Finance Minister has tabled the Direct Taxes Code, 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:
Source Income rules:-Income shall be deemed to accrue in India if it accrues, directly or indirectly through or from transfer of a capital asset situated in India. However, the income from the transfer by a non?resident of any share or interest in a foreign company would not be considered as income, wherein at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company.
Residence
- 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. For this purpose, 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.
Re organisation
Business organisations involving one of the parties as a non-resident would not be subject to tax exemption. Accordingly, cross border mergers and demergers would have tax implications.
In case of amalgamation/demerger of foreign companies, 75 percent of the value of shareholders would have to continue holding shares in the amalgamated/resulting company to availing exemption from capital gains as opposed to 25 percent under the ITA.
Anti- abuse provisions
General anti-avoidance rules
The characteristics of the originally proposed rules have been retained.
It would be applicable to both domestic and international arrangements where such arrangement’s (in part or in whole) main purpose is to a obtain a tax benefit and has been entered or carried on in a manner not normally employed for bona-fide business purposes or is not at arm’s length or abuses the provisions of the DTC or lacks commercial substance.
It is additionally proposed that an arrangement would be presumed for obtaining a tax benefit which would result in reduction in tax bases including increase in loss.
The tax payer would be required to prove that the obtaining the tax benefit was not the main purpose of the arrangement.
In accordance with the revised discussion paper on the DTC
– it has been provided that the provisions would apply in accordance with such guidelines as may be prescribed by the Central Government.
– the forum of Dispute Resolution Panel would be available where GAAR provisions are invoked.
GAAR would override tax treaty provisions
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 as gross residuary income. 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, where the amount of tax paid in that country or territory in respect of the profits accruing is less than half of the corresponding tax payable on those profits computed under DTC;
– the shares of the company are not traded on any stock exchange recognized by the law of the territory;
– one or more persons individually or collectively exercise control over the company through specified percentages by way of ownership of shares, or over assets or income of the income, or exercise dominant influence, or exert a decisive influence in a shareholder meeting;
– it is not engaged in any active trade or business and 50 percent or more of its income is of the nature of dividend, interest, income from house property, capital gains, royalty, annuity, income from sale or licensing of intangible property, income from sale of goods or supply of services to associated concerns, income from management, holding or investments in financial assets etc;
– the specified income exceeds Rs. 2.5 million.
The formulae for the determination of the amount of income attributable to a CFC and for the specified income of such a company have been provided.
CFC rules would override the provisions of a tax treaty. Accordingly, the availability of tax credit would to the resident in India, for the taxes paid by the CFC in the home country for the income attributable to such resident would need to be examined.
Tax treaty provisions
It has been proposed to revert to the provisions under the ITA. The domestic law or the relevant DTAA, whichever is more beneficial to the taxpayer would be applicable.
DTAA to have a preferential status over domestic law except in the following circumstances – when General Anti-Avoidance Rules (GAAR) invoked, or
– when CFC provisions invoked, or
– when Branch Profits Tax levied.
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.
Foreign Tax Credit
A resident will be allowed a credit for the income-taxes paid in a foreign country as under:
| Credit when tax treaty exists with other country – | Credit will be allowed against the Indian Income tax according to the provisions of the tax treaty. |
| Credit when tax treaty does not exist with other country | In case tax rates of India and the other country are different – at the lower rate of taxes |
| In case tax rates of India and the other country are equal – at the India rate of tax. |
However, the credit for the taxes paid in the foreign country cannot exceed the tax payable under the DTC.
The DTC also states that the Central Government may prescribe the method for computing the amount of credit and the manner of claiming the credit.
Branch Profit Tax
It is proposed that every foreign company would be liable to Branch Profit Tax (BPT) in respect of the profits in a financial year. This tax shall be in addition to corporate income-tax payable.
Branch Profits would refer to income directly or indirectly attributable to the permanent establishment or to an immovable property situated in India and included in the total income of the foreign company, as reduced by corporate income-tax payable on such income.
BPT would be chargeable at 15 percent.
Presumptive tax
It has been proposed that the income from specified certain businesses would be determined on a presumptive basis and be computed in the manner provided under the schedule.
Businesses carried out by a foreign company or a non resident would be determined on a presumptive basis wherein a percentage of the amounts due or received would be considered as the income from such business; for e.g.
– business of providing services or facilities or business of supplying plant and machinery on hire, used or to be used, in connection with the prospecting for, or extraction or production of, mineral oil or natural gas, wherein the amount presumed to be income shall be 14% of the amount paid, payable or receivable for providing such services or facilities.
– business of operation of ships or aircraft (including an arrangement such as slot charter, space charter or joint charter), wherein the amount presumed to be income shall be 10% of the transport charges.
Source: Direct Taxes Code Bill 2010 tabled on 30 August 2010 in the Lok Sabha.
