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Deloitte DTC Impact Financial Services

Deloitte DTC Impact Financial Services

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Published by: Gs Shiksha on May 27, 2011
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Direct Tax AlertDirect Tax Code Bill -2010Focus on Financial Services Sector
Volume: DTX/ 19 /2010 1 September 2010
The Finance Minister tabled the Direct Taxes Code Bill, 2010 (DTC 2010) in theParliament on 30 August 2010 which is proposed to come into force on 1 April2012.
In this issue:
BackgroundKey highlightsContacts
The Direct Tax Code Bill 2010 (the Code) has been introduced by the Government on 30 August 2010 in themonsoon session of the Parliament. The Code is proposed to take effect from 1 April, 2012. The tax base proposedin the original tax code has reduced in view of the changes proposed and concessions given. The calibration of taxrates as mentioned in the revised discussion paper has been carried out by retaining the corporate tax rate at 30 %as against the proposed 25% and a nominal concession in the personal tax slabs in contrast to those proposed.
Key highlights
The Code on being enacted to come into force on 1 April 2012.
The concept of assessment year and previous year to be replaced with financial year.
Levy of surcharge and education cess to be done away with.
Rates of tax applicable are proposed under a schedule to the Code, for companies the rate of tax proposedis 30%.
Additionally, domestic companies would be liable to dividend distribution tax (DDT) at 15% of the dividenddeclared, distributed or paid.
MAT of 20% applicable to a company if the tax under normal computation is lower than the tax on bookprofit.
A Foreign company to be liable to additional branch profit tax (BPT) of 15%. (irrespective of whether thebranch profits are distributed)
No long-term capital gains tax, short term capital gains tax maintained at 15% on sale of equity shares andunits of equity oriented mutual fund subject to securities transaction tax. Capital gains on other assetsconsidered as income from ordinary sources and taxable at the rate of 30%.
Security transaction tax (STT) to continue.
Wealth tax shall be payable at the rate of 1 percent on net wealth exceeding ` 10 million (as against theearlier limit of ` 3 million).
Income distributed by mutual funds to unit holders of equity oriented funds and by insurance companies topolicy holders of equity oriented life insurance schemes liable to income distribution tax of 5%
A company is proposed to be resident in India if it is an Indian company or if the place of effective management(POEM) is in India. POEM is defined as(i) the place where the board of directors or executive directors, as the case may be, make their decisionsor(ii) the place where the executive directors perform their functions where the board of directors routinelyapproves the commercial or strategic decisions taken by the executive directors.
Source rules
Additional source rules for income arising to a non resident to be taxed as income deemed to accrue or arise in Indiasuch as-
insurance premium including reinsurance premium paid by resident or non-resident in respect of insurancecovering any risk in India;
income arising from the transfer of any share or interest in a foreign company, where the fair market value ofthe assets owned by the company represent at least 50% of the fair market value of all the assets owned bythe company.
Computation of Income
Income proposed to be classified as income from ordinary sources and income from special sources;
Income from ordinary sources to include income from employment, house property, business, capital gainsand residuary sources;
Income from special sources to include specified income of non-residents, winning from lotteries, horseraces etc
Income of a non-resident attributable to a PE would not be considered as income from special sources.
Minimum Alternate Tax (MAT)
Computation of Book profits for a company broadly similar to that under the existing provisions.
Profit based MAT retained as against the asset based MAT initially proposed @ 2% on gross assets (0.25%in case of banking companies) .
MAT to be levied @ 20% of the adjusted book profits where tax payable on taxable income under normalprovisions of the DTC is lower than such tax. The rate is marginally higher than the existing rate of 18%(plus surcharge and cess).
Credit for MAT paid to be allowed for 15 years as against existing period specified of 10 years.
The code does not provide for credit of MAT paid under the Income tax Act, 1961.
Capital gains
Income from all Investment assets to be computed under the head ‗Capital gains‘. Investment asset to
include any capital asset which is not business capital asset, any security held by a FII and any undertakingor division of a business.
No tax on gains on transfer of shares of a company or unit of an equity oriented fund held for more than oneyear where such transfer is chargeable to STT. STT chargeable on transfer of equity shares of a companyor units of an equity oriented fund.
Fifty percent of capital gains to be allowed as a deduction on transfer of shares of a company or unit ofequity oriented fund held for a period of one year or less where such transfer is chargeable to STT.
Base date for determining cost of acquisition and indexation to be shifted from 1 April 1981 to 1 April 2000.Consequently all unrealized capital gains on assets acquired between 1 April 1981 and 31 March 2000 notto be liable to tax.
The cost of acquisition for various modes of acquisition of shares provided in the Seventeenth Schedule tothe Code.
Capital loss to be allowed to be set off only against capital gains. Capital loss to be carried forwardindefinitely.
International tax
Foreign companies liable to tax at 30 % as against existing rate of 40% (plus surcharge and cess).Additional branch profits tax of 15 percent (on post tax income) for income attributable directly or indirectly tothe permanent establishments of the foreign companies in India.
Foreign company is considered resident in India if its place of effective management (as defined) at any timein the year is in India.
Income from transfer of share or interest in a foreign company by a non resident outside India will not bedeemed to accrue in India if the FMV of the assets owned (directly or indirectly) by that company does notexceed 50 % of the FMV of the total assets owned by that company.
Proportionate gains would be taxable in India where any income is deemed to accrue in India to a nonresident by way of transfer of share or interest in a foreign company computed as follows-A * B / CA = Income from the transfer computed under the Code as if the transfer was effected in IndiaB = Fair Market value of the assets in India, owned directly or indirectly by the foreign company

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