The Direct Taxes Code, 2010

Specific proposals for Real Estate sector

Background
The Finance Minister of India tabled The Direct Taxes Code, 2010 ("DTC") in Parliament for debate and
discussion on 30 August 2010. The DTC will be effective from 1 April, 2012 and not from 1 April, 2011, as
had been intended earlier.

This alert outlines key proposals in the DTC relating to the Real Estate sector. For other key general
proposals, please refer to our “Snapshot on DTC 2010”, which has been sent separately.

Key General Proposals

Tax Rates for companies

Particulars Income tax Act 1961 („Act‟) DTC

Domestic Co 33.22% 30%

Foreign Co 42.23% 30%
Branch Profit tax - 15%
MAT* 19.93% on Book Profits 20% on Book Profit
DDT 16.61% 15%
Wealth Tax 1% on Net Wealth exceeding Rs. 3mn 1% on Net Wealth exceeding Rs. 10mn
* MAT credit reinstated and allowed to be carried forward up to 15 years
General Anti-Avoidance Rule (“GAAR”)
GAAR empowers the Commissioner of
Income-tax to amend, disregard or re-
characterise or declare an arrangement as
impermissible:
- If the arrangement entered into was with
the objective of obtaining tax benefit and,
inter alia, lacks commercial substance or
misuses the provisions of the DTC.
GAAR provisions would override provisions of
tax treaties.
- Thus, GAAR provisions are highly
subjective and provide sweeping powers
to the tax department.
Controlled Foreign Company (“CFC”)
CFC provisions introduced with a view to tax
the passive income earned by foreign
company directly or indirectly controlled by a
resident in India.
CFC means a foreign company, which
satisfies the following conditions:
- The foreign company is controlled by
resident tax payers - „control‟ defined to
mean one or more persons resident in
India, individually or collectively, directly or
indirectly, holding shares carrying not less
than 50% of the voting power or capital of
the company, and
- Such foreign company is a resident of a
country with lower level of taxation, i.e. the
amount of tax payable in foreign country is
less than 50% of the corresponding tax
payable under the DTC.
CFC provisions not triggered in case the
foreign company is listed on a stock exchange
or is engaged in "active trade or business"
(subject to certain conditions) or specified
income does not exceed Rs 2.5 mn.
Thus, it is pertinent to keep in perspective the
CFC provisions while making any outbound
investments, considering that the underlying
foreign tax credit (corporate tax paid by the
overseas subsidiary in that country)
mechanism is currently not provided in DTC.
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Indirect transfer of capital asset situated in
India
Income accrued from „indirect‟ transfer of
capital asset situated in India would be
construed as income deemed to accrue in
India in addition to direct transfer of capital
asset.
However, indirect transfer of asset not taxable
in India, if fair market value of India assets of
the transferor company represent less than
50% of the total fair market value of the all
assets owned by the company at any time in
12 months preceding the transfer.
Formula for calculation of income in case of an
indirect transfer has been specified.
Offshore borrowings
Interest paid by offshore investors making
investments in India to overseas lenders liable
to tax in India if such interest is claimed as an
allowable deduction by the offshore investor
from calculating its tax base in India.
Tax treaty eligibility
In line with the provisions of IT Act, the tax
payer under the provisions of DTC will be able
to opt for the beneficial provisions between the
DTC and the relevant DTAA.
However DTAA will not have preferential status
in the following circumstances:
- where GAAR provisions are invoked;
- where Controlled Foreign Corporation
provisions are invoked; or
- where Branch profits tax is levied.
Key Proposals relating to Real Estate Sector
Tax / Incentive Regime for Specified business:
Under DTC, it is proposed to shift from Profit
linked deductions to Investment linked
deduction.
Investment linked deduction envisages
reduction of the following expenditure from
Gross Income:
a) Operating expenditure including finance
charges and expenditure on license
charges and rental fees;
b) Capital expenditure excluding expenditure
on acquisition of land or long term lease,
goodwill or financial instrument;
c) Above expenditure in points (a) and (b)
incurred before the commencement of
business.
SEZ Developers
Deduction for Developers of Special Economic
Zones („SEZ‟) notified on or before 31 March,
2012:
Deduction for developers of SEZ notified on or
before 31 March, 2012 and engaged in the
business of developing, operating and
maintaining SEZ, shall be grand-fathered and
such developers will continue to be eligible for
profit linked deductions for the balance period.
Profits for computing deduction after 31
March, 2012 will be computed as per the
computation mechanism provided in DTC.
However, expenditures as specified in points
(b) and (c) above shall not be allowed.
Deduction for SEZ Developers notified after 31
March, 2012:
Investment linked deduction would be
available to entities engaged in the business
of developing SEZs notified post 31 March,
2012.
Applicability of MAT and DDT to all SEZ
developers
Under the present regime, provisions of MAT
and DDT are not applicable to SEZ
Developers. However, under the DTC, SEZ
Developers would be liable to pay MAT and
DDT. This would also apply to SEZ developers
operating currently as well as those notified
prior to 31 March, 2012, even if they are
eligible for the profit linked deductions. This
could increase the tax burden substantially.
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SEZ Units
Deduction for SEZ Units commencing operations
on or before 31 March, 2014
Deductions allowed to SEZ units under the IT
Act will continue to be available to units
commencing operations before 31 March,
2014 subject to specified conditions. Profits for
computing deduction after 31 March, 2014 will
be computed as per the computation
mechanism provided in DTC. However,
expenditures as specified in points (b) and (c)
above shall not be allowed.
Deduction for SEZ Units commencing operations
after 31 March, 2014
SEZ units commencing operations after 31
March, 2014 shall be entitled to investment
linked deductions as applicable to SEZ
developers. As stated in point (b) above, since
capital expenditure excludes long term lease,
such long term lease will not be allowed as a
deduction to SEZ units for computation of
profits. This will have a huge impact for SEZ
units that will claim investment linked
deduction under DTC.
SEZ units are now brought within the ambit of
MAT. DDT continues to be applicable to the
units.
It would be a critical issue to examine whether the
tax and incentive regime for SEZ Developers and
SEZ Units as proposed under the DTC would be
applicable, considering the overriding provisions of
the SEZ Act, 2005 which notified the beneficial tax
provisions for SEZ Developers and SEZ Units.
Infrastructure Companies
Deduction for companies engaged in
development, operating or maintaining an
infrastructure facility commencing business on
or before 31 March, 2012, shall be grand-
fathered and such companies will continue to
be eligible for profit linked deductions for the
balance period. Profits for computing
deduction after 31 March, 2012 will be
computed as per the computation mechanism
provided in DTC. However, expenditures as
specified in points (b) and (c) above shall not
be allowed.
The benefit of grandfathering not available to
companies engaged in the business of
development, operation and maintenance of
industrial parks.
 Investment linked deduction would be - building and operating, anywhere in India,
available to entities engaged in the business a new hotel of two star or above category
of developing, operating or maintaining as classified by the Central Government
infrastructure facility commencing operations and commences operation on or after the
post 31 March, 2012. 1 April, 2010.

Housing Projects & Hotels

Characterisation of Income:
Under the current tax regime, profit based
deductions is allowed to the undertakings Income from letting out of house property to
engaged in the business of: be compulsorily characterized as Income from
House Property except for hospital, hotel,
- developing and building housing projects
convention centre, cold storage and Special
approved before 31 March, 2008, subject
Economic Zone.
to certain specified conditions
- hotels located in specified area and
building, owning and operating a Capital Gains on sale of land or building (not
convention centre located in specified being a business capital asset)
area, subject to certain specified
For the purpose of computing capital gains on
conditions
transfer of land or building, the stamp duty
The above mentioned projects eligible for value of such land or building shall be
deduction till 31 March, 2012 shall continue to considered to be the full value of
be eligible for profit linked deductions, under consideration, as against the current law
the DTC for the balance period. which requires substitution of stamp value in
case it is more than the sale consideration.
Further, investment linked deduction shall be
allowed to the undertakings engaged in the Others
business of:
Deduction in respect of any interest payable
- developing and building a housing project on Housing loan continues to be available to
under a scheme for slum redevelopment Individual / HUF.
or rehabilitation framed by the Central
Government or a State Government and
notified and commences operation on or
after the 1 April, 2010,

Contacts

Gautam Mehra Akash Gupt

Executive Director Executive Director
Tax & Regulatory Services Tax & Regulatory Services
Tel No. +91-22-66891155 Tel No. +91 -124-3306001
Email: Gautam.Mehra@in.pwc.com Email: akash.gupt@in.pwc.com

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