Direct Tax Code (DTC) 2010 consolidates the withholding tax provisions as well as the procedural law dealing with reporting of income (including branch profits), net wealth and dividends distributed. To ensure compliance with the reporting requirements under DTC 2010, certain amendments have been proposed to the penal provisions, as also provisions relating to prosecution. This article summarizes the key amendments to the procedural law, including amendments to the assessment procedures, tax withholding provisions, penalty and prosecution.
Under DTC 2010, a taxpayer will be required to file a consolidated return of its tax base, which includes a return of income (including branch profits), net wealth and dividends distributed [which are subject to Dividend Distribution Tax (DDT)]. The due dates for filing return of tax base will be advanced i.e., 30 June for non? business/non-corporate taxpayers and 31 August for all other taxpayers (including corporate taxpayers). A company (including Indian company and foreign company), firm, association of persons, body of individuals, societies (including co-operative societies), nonprofit organizations and local authorities are mandatorily required to file a return of its tax bases, irrespective of the income earned. Furthermore, a company resident in India, distributing dividends or income, will also have to furnish its return before the due dates. Every person who has entered into an international transaction shall furnish a report of such transaction, before the due dates specified above, with the Transfer Pricing Officer. Furthermore, the Indian administrative authority (Authority) can notify additional classes of persons who will be required to file their return. In case the due date specified above lapses and the taxpayer has not furnished a return, the losses (including depreciation losses) will not be entitled to be carried forward.
The time limit for filing revised or belated return of tax base, as proposed in DTC 2010, is retained similar to the provisions as existing in the current Indian Tax Law (ITL). Such return can be filed within one year from the end of the tax year in which the return was due or before the completion of the assessment, whichever is earlier.
Similar to the ITL, in DTC 2010, the Tax Authority has a right to make an assessment on receipt of return if it considers it necessary to ensure that the taxpayer has not understated its tax bases or computed excessive loss or allowance or underpaid taxes in any manner. For this purpose, the Tax Authority can call for accounts or documents relating to a period not more than six years prior to the relevant tax year. The time threshold of six years has been increased from the current period of three years under the ITL.
The Tax Authority at the Commissioner level (Commissioner) would be granted powers for invoking the General Anti-avoidance Rules (GAAR) for declaring a taxpayer’s arrangement as an ’impermissible tax avoidance arrangement’, if considered appropriate. Where a notice for invoking GAAR is issued by the Commissioner, the proceedings would need to be completed within 12 months thereof.
In cases of reassessment, where the Tax Authority has reasons to believe that any tax chargeable under DTC 2010 has escaped assessment, it can serve a notice on the taxpayer to furnish a return of tax bases. Such notice can be issued within a period of seven years from the end of the relevant tax year. Furthermore, the scope of the underlying criteria for determining income escaping assessment is also widened to include: (i) Cases of income escaping assessment if an assessment has not been made in accordance with the Authority’s circular, order or direction issued by the Tax Authority superior to the Assessing Officer. (ii) Any objections or observations of the Comptroller and Auditor General of India on the correctness of the taxpayer’s assessment.
The Commissioner will continue to hold the power to revise an order of assessment which is found to be erroneous and prejudicial to the interest of the revenue. The scope of revision is enlarged to treat the order erroneous, amongst others, if the order is passed without any verification or enquiry or allowing relief without probing into the taxpayer’s claim. However, the Commissioner has no authority to revise an order against which an appeal is pending before the first appellate authority [CIT(A)] or which has been considered and passed in pursuance of the directions of the Dispute Resolution Panel (DRP).
The provisions dealing with appeals before the CIT(A) is largely similar to those prevailing under the ITL. However, the following are the important changes prescribed under DTC 2010: (i) If a rectification application filed before the Tax Authority is not disposed off within six months, the taxpayer can prefer an appeal before the CIT(A) against such non-disposal. (ii) The matter can be remanded back to the Tax Authority by the CIT(A) only on new question of fact or law and not otherwise. (iii) The power to condone delay is restricted to cases involving delay up to one year.
The provisions dealing with appeals before the second appellate authority (Tribunal) is largely similar to those prevailing under the ITL.
However, the following are the important changes prescribed under DTC 2010: (i) An appeal against an order of the Tax Authority passed pursuant to the Commissioner’s revision order will lie before the Tribunal. (ii) In the case of public sector companies (PSCs), an appeal against the order of the CIT(A) or the Commissioner will lie before the Authority for Advance Rulings and Dispute Resolution (AAR&DR) and not with the Tribunal. (iii) The Tribunal is empowered to rectify its own order suo motu within four years. (iv) The recommendatory time limit of disposal of appeal by the Tribunal curtailed to two years from the existing four years under the ITL. (v) The power to condone delay is restricted to one year of delay. (vi) Appeal against the Tribunal’s order will lie before the High Court and not before the National Tax Tribunal as suggested by DTC 2009.
DTC 2010 proposes to significantly expand the scope of the Authority for Advance Rulings to resolve disputes arising in the case of a PSC and has been appropriately renamed as the AAR&DR. A PSC may carry an appeal against the Tax Authority’s order pursuant to the DRP’s direction or against an order of the CIT(A) or against a revision order of the Commissioner. In case of a PSC, the Commissioner can carry an appeal against the CIT(A)’s order or against revision, penalty or rectification order of the Commissioner. Most importantly, the orders passed by the AAR&DR shall be final and binding on both the parties. The DRP, as prevalent under the ITL, will continue to exist. DTC 2010 provides that, apart from transfer pricing (TP) cases and foreign companies, only those cases in which GAAR has been applied and other prescribed cases will be able to approach the DRP.
Similar to the ITL, DTC 2010 has retained the settlement provisions whereby the taxpayers who did not disclose their income chargeable to tax may come clean, disclose their income and pay the appropriate taxes. Such erring taxpayers may apply to the Settlement Commission and seek immunity from penalty and prosecution for taxes evaded till then. However, such settlement is a one-time affair for the taxpayer in cases where search and seizure has been carried out. Most of the provisions relating to constitution of Settlement Commission, procedure for applying to the Commission, the eligibility criteria for the taxpayer, manner of hearing and disposal of the cases are largely identical to the current provisions of the ITL.
Withholding tax provisions
In case of payments to residents, the scope of tax withholding provisions is substantially similar to that of the ITL. DTC 2010 has increased the limit in respect of certain payments up to which no taxes are required to be withheld e.g., payment to contractors, rent payments, compensation on compulsory acquisition of immovable property etc.
In the case of payments to non-residents, the tax withholding scope is widened, making it obligatory to withhold tax in respect of the whole of the other income, as specified. Furthermore, DTC 2010 has introduced a new section which states that if the payee is a nonresident and the rate of tax on specified payments is provided in the Tax Treaty with another country, tax shall be withheld at the rate which is lower of the rate of tax provided in DTC 2010 and the Tax Treaty. Furthermore, any tax arrears due from a non-resident can be recovered from any asset of the non-resident, wherever located, or from any amount payable by any person to the non-resident. DTC 2010 provides that no tax is required to be withheld on payments made to non-residents, being foreign institutional investors, as consideration for sale of listed securities.
Rates of withholding on various incomes
|Nature of income||Resident||Non?
card game or horse race
Other income (in case of non-residents only)
Penalties and prosecution :-DTC 2010 has retained minimum penalty for underreporting of the tax base at 100% of tax payable. However, the amount of maximum penalty leviable will be reduced to 200% of the tax payable (as compared to 300% under the ITL). Penalty will not be imposed in case the taxpayer has disclosed all material facts and provides a bona fide explanation. A taxpayer who fails to furnish a return of tax base (without any reasonable cause) by the due date will be liable to a penalty of INR 5,000. Similarly, in respect of other defaults, including non-maintenance of accounts or tax audit default or withholding tax defaults etc., similar penalty provisions, by and large, are made except for the change in value limits of penalty. Furthermore, the provisions relating to prosecution are more stringent as compared to those in the ITL.
Our Views:-One of the objectives of introducing DTC 2010 is to ensure better tax compliance, reduce compliance costs and lower administrative burden. DTC 2010 seeks to achieve this by consolidation of the procedure relating to filing of tax base returns, assessment and appeal proceedings. Some of the provisions introduced by DTC 2010, especially those relating to withholding tax, could possibly result in an increase in compliance and administrative burden. The strict penal provisions and the procedures proposed for recovery of tax from non? residents merit the attention of the business community.
Expanding the scope of the AAR&DR to finalize tax disputes for PSCs is a welcome sign to reduce the tax burden of the courts. However, the GOI will have to adequately resource the AAR&DR to meet this additional burden and achieve the objectives sought. Restricting the DRP’s purview to foreign companies, TP cases and GAAR will allow the DRP to focus and act as a specialized forum for resolving complex tax disputes. Furthermore, revival of the Settlement Commission mechanism, under DTC 2010, should provide speedy resolution route for longpending/litigated tax disputes.