The Finance Minister tabled the Direct Taxes Code Bill, 2010 (DTC 2010) in the Parliament on 30 August 2010 which is proposed to come into force on 1 April 2012. Some of the salient features are outlined below:
- The Code proposes that every person shall be liable to pay income-tax in respect of the total income for the financial year. The concepts of “previous year” and “assessment year” are proposed to be done away with.
- Rates of tax as applicable to the persons are proposed under a schedule; for companies, individuals etc the maximum rate of tax is proposed at 30%. Additionally a domestic company would be required to pay a dividend distribution tax (DDT) of 15% on dividends declared, distributed or paid. Minimum Alternate tax (MAT) of 20% would be applicable on a company in case the tax based on the book profits is higher than the tax based on the profits as per the normal tax computation. A foreign company is required to pay an additional branch profits tax of 15% in respect of the branch profits.
- Levy of surcharge and education cess is proposed to be done away with.
- In the case of a company, it is proposed that the company shall be resident in India if it is an Indian company or if the place of effective management (POEM) is in India. POEM has been defined to mean the place where the board of directors or executive directors make their decisions or the place where such executive directors or officers of the company perform their functions and the board of directors routinely approves the commercial and strategic decisions taken by such executive directors or officers.
- In all cases, other than an individual, the persons would be a resident in India, if the place of control and management of the affairs, at any time of the year is situated wholly, or partly, in India.
- Additional source rules for income arising to a non- resident are proposed to be introduced as income deemed to accrue in India; for e.g. insurance premium including reinsurance covering any risk in India, from the transfer of any share or interest in a foreign company, where the fair market value of the assets in India
owned by the company represent at least 50% of the fair market value of all the assets owned by the company etc.
Computation of total income
Income has been proposed to be classified as income from ordinary sources and income from special sources; Income from ordinary sources would comprise of income from employment, house property, business, capital gains and residuary sources. Income from special sources would refer to specified income of non –residents, winning from racehorses, lottery etc. However where the income of a non resident is attributable to a PE, then the same would not be considered as income from special sources.
- Changes in income slabs which will result in incremental savings in tax.
- The concept of „Not ordinarily resident? is removed. The condition of 729 days has been retained to determine the taxability of overseas income of an individual
- A person not entitled to HRA is allowed a deduction of rent paid upto 10% of GTI or INR 2000 per month & other conditions as may be prescribed
- Exemption for medical expenses has been increased to INR 50,000.
- Contribution to approved funds is deductible to the extent of INR 1 lacs.
- Deduction for insurance premium (not exceed five percent. of the capital sum assured), Health Insurance covered & Tuition fees to the extent of INR 50,000.
- Wealth tax to be levied at 1% for wealth in excess of INR 10 million
- Income from all investment assets to be computed under the head „Capital gains?. Investment asset to include any capital asset which is not a business capital asset, any security held by a Foreign Institutional Investor and any undertaking or division of a business.
- Distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset to be eliminated.
- No tax on gains on transfer of shares of a company or unit of equity oriented fund that are held for more than one year and such transfer is chargeable to Securities Transaction Tax (“STT”). STT would be chargeable on transfer of equity shares of a company or a unit of an equity oriented fund.
- Fifty percent of the capital gains are allowed as deduction on transfer of shares of a company or unit of equity oriented fund that are held for a period of one year or less and such transfer is chargeable to STT.
- The base date for determining the cost of acquisition to be shifted from 1 April 1981 to 1 April 2000. Consequently, all unrealized capital gains on assets between 1 April 1981 and 31 March 2000 not to be liable to tax.
- Cost of acquisition to be Nil, if cannot be determined or ascertained for any reason.
- Capital loss to be allowed to set off only against capital gains. The capital loss can be carried forward for indefinite period.
- Computation of book profits broadly similar to existing law
- Credit for tax paid under DTC 2010, would be available. The credit would be allowed to be carried forward for 15 years.
- MAT now applicable to SEZ developers and units in an SEZ
The DTC 2010 provides for expenditure based incentives wherein capital expenditure incurred by the specified business would be allowed as a deduction. Specified businesses, amongst others would include generation,
transmission or distribution of power, developing or operating and maintaining any infrastructure facility, operating a maintaining a hospital in a specified area, SEZ developers and units established in an SEZ, exploration and production of mineral oil or natural gas, setting up and operating a cold chain facility, developing and building a housing project under a scheme of slum redevelopment etc.
Grandfathering provisions for SEZ developers and SEZ Units
Grandfathering of profit linked incentives under the Income-tax act, 1961 to continue for SEZ developers notified on or before 31 March 2012. In case of SEZ units, the deduction would be permissible for units commencing operations on or before 31 March 2014
Anti- abuse provisions General anti-avoidance rules
The characteristics of the originally proposed rules have been retained. Additionally it is proposed that an arrangement would be presumed for obtaining a tax benefit would include reduction in tax base including increase in losses. The provisions would be applicable as per the guidelines to be framed by the Central Government. Further the definition of lacking commercial substance has been amended to clarify that obtaining tax benefit cannot be the only criteria for applicability of GAAR.
Controlled foreign company (CFC) rules:
As indicated in the revised discussion draft, CFC rules have been incorporated to provide for the taxation of income attributable to a CFC to be taxed in the hands of the resident. A foreign company would be considered as a CFC which
- for the purposes of tax is a resident of a country or territory with a lower rate of tax
- the shares of the company are not traded on any stock exchange
- one or more persons individually or collectively exercise control over the company
- it is not engaged in any active trade or business
- the specified income exceed INR 2.5 million.
Rules pertaining to the computation of the income attributable to the CFC which would be required to be added to the income of the resident have been provided.
Tax treaty provisions
It has been proposed to revert to the provisions under the existing law, wherein the provisions of the Code shall apply in relation to an assessee to whom the agreement applies, to the extent they are more beneficial. However, the provisions relating to GAAR, CFC and Branch profit tax would continue to apply irrespective of the beneficial provisions of the tax treaty provisions. It has also been proposed that a person shall be entitled to claim relief under the provisions of the agreement on production of a certificate in the prescribed form, from the tax authorities of the country that such person is a resident of the country.
A resident in India would be entitled to claim credit of taxes paid or deducted at source in the country in accordance with the provisions of the tax treaty against the income tax payable in respect of the income for the financial year. Where tax has been paid or deducted in a country with which there exists no agreement credit can be claimed only at the lower of the rate of tax under the DTC 2010 and the tax rate levied in the other country. However, the credit cannot exceed the tax payable under the DTC 2010.
Source: Direct Taxes Code Bill 2010 tabled on 30 August 2010 in the Lok Sabha.