information in the Press
16© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
General Anti-Avoidance Rule - Purpose and implications
Conditions to be fulfilled for invoking provisions
Entering into any of the following arrangements with the main purpose of deriving a tax benefit:
- Without a bona fide business purpose
- Not at arm’s length
- Misusing or abusing any tax provision
- Lacking commercial substance
Objective sought to be achieved- Deter tax avoidance
- Preventing misuse of any provision
17© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Tax incentives linked to profits
Tax Incentives - Key Changes
Current regime
- Expenditure linked: Capital investment also eligible for tax breaks
- No tax holiday for units in: SEZs, STPI, EOUs
- Certain existing tax incentives grandfathered
Proposed regime
18© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Introduction of Advance Pricing AgreementsUpfront determination of an arm’s length price
Valid for a period upto 5 years
Binding on the taxpayer and tax authorities
Safe Harbor provisions retained
Transfer Pricing
Definition of Associated Enterprises widened
one-third
10%Proposed
one-halfNomination of Directors
26%CurrentCriteria
Share holding with voting power
19© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
− Minimum Alternate Tax now calculated as a % of ‘Value of Gross Assets’ (as against ‘Book Profits’)
− All capital Gains taxed at normal rates (lower regime of capital gains done away with)
Positives Negatives
− Unlimited carry forward of business loses
− Depreciation benefit extended to amortized expenditure
− Provisions relating to foreign tax credit introduced
Miscellaneous Provisions
20© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Concluding Thoughts
- The DTC proposes significant changes to the current tax system
- Stringent anti-avoidance measures could impact bona fide business structures
- Businesses should consider the following actions:
Impact assessment of proposals on their current structures and business modelsActive dialogue with the Government for presenting their views
Government to consider public comments before tabling legislation in Parliament
21© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Contact details
Naveen AggarwalExecutive Director
KPMG India
Tel (Direct): +91 124 307 4416Cell: +91 98112 03453
e-mail: [email protected]
Richard RekhyChief Operating Officer
KPMG India
Tel (Direct): +91 (124) 307 4303Cell: +91 9845170801
e-mail: [email protected]