Seminar on Direct Tax Code: Corporate Tax

Presented by: Vishal Shah, Executive Director, PwC August 11, 2010

Snapshot … Corporate Tax Proposals
Key Proposals Original DTC Revised Discussion Paper Could be increased Roll-back to Profit based Not commented Not commented Introduced at conceptual level Corporate Tax 25% Rate MAT Gross Asset Based Incentive Regime “Expenditure based” proposed Business Reorganizations Controlled Foreign Corporation GAAR Capital Gains Tax neutral reorganization continued for residents Not proposed

Anti-avoidance measure Recognition of need to restrict introduced GAAR trigger Distinction between short-term Distinction restored – & long-term eliminated Special Scheme for listed equity / equity MFs

Slide 2

Business Income computation .

All receipts • Expenditure – operating expenditure and permitted financial charges • Capital allowances Key Changes • Capital receipt brought to tax • Profit from sale of business capital assets / slump sale of business undertakings – now taxable as Business Income Convergence with IFRS roll out ? Slide 4 .Computation Methodology Adoption of income expense model • Gross Earnings .

Capital / Revenue – Identity Loss Capital Receipt .Taxable Remission of loan Non Compete Fees Goodwill Sale of assets Capital Loss – Deductible ? (No provision) (25% Depreciation) (No Depreciation) (Deferred by way of depreciation claim) Dichotomy – Capital receipt taxable in year 1 but Capital loss allowable on staggered basis – Matching principles ? Slide 5 .

Use of diff mfg process • Income of all businesses ultimately to be aggregated • Separate a/cs maintainable Administrative Hassles Allocation of Common Cost ? Issues Rationale ? Additional Expenses Should be restricted only to speculative / specified incentive businesses Slide 6 .Separate physical location .No inter-dependence between units .Separate computation for each business • Business deemed to be separate if : .


MAT • Under Current Law • • • MAT currently levied @ 18%* on book profits MAT Credit available for 10 years As per Revised Discussion Paper on DTC • • • Tax base for MAT to be retained as “Book Profits” (not Asset based) No clarity on MAT rate MAT Credit – likely to be introduced MAT base retained at “Book Profits” * Excluding surcharge and cess Slide 8 .

Incentive Regime .

can certainly be a catalyst Slide 10 .Investment Linked Incentive Scheme • • “Profit based tax incentive” for specified sectors replaced with “Expenditure-based incentive scheme” New Scheme – akin to Investment-based allowance . allowing capital expenditure on day one instead of yearly depreciation Key Issues • • Losses ring-fenced against other businesses Lack of clarity on deduction for land purchase cost Competitiveness of India’s CORE sector to attract Capital vis-à-vis other Economies–not to lose sight of.Basically. Tax policy – while not the driver.

Grandfathering Provisions Open Issues • • • • • Cut-off date .currently linked to FY0910 – should be FY1011 Projects under commissioning on cut-off date Year election (10 out of 15 years) Profit Computation under DTC SEZs Clarity needs to emerge Slide 11 .

Business Reorganizations .

Business Reorganizations – Amalgamation/ Demerger • Amalgamation or demerger between two or more residents • Tax neutral reorganization continued .Cross border transactions .Business continuity test extended to demergers as well • Demerger definition satisfied only on issue of “Equity Shares” Cross border mergers – should be tax neutral Slide 13 .Business reorganization under SICA – tax neutral ? • Loss set-off available .Irrespective of industry .tax neutral ? .

Unlike capital gains.Transferor • Income from slump sale to be computed as Sale consideration less Net worth . no separate exemption for transactions with WOS Implications .Transferee • Ambiguity as to allowability of depreciation on the actual purchase price Slide 14 .Taxable under head ‘Business Income’ .Business Reorganizations – Slump sale Implications .

Business Reorganizations – Transactions with WOS Nature of Transaction Exemption Current Proposed Transfer of investment asset Transfer of business capital asset Slump sale Review period Transfer of business trading asset Slide 15 (8 years) Open Ended .

Other Proposals .

Controlled Foreign Corporation (‘CFC’) • Indian Co Primarily seeks to tax passive income without repatriation to India Open Issues Hold Co Loan + Equity Dividend / Interest • • • What constitutes “passive income” Nature of subsidiaries subject to CFC taxation Computation mechanism Credit mechanism Record Keeping Operating Co Operating Co Operating Co • • Clarity awaited on CFC proposals Slide 17 .

General Anti-Avoidance Rules (GAAR) • Revised Discussion paper clarifies GAAR not to apply to every arrangement of tax planning • • • CBDT guidelines to provide circumstances for GAAR trigger Threshold limit to be provided DRP mechanism available Need of the hour • • • • • Objective approach Broader and commercial mindset –A Collegium of Revenue & Industry representatives to review? Prospective application Advance Ruling mechanism LOB clause applicability (in case of specific treaties) Slide 18 .

Flat Reduction in Gains – 50% to 70% .Capital gains taxation Particulars Short Term Resident Act 15% DTC 25%* Non Resident Act 15% DTC 25%* • If held for less than one year from the end of Remarks financial year in which the asset is acquired • Listed shares / Equity MF .Indexation available Long Term Exempt 25%* Exempt 25%* STT to be calibrated Carry forward of losses • No distinction between long term and short term capital losses • Capital losses not to be set off against any other income • Losses allowed to be carried forward indefinitely * May be increased Slide 19 .No indexation • Other assets .

WHT provisions • • Rate of tax on residuary income 10 % List of income proposed to be covered under residuary clause to be specified to mitigate litigation • Scope for obtaining Tax WHT order restricted to Nil withholding only − Obtaining Lower Tax WHT orders – not provided for All payments to residents subject to WHT – Likely to be revisited in the revised draft Slide 20 .

Key takeaways .

Key takeaways • Tax Rate could be higher than 25%. need to be moderate • MAT based on profits – huge respite • Incentive regime – need to catalyse investments in CORE Sectors • Adequately grandfather ALL current projects • WHT cannot be a burden on the Corporate & the Economy • CFC regime – needs a robust tax administration mechanism • GAAR – should be progressive Slide 22 .

Thank You .