mint
THURSDAY, JUNE 17, 2010, DELHI ° WWW.LIVEMINT.COM
FOR BETTER OR FOR WORSE
The new draft of the Direct Tax Code (DTC)
alters the proposals that were presented in
the earlier version. Here’s a look at how it
compares with the existing provisions and the
earlier version of the DTC.
AHMED RAZA KHAN/MINT
PROVISION
Minimum alternate tax (MAT)
INCOME-TAX ACT, 1961
MAT levy on book profits: 18%
ORIGINAL DIRECT TAX CODE BILL (DTC)
MAT levy on gross assets:
2% (0.25% for banks)
DISCUSSION PAPER ON DTC
Book profits to continue to form the basis for application of MAT.
Rate to be decided
Taxation of savings instruments
Exempt, exempt, exempt (EEE) scheme
applicable in respect of specified savings
Exempt, exempt, taxation scheme:
withdrawal at any stage from savings
scheme to attract tax
EEE scheme to continue for specified savings, viz GPF, PPF, RPF,
specified pension fund; approved pure life insurance products
and annuity schemes. EET to apply for other saving instruments
Non-profit organizations (NPOs)
Income of NPOs exempt subject to the
specified threshold limit and conditions
for utilization of funds
NPOs to be taxed at 15% of total income on
the basis of cash system of accounting
Basic exemption limit to be prescribed in respect of income of NPO
from charitable activities. Public religious trusts and
religious-cum-charitable trusts eligible for exemption subject to
specified conditions
Concept of residence in case of a
company incorporated outside India
Foreign company will be treated as resident in
India if the ‘whole of control and management’
of its affairs is situated in India
Foreign company will be treated as resident in
India if the ‘control and management’ of its
affairs is situated ‘wholly or partly’ in India
A company incorporated outside India will be treated as
resident in India if its ‘place of effective management’ is in
India. ‘Place of effective management’ defined
Double Taxation Avoidance
Agreement (DTAA)
Provisions of the DTAA to prevail over
domestic law, if DTAA provisions more
beneficial to the taxpayer
In the case of a conflict between the
provisions of a treaty and DTC, the one
later in time will prevail
Between the domestic law and relevant DTAA, the one which
is more beneficial to the taxpayer will apply. However, DTAA
not to have preferential status over DTC if the provisions of
GAAR/controlled foreign corporation are invoked or branch
profit tax is levied
Source: BMR Advisors
Income from
employment–retirement
benefits and perquisites
Retirement benefits exempt from taxability
subject to specific monetary limits
envisaged under the concerned provisions
Retirement benefits to be exempt only if deposited in retirement
benefits account and will be subject to tax on withdrawal
Contribution of employer towards specified retirement benefits to
continue to be exempt subject to specified monetary limits.
Scheme of setting up retirement benefits account dispensed with.
Method of valuation of perquisites to be notified
Wealth tax
Wealth Tax Act, 1957 to apply
Wealth tax to be levied at the rate of
0.25% on net wealth in excess of Rs50
crore on the date of valuation
Wealth tax to be levied broadly on the same lines as provided in
the Wealth Tax Act, 1957. Wealth tax not to apply to NPOs
General Anti-Avoidance
Rules (GAAR)
NO concept of GAAR is envisaged
under the extant provisions
Tax authorities given power to use provision in case the
purpose is to obtain tax benefit
Specific situations prescribed that will trigger application of
GAAR provisions. Further, certain safeguards against
application of GAAR also prescribed
Long-term capital gains (LTCG)
on transfer of listed securities/
equity-oriented fund
Exempt, if transaction of sale is
undertaken at stock exchange (securities
transaction tax, or STT, is payable)
LTCG on transfer of listed securities to be taxed at special rate of
30%. Indexation benefit will be available where asset is held for
more than a year
Graded taxation for LTCG. Gain after specified percentage of
deduction taxable as ordinary income. Specified percentage of
deduction to be separately prescribed. Indexation benefit not
available in this case. Rate to be decided
LTCG on transfer of other
investment assets (other listed
securities/equity-oriented fund)
Taxable at the rate of 20%
Taxable at special rate of 30%. Indexation
benefit will be available where asset is held
for more than a year
Taxable as ordinary income of taxpayer. Indexation
benefit to be available. Rate to be decided
Short-term capital gain (STCG)
on transfer of investment assets
Taxable at 15% (if STT is payable). In other
cases, it is taxable at the ordinary rate of
tax
Taxable at special rate of 30%. Indexation benefit will not be
available where asset is held for less than a year
STCG to be taxed at the ordinary rate of the taxpayer.
Benefit of indexation not available for STCG (asset held
for less than a year). Rate to be decided
IN DETAIL 13
TAX MATTERS
MUKESH BUTANI
Your comments and queries on this column are welcome at
feedback@livemint.com
SMOOTHENING
THE ROUGH EDGES
A nine-month-long wait has ended with the government
presenting a revised draft of the Direct Tax Code (DTC) on
Tuesday. The new code, slated to replace the five-decade-old
income-tax law, will be tabled in Parliament in the upcoming
monsoon session. A reading of the revised code and the
fine-tuning of the original proposals in the draft Bill show the
government’s commitment to implementing the new legislation
with the least possible resistance from both taxpayers and the
tax administration.
The draft Bill, unveiled in August last year, generated a large
number of suggestions from industry and experts alike. After
taking into consideration the proposals and concerns of
stakeholders, the working committee reworked the original
draft with significant changes in 11 areas.
Not surprisingly, the proposal to levy a gross assets tax (at a
flat 2%) was left out in favour of the current minimum alternate
tax (MAT) on book profits. The rate of tax determination has,
however, been left out and I hope that the rates are brought to
a reasonable level compared with the present 18%. Replacing
“gross assets” with “book profits” as the basis for the MAT levy
would be cheered by non-banking finance companies and
insurance companies in particular, which have been on
tenterhooks since the Bill was unveiled. However, leaving the
tax rate determination to the legislature is a setback. The only
logical reason I can think of for procrastinating on the rate
determination is the lack of data on what lower tax rates augur,
coupled with a deferral of tax liability on capital-linked
incentives.
Sweeping powers accorded to the tax administration for
overriding tax treaty provisions have been rightly fettered, in
line with the spirit of the Vienna Convention. Limited
provisions have been enabled for domestic law, overriding the
tax treaty in circumstances where the General Anti-Avoidance
Rules (GAAR) or Foreign-Controlled Corporation (FCC)
provisions are invoked or where foreign companies are paying
branch office tax. The last rider can leave foreign companies in
a tizzy until the fine print of DTC is available.
In another positive move, GAAR provisions have been
proposed to be made more specific, with guidelines to be
prescribed by the Central Board of Direct Taxes for tax
administration invoking GAAR; yet, I believe the mere two
pages devoted to this important piece of legislation do not
reflect its significance. For
instance, qualitative tests for a
COLUMN transaction lacking commercial
expediency or bonafide business
purpose, or arm’s length nature or misuse or abuse of the code,
objective thinking that may be required in framing the rules.
The “effective management test” prescribed for residence of
a foreign company in India would allay misgivings of
multinational companies; the introduction of explicit FCC
provisions would certainly be a dampener for Indian
multinational companies that were otherwise not paying tax in
India on non-repatriated part of their offshore earnings.
Whereas such legislations are prevalent in many jurisdictions,
it is premature in the Indian context as domestic companies
have internationalized only in the past decade. I will earnestly
hope that the FCC regime, if introduced, is adequately
buttressed by robust foreign credit mechanisms to mitigate the
impact on profit after tax.
The revised discussion paper has mixed tidings for foreign
institutional investors (FIIs); while clarity on income
characterization for FIIs would save expensive litigation, the
classification of income as a capital gain is likely to translate
into higher tax costs for investors. Rethinking the calibration of
the securities transaction tax could be a double whammy for
FIIs, especially where gains are taxable as short-term capital
gains at ordinary income-tax rates. The dilution of special
taxation of long-term capital gains in listed securities in favour
of graded taxation would mitigate the misery of taxpayers to
some extent, especially for long-term strategic investors and
individual traders.
In another encouraging proposal for industry, the revised
discussion paper proposes to allow existing tax benefits for
special economic zones to (SEZs) run their full course; it,
however, remains to be seen in the fine print of DTC whether
this would apply to all units existing until the date of
commencement of the code. A lack of clarity as to the manner
of computation of a tax holiday for SEZ units (income-based or
investment-linked), however, is a handicap.
For individual taxpayers, the government has, in a bold
move, proposed restoring the EEE (exempt-exempt-exempt)
taxation scheme for savings instruments such as Government
Provident Fund, Public Provident Fund, Statutory Provident
Fund and approved pure life insurance products and annuity
schemes. Nevertheless, the EET (exempt-exempt-tax) scheme
for other saving instruments would still hurt certain classes of
investors who have exposure to unit-linked saving schemes.
In summary, I assess this interim effort on the government’s
part as laudable and encouraging. Clearly, the government has
reaffirmed its commitment to introduce the new legislation by
the next fiscal. But I would prefer to be circumspect before
passing a final verdict. That will have to wait until after I see
the fine print of the code.
Mukesh Butani is a partner at BMR Advisors. His views are
personal.