In August 2009, the Government unveiled the Direct Taxes Code, 2009 (DTC 2009) along with a discussion paper for public comments to replace the Income-tax Act, 1961 and the Wealth tax Act, 1957. In June 2010, the Government released the Revised Discussion Paper to address concerns over some major issues arising therefrom.
In August 2010, the Government tabled a revised Direct Taxes Code, 2010 (DTC 2010) in the Lok Sabha which was then referred to the Standing Committee on Finance (SCF) for its review and comments. Various stakeholders have submitted their suggestions to the Standing Committee on the DTC 2010. The SCF after deliberating with various stakeholders submitted their report to the Parliament on 9 March 2012.
The Finance Minister has now released the Direct Taxes Code, 2013 (DTC 2013) for public discussion/comments. As pr news reports, out of 190 recommendations made by SCF, 153 are proposed to be accepted wholly or with partial modifications. Key provisions of DTC 2013 are as follows:
General Anti-Avoidance Rules
General Anti-Avoidance Rules (GAAR) were originally introduced in DTC 2009. Subsequently, GAAR has been included in the Income-tax Act, 1961 (the Act) with certain modifications. GAAR applies to transaction which are ‘impermissible avoidance arrangement’. Under the Act, the entire arrangement may be declared as impermissible arrangement even if a part of arrangement is impermissible arrangement.
The SCF had proposed that only such part of the arrangement would be invoked which is proved as ‘impermissible’ and not the whole part of it. DTC 2013 has proposed that entire arrangement may be declared as impermissible arrangement even if a part of an arrangement is impermissible arrangement.
The Act also defines the meaning of term ‘tax benefit’. DTC 2013 proposed to expand the scope of the term ‘tax benefit’ so as to include a reduction or avoidance or deferral of tax or other amount that would be payable under this code, as a result of a tax treaty. Further it also includes an increase in a refund of tax or other amount under this code, as result of a tax treaty.
As a result, such transaction would also be covered under GAAR.
The Standing Committee had recommended that the onus of proof should rest on the tax authority invoking the provisions of GAAR. However, DTC 2013 propose to rest the onus of proof on the taxpayers.
Indirect transfer of capital assets
DTC 2010 had introduced provisions to tax income of a non-resident, arising from indirect transfer of a capital asset situated in India. Further the SCF had recommended that exemption should be provided to transfer of small share-holdings and transfer of listed shares outside India.
In the meantime, the Supreme Court in the case of Vodafone International Holdings B.V. held that the transfer, by a non-resident to another non-resident, of shares of a foreign company holding an Indian subsidiary Company does not amount to transfer of any capital asset situated in India. Subsequently, the Act has been amended to tax the indirect transfer of a capital asset situated in India with retrospective effect from 1 April 1962.
DTC 2013 has proposed that in case of indirect transfer of asset situated in India if 20 per cent of the total assets of a company are located in India, then the income arising from such a transaction will be taxed in India.
However, DTC 2010 had provided that such transactions would be taxed if 50 per cent of the total assets were located in India.
Further SCF’s recommendations relating to exception to intra group restructuring outside India and transfer of listed shares outside India have not been accepted in DTC 2013.
Place of effective management
The earlier versions of DTC introduced a concept of Place of effective management (POEM) where it was provided that POEM means the place where the board of directors of the company or its executive directors, make their decisions.
In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.
The SCF had recommended that the reference to executive directors or officer may be removed from the definition of POEM.
It should be determined on the basis of internationally accepted standards and judicially settled principles, where the focus is on the place, where the key management and commercial decisions as a whole are made or where the “head and brain” of the company is situated.
Accordingly, DTC 2013 has provided that POEM means the place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.
Conversion of partnership firm into LLP
Presently, conversion of a partnership firm into a Limited Liability Partnership (LLP) or a company is exempt from tax under the Act on fulfillment of certain conditions. There was no clarity on this aspect in the earlier version of DTC. The Committee had recommended that tax neutrality may be provided on conversion of a partnership firm into a LLP or a company.
DTC 2013 has provided that transfer of any investment asset by a firm to company as a result of conversion of the firm into LLP company in accordance with the provisions of relevant Act shall be exempt if specified conditions are satisfied.
Minimum Alternate Tax
Under the Act, the taxpayers are eligible to carry forward taxes paid on book profits i.e. Minimum Alternate Tax (MAT). The SCF had recommended that a grandfathering provision may be introduced in DTC for carry forward of unutilised MAT credit under the Act. However, DTC 2013 is silent on this aspect.
Additional tax at the rate of 10 per cent on recipient of dividend (liable to Dividend Distribution Tax) exceeding one crore rupees
Under the Act as well as under DTC 2010, the dividend distribution tax (DDT) is to be levied at the rate of 15 per cent. As per news posted on an official Government site, this treatment favours high net worth taxpayers who pay only a fraction of their earnings as tax on their investments in the capital market. Accordingly, DTC 2013 proposes to levy 10 per cent additional tax on the resident recipient if the total dividend in his hand exceeds INR 1 crore.
Deduction for CSR expenditure in backward regions and districts
The Companies Act, 2013 provides that every company on fulfillment of certain conditions is required to incur expenditure on Corporate Social Responsibility (CSR). There is no specific provision to allow such expenditure either under the Act or DTC 2010. Further the Committee had recommended that the CSR expenditure cannot be allowed as a business deduction as it is an application of income.
Allowing deduction for CSR expenditure would imply that the government would be contributing one third of this expenditure as revenue foregone. In line with the same, no provision has been proposed in DTC 2013 to allow CSR expenditure.
35 per cent tax rate for individual/ HUF having income exceeding INR 10 crore
DTC 2013 propose to introduce a fourth slab for individuals, HUFs and artificial juridical persons. In their case, if the total income exceeds INR 100 million, it is proposed to be taxed at the rate of 35 per cent.
Wealth tax
DTC 2013 has proposed to increase the threshold limit of levying wealth tax to INR 500 million from INR 10 million and INR 3 million provided in DTC 2010 and Wealth Tax Act, 1957 respectively. As per proposed provisions, the wealth tax is proposed to be levied at the rate of 0.25 percent on the net-wealth exceeding 500 million as compared to 1 percent provided in DTC 2010 Wealth Tax Act.
DTC, 2013 propose to cover all assets, physical or financial, as against only unproductive assets provided in DTC Bill, 2010. Further, the outstanding liability of wealth tax is specifically excluded from the scope of debts incurred in relation to specified assets.
DTC 2013 has accepted most of the recommendations of the Standing Committee, except progressive rate of taxation.
