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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 Domestic Co Foreign Co Branch Profit tax MAT* DDT Wealth Tax Income tax Act 1961 („Act‟) 33.22% 42.23% 19.93% on Book Profits 16.61% 1% on Net Wealth exceeding Rs. 3mn DTC 30% 30% 15% 20% on Book Profit 15% 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 recharacterise 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.
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.
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.
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.
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 grandfathered 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 available to entities engaged in the business of developing, operating or maintaining infrastructure facility commencing operations post 31 March, 2012. Housing Projects & Hotels Under the current tax regime, profit based deductions is allowed to the undertakings engaged in the business of: developing and building housing projects approved before 31 March, 2008, subject to certain specified conditions hotels located in specified area and building, owning and operating a convention centre located in specified area, subject to certain specified conditions
building and operating, anywhere in India, a new hotel of two star or above category as classified by the Central Government and commences operation on or after the 1 April, 2010.
Characterisation of Income: Income from letting out of house property to be compulsorily characterized as Income from House Property except for hospital, hotel, convention centre, cold storage and Special Economic Zone. Capital Gains on sale of land or building (not being a business capital asset) For the purpose of computing capital gains on transfer of land or building, the stamp duty value of such land or building shall be considered to be the full value of consideration, as against the current law which requires substitution of stamp value in case it is more than the sale consideration. Others Deduction in respect of any interest payable on Housing loan continues to be available to Individual / HUF.
The above mentioned projects eligible for deduction till 31 March, 2012 shall continue to be eligible for profit linked deductions, under the DTC for the balance period. Further, investment linked deduction shall be allowed to the undertakings engaged in the business of: developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government and notified and commences operation on or after the 1 April, 2010,
Gautam Mehra Executive Director Tax & Regulatory Services Tel No. +91-22-66891155 Email: Gautam.Mehra@in.pwc.com Akash Gupt Executive Director Tax & Regulatory Services Tel No. +91 -124-3306001 Email: email@example.com
The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in reliance of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert may not be quoted in whole or in part or otherwise referred to in any documents ©2010 PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers", a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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