Comparison of Revised Discussion Paper on Direct Taxes Code with Proposals in Direct Taxes Code

• Second Schedule to the DTC read with Section 2(3) provides for computation of Minimum Alternative Tax (‘MAT’)

• The tax shall be as follows:

-0.25% of the gross assets as on the close of the financial year for banking company;

-2% of the gross assets as on the close of the financial year for any other company

• Section 97 and 98 of the DTC provides for computation of the gross assets and methodology of preparation of balance sheet for computation of gross assets.

• Chapter XII provides the ‘Exempt- Exempt-Taxation’ (EET) method of taxation for savings. Under this method, the contributions towards certain savings are deductible from income, the accumulation/ accretions are exempt till such time they remained invested and all withdrawals at any time are subject to tax at the applicable marginal rate of tax.

• Under the DTC, the deductions shall be allowed to be individuals and HUFs in respect of amount deposited in any account maintained with any permitted savings intermediary subject of a maximum limit of Rs.300,000.

• Government Provident Fund (GPF)
• Public Provident Fund (PPF)
• Recognised Provident Funds (RPFs)
• Pension scheme administered by Pension Fund Regulatory and Development Authority
• Approved pure life insurance products
• Annuity schemes

• The Income from Employment shall be Gross Salary as reduced by the specified deductions.
• Contributions made by the employer to an approved superannuation fund, provident fund, life insurer and new pension system trust are concerned as salary.
• The deductions from Gross Salary are limited to certain the benefits received by the employees.
• Among the restricted list, the deduction shall be allowed of the amount received directly/ indirectly on account of voluntary retirement or termination of services, gratuity, and commutation of pension; if the same are paid/ deposited in a Retirement Benefit Account.
• Perquisite value of Rent-free accommodation will be determined for all employees including Government employees in the same manner as is presently determined in the case of employees in the private sector.
• Employees will not be entitled to claim deduction/ exemption in respect of amount received by way of Leave travel concession, Leave encashment, House Rent allowances, Value of rent free /concessional accommodation and  Medical reimbursements, etc.

• It is proposed not to introduce the Retirement Benefits Account Scheme.

• An employer’s contribution to an approved provident fund, superannuation fund and new pension scheme within the limits prescribed shall not be considered as salary in the hands of employee

• Retirement benefits (such as amount of gratuity received, the amount received under a voluntary retirement scheme, the amount received on commutation of pension linked to gratuity received, leave encashment at the time of superannuation) received by an employee will be exempt subject to specified monetary limits.

• The method of valuation of perquisites will be appropriately provided in the rules.

• Perquisites in relation to medical facilities/reimbursement provided by an employer shall be valued as per the existing law with appropriate enhancement of monetary limits.

• It is not proposed to compute perquisite value of rent free accommodation based on market value.

• Under the DTC, for the purposes of the computing “Income from House Property”, the gross rent in respect of a property shall be taken to be at the higher of:

– the amount of contractual rent and

– the presumptive rent.

• The presumptive rent shall be 6 % of –

-the ratable value fixed by any local authority in respect of the property; or

– the cost of construction or acquisition of the property, if no such value has been fixed by the local authority

• The scope of income from house property is proposed to be extended to all properties even if the same is in the nature of trade, commerce or business.

• The amount of tax on services paid during the financial year to the Central Government is proposed to be reduced from the gross rent.

• A deduction towards repair and maintenance at the rate of 20% of the gross rent is proposed to be allowed from the gross rent.

• In case of a property let out, interest amount on capital borrowed for the purpose of acquiring, constructing, repairing, renewing or reconstructing the property is proposed to be allowed.

• In case of let out house property, gross rent will be the amount of rent received or receivable for the financial year.

• Gross rent will not be computed at a presumptive rate of 6% of the rateable value or cost of construction/acquisition.

• In case of house property which is not let out, the gross rent will be nil and therefore, no deduction for taxes or interest will be allowed. However, in case of one house property, which has not been let out, an individual or HUF will be eligible for deduction on Account of interest on  capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.50 lakh) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.

• The differentiation between long term and short term capital gain is done away with by the DTC.
• Indexation benefit will be allowed for assets sold after one year from the end of financial year in which the asset is purchased.
• The base year for indexation will be changed from FY 1981-82 to FY 2000-2001.
• In case of assets purchased prior to April 1 2000, the taxpayer is given an option to choose between the following:

-The purchase of the asset; or

-Fair market value of the asset as on April 1, 2000

• The STT is proposed to be abolished and hence the capital gains on transfer of securities will be liable to tax at normal rate which could be as high as 30%.
• There was no provision for taxation of gains realized on sale and purchase of securities by FIIs.

• Income under the head ‘Capital Gains’ will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer.

• Capital gains on Listed equity shares or units of an equity oriented fund held for more than one year –

-Capital gains arising from transfer of an investment asset, being listed equity shares or units of an equity oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified Percentage of capital gains without any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be taxed at the applicable rate.

-The loss arising on transfer of such asset held for more than one year will be scaled down in a similar manner.

-As there will be a shift from nil rate of tax on long-term capital gains in respect of listed equity shares and units of equity oriented funds, an appropriate transition regime will be provided, if required.

• Capital gains on other assets held for more than one year –

-For taxation of capital gains arising from transfer of investment assets held for more than one year (other than listed equity shares or units of equity oriented funds), the base date for determining the cost of acquisition will now be shifted from April 1, 1981 to April 1, 2000.

– The capital gains will be computed after allowing indexation on the raised base.

-The capital gains on such assets will be included in the total income of the taxpayer and will be taxed at the applicable rate.

-It is proposed not to introduce the Capital Gains Savings Scheme.

• Capital gains on assets held for less than one year from the end of the financial year in which asset is acquired –

-The capital gains arising from transfer of any investment asset held for less than one year from the end of the financial year in

which it is acquired will be computed without any specified deduction or indexation.

-It will be included in the total income and will be charged to tax at the rate applicable to taxpayer.

• Characterisation of income of FIIs

-The income arising on purchase and sale of securities by an FII shall be ‘deemed to be’ income chargeable under the head ‘capital gains’.

-The capital gains arising to FIIs shall not be subject to TDS and they will be required to pay tax by way of advance tax on such gains as is the existing practice.

• Securities Transaction Tax – STT is proposed to be calibrated based on the revised taxation regime for capital gains and flow of funds to the capital market.

• There is confusion in the period of holding of investment assets as per the proposed amendment, which needs to be clarified.
• The proposed amendment of the FII taxation may clash with the provisions of the Double Tax Avoidance Agreement (DTAA).

• This is an equitable relief for the units operating in SEZs considering the high investments made by the units off late.
• Such relief should also be allowable for profit linked deductions under Chapter VI-A (like deduction under sections 80IA, 80IB, 80IC, 80ID, etc.).

• A Company shall be resident in India in any financial year if its place of control and management is wholly or partly situated in India at any time during the said financial year.
• Therefore, the foreign company where control and management is partially situated in India would become ‘Resident’ of India and in such a case its world-wide income would be liable to tax in India.
• There was no indication to introduce the ‘Controlled Foreign Corporation’ (CFC) regime.

• It is proposed that a company incorporated outside India will be treated as resident in India, if its ‘place of effective management’ is situated in India.

• The ‘place of effective management’ is defined in the DTC, as being the place where the board of directors of the company or its executive director, as the case may be, make their decisions; or 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.

• It is proposed to introduce Controlled Foreign Corporation’ (CFC) regime so as to tax the passive income earned by a foreign company, which is controlled directly or indirectly by a resident in India and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed.

• The proposed test for determining the residential status of a foreign company, by its place of effective management is more practical and reasonable than the earlier test, of control and management of its affairs being situated ‘wholly or partly’ in India.
• The proposed CFC regime may not be conducive for growth of Indian Multinationals, as Indian Industry is just beginning to spread its wings in the global economy.

• It is proposed that the a person will not be entitled to claim benefit of the DTAA, unless a certificate of his being resident in the other country or specified territory is obtained by him from the tax authority of that country or specified territory in prescribed format.

• The DTC proposes to allow any specified association in India to enter into agreement with an specified association in the specified territory outside India for granting tax relief, avoidance of double taxation, exchange of information and recovery of taxes.
• Further, it is proposed to put the provisions of the DTAA and the DTC on an equal footing and further provides that in case of conflict the provision which is later in time shall prevail.

• It is proposed to provide that between the domestic law and relevant DTAA, the one which is more beneficial to the taxpayer shall apply.

• However, DTAA will not have preferential status over the domestic law in the following circumstances:-

-when the General Anti Avoidance Rule is invoked, or

-when Controlled Foreign Corporation provisions are invoked or

-when Branch Profits Tax is levied.

• Provisions in relation to the Wealth Tax are proposed to be applicable to every individual, Hindu Undivided Family and Private Discretionary Trust.
• The Companies are proposed to be taken out of the Wealth Tax net.
• The DTC has proposed to enhance the basic exemption under the wealth tax form Rs. 30 Lakhs to Rs. 50 crores.
• However, at the same time all the assets (including financial assets, productive assets, business assets, etc.) will be liable to Wealth Tax.
• Rate of Wealth tax is proposed to be reduced from 1% to 0.25%.
• That means the tax on the net wealth is proposed to be 0.25% of the amount by which the net wealth exceeds Rs. 50 crores.

• It is proposed that Wealth Tax will be levied broadly on the same lines as provided in the Wealth Tax Act, 1957.

• Accordingly, specified “unproductive assets” will be subject to the wealth tax.

• However, it will be payable by all taxpayers except non-profit organizations.

• The threshold limit and rate of tax will be suitably calibrated in the context of overall tax rates.

Anti-

Avoidance

Rule

(GAAR)

• The provisions in relation to GAAR are proposed to be introduced in the DTC.
• The powers to invoke GAAR are bestowed upon Commissioner of Income tax (CIT).
• Any arrangement entered with the main objective to gain tax benefit and create rights and obligations; or misuse of or abuse of the tax code or lacks commercial substance would be treated as an impermissible avoidance arrangement.
• An arrangement when declared as an impermissible avoidance arrangement by the CIT, it may be disregard or re – characterized.
• The onus is on the taxpayer to prove that the availability of tax benefit was not the main objective of the arrangement.
• The avoidance arrangement includes cases of round trip financing, thin capitalization, etc.

• The Central Board of Direct Taxes will issue guidelines to provide for the circumstances under which GAAR may be invoked.
• GAAR provisions will be invoked only in respect of an arrangement where tax avoidance is beyond a specified threshold limit.
• The forum of Dispute Resolution Panel (DRP) would be available where GAAR provisions are invoked.

• The efficacy of GAAR to act as a deterrent would be dependent upon the equity of its administration, or otherwise it would become burdensome on the taxpayer and may lead to litigation.
• Further, can motive of tax avoidance be judged by its pecuniary effect, which may be discriminatory?