mint

IN DETAIL 13
TAX MATTERS
MUKESH BUTANI
Your comments and queries on this column are welcome at feedback@livemint.com

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.

Income from employment–retirement benefits and perquisites
Retirement benefits exempt from taxability subject to specific monetary limits envisaged under the concerned provisions

SMOOTHENING THE ROUGH EDGES
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 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.

AHMED RAZA KHAN/MINT

A

PROVISION

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

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

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

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

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

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

Specific situations prescribed that will trigger application of GAAR provisions. Further, certain safeguards against application of GAAR also prescribed

COLUMN

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

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

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

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

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

Mukesh Butani is a partner at BMR Advisors. His views are personal.

Sign up to vote on this title
UsefulNot useful