dtc an overview_arkay_and_arkay
DESCRIPTION
TRANSCRIPT
DISCUSSION PAPER ON THE DIRECT TAX CODE
Analysis of
(For internal circulation only)
Contents
•MINIMUM ALTERNATE TAX
•FOREIGN CO - RESIDENCY TEST
•CONTROLLED FOREIGN CORP
•DTAA vs DOMESTIC LAW
•CAPITAL GAINS
•FOREIGN INSTITUTIONAL INVESTORS
•GENERAL ANTI AVOIDANCE RULES
•SPECIAL ECONOMIC ZONES
• INCOME FROM EMPLOYMENT
•EEE vs EET
•HOUSE PROPERTY
•NON-PROFIT ORGANISATION
•WEALTH TAX
•UNADDRESSED ISSUES
•ACT vs DTC vs RDTC
MINIMUM ALTERNATE TAX (MAT)
MINIMUM ALTERNATE TAX (MAT)
MAT to be levied on value of gross assets
MAT rate – 2 percent (0.25 percent for banking companies)
Value of ‘gross assets’ to include, inter alia, capital work-in-progress
Credit of MAT not allowable in subsequent years
Pro
po
sed
Asset based MAT not linked to particular year’s income or turnover –hardship for
loss making companies
Not reasonable to apply MAT for newly set-up infrastructure companieswhich have
long gestation period or companies undergoing major expansion
Contradicts policy on ‘investment linked’ incentives
Cascading effect in case of multiple tiers of subsidiaries
Issu
es
MINIMUM ALTERNATE TAX (MAT) (Cont)
MAT levy aligned to current regime – to be levied on ‘book profits’
Rate of MAT to be decided by legislature
Rev
ised
Rate of MAT and method of computation of book profits not yet known
Apparently the existing MAT provisions would be reinstated – litigativeissues
under the current regime may be clarified
Provisions relating to MAT credit are yet to be prescribed, though from theplain
reading of the revised discussion paper it appears that the credit may beavailable
In case of foreign companies, branch profits tax may be levied over & aboveMAT
Inte
rpre
tati
on
FOREIGN COMPANIES
FOREIGN COMPANIES
Foreign company to be regarded as resident, if ‘control and management ofaffairs’ situated ‘wholly or partly’ in India at any time during the financialyear
‘Control and management’ not definedPro
po
sed
Word “partly’ used in the DTC sets a very low threshold for regarding aforeign company as a resident in India
Apprehensions expressed that it could lead to a foreign multi-nationalcompany being held as resident in India on the ground that some activitylike a single meeting of the Board of Directors is held in India
Issu
es
‘Place of effective management’ test prescribed for determining residence
‘Place of effective management’ defined as:
“the place where the board of directors or its executive directors, make decisions;or where the board routinely approve the commercial and strategic decisionsmade by the executive directors or officers, the place where such executivedirectors or officers perform their functions
Rev
ised
FOREIGN COMPANIES (Cont)In
terp
reta
tio
n
Place of effective management’ would need to be determined based on facts
‘The OECD Commentary provides the following in this regard :
“The place of effective management is the place where key managementand commercial decisions that are necessary for the conduct of theentity’s business as a whole are in substance made. All relevant factsand circumstances must be examined to determine the place of effectivemanagement. An entity may have more than one place of management,but it can have only one place of effective management at any one time.
CONTROLLED FINANCIAL CORPORATION
CONTROLLED FINANCIAL CORPORATION
No explicit proposals for introducing CFC regime
Residence test for foreign company was viewed as backdoor entry for CFCregime
Pro
po
sed
CFC provisions proposed for the first time, as an ‘anti-avoidance’ measure
CFC provisions to trigger if the following conditions are met:
There is a foreign company which is controlled directly or indirectly byan Indian resident
Such foreign company earns ‘passive income’
Passive income is not distributed to the shareholders resulting indeferral of taxes
Accumulated passive income not distributed to the shareholders shall bedeemed to have been distributed
Taxable in the hands of resident shareholders as dividend received from aforeign company
Rev
ised
CONTROLLED FINANCIAL CORPORATION(Cont)
Term ‘control’ not defined - revised DTC expected to provide certainthresholds limit on ownership, nature of income and location of foreigncompany
No clarity as to how many layers could be taxed under the CFC regime
Whether the deemed taxation of dividend will be in the hands of thecontrolling shareholders or all the resident shareholders (including theminority)
CFC provisions may not apply in case a company is set-up in high taxjurisdiction
Inte
rpre
tati
on
/ is
sue
s
TREATY VS DOMESTIC LAW
TREATY VS DOMESTIC LAW
Provisions of the tax treaties or the DTC whichever is later in point of timeshall prevail
Pro
po
sed
Higher rate of taxation on royalty, fees for technical services and interestincome etc, which are taxed in the source country at a concessional rate asper DTAA
Uncertainty regarding cost of doing business in India will also affect foreigndirect investment
Not possible to restore the preferential status of the DTAAs over domesticlaw by re-notification of all the existing DTAAs as they are bilateralagreements which cannot be re-notified unilaterally
Issu
es
TREATY VS DOMESTIC LAW(Cont)
More beneficial provisions of the tax treaties or the DTC to apply, exceptwhere:
the General Anti Avoidance Rule is invoked; or
the Controlled Foreign Corporation provision is invoked; or
branch profits tax is levied
Rev
ised
Under DTC, every foreign company is liable to pay branch profits tax. Theintent of not providing treaty benefits to companies paying branch profitstax is unclear
Inte
rpre
tati
on
TAXATION OF CAPITAL GAINS
TAXATION OF CAPITAL GAINS
Distinction between long term and short term gains eliminated
Exemption for long term gains to be withdrawn; taxed at 30 percent (non-residents) and ordinary rates (residents)
STT proposed to be abolished; cost indexation for assets held for over oneyear
Base date for cost indexation shifted from April 1, 1981 to April 1, 2000
Pro
po
sed
Considerable rise in the tax liability causing fluctuation in the capital market
Tax at 30 percent for capital gains in the hands of non-residents is very highas they are currently being taxed at nil rate for equity shares, if held formore than one yearIs
sues
TAXATION OF CAPITAL GAINS(Cont)
• Capital gains to be treated as income from ‘ordinary sources’ for all taxpayers, including non-residents and taxed at applicable rates
• Gains from transfer of listed equity shares / units held for more than one year
• Deduction will be allowed at a specified percentage of the gains based on overall tax rates; no indexation benefit will be allowed
• Similarly, capital losses will be scaled down by the specified percentage
• STT proposed to be calibrated based on revised taxation regime
• Gains from transfer of other investment assets held for more than one year
• Indexation benefit would be available with reference to base date of April 1, 2000
• Gains from transfer of assets held for less than one year
• In respect of assets held for less than one year from the end of the financial year in which these were acquired, capital gains will be computed without the benefit of either a specified deduction or indexation
Rev
ised
TAXATION OF CAPITAL GAINS(Cont)
• Imposition of tax on sale of listed securities vs Nil rate under the current regime – it may dampen the inflow of funds in the Indian capital market
• Listed shares transferred on the floor of stock exchange and off the floor of stock exchange to be taxed in a similar manner – except that shares traded on stock exchange to bear additional tax in the form of STT
• Benefit from long-term capital gains under section 54EC has not been provided; capital gains savings scheme also dispensed with
Inte
rpre
tati
on
TAXATION OF FIIs
TAXATION OF FIIs
No special regime for FII taxation
No guidance on income characterisation
Pro
po
sed
Income of FIIs on purchase and sale of securities deemed to be capital gains
Income payable to FIIs will not be subject to withholding tax, therefore liableto advance tax in line with the current regimeIs
sues
Treaty exemption like capital gains exemption in Mauritius, may behindered if GAAR is invoked; though invoking GAAR is highly litigative
No clarity on income from derivatives
Adverse implications for FIIs investing from treaty jurisdictions – ‘no PE notax’ claim not available
Rev
ised
GENERAL ANTI AVOIDANCE RULES (GAAR)
GENERAL ANTI AVOIDANCE RULES
• GAAR introduced – powers to invoke vested with Commissioner
• Applies to a tax avoidance transaction, if undertaken with the main purpose of obtaining a ‘tax benefit’ and the transaction:– is entered into 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
• Commissioner may disregard parties, reallocate/ re-characterize income or
• disregard the arrangement or deny treaty benefits
• Onus to prove that the transaction is bona fide shifted to the tax payer
Pro
po
sed
Sweeping nature of GAAR; may be invoked by the CIT in a routine manner
Any arrangement to obtain a tax benefit may be considered as animpermissible avoidance arrangement
Suitable threshold limits for invoking GAAR should be considered
Issu
es
GENERAL ANTI AVOIDANCE RULES(Cont)
Certain safeguards to be provided for successful implementation:
CBDT to make rules for invoking GAAR;
A threshold limit (possibly a monetary limit) to be prescribed; and
Taxpayers allowed access to Dispute Resolution Panel, in cases where GAAR is invoked
Rev
ised
Safeguards to provide some certainty on invocation of GAAR; however, it isnot clear whether GAAR would apply only prospectively or also to existingtransactions
Efficacy of DRP yet to be tested
Inte
rpre
tati
on
SEZ – TAXATION OF EXISTING UNITS
SEZ – TAXATION OF EXISTING UNITS
• Shift from profit linked incentives to investment linked incentives
• Tax holiday currently available to SEZ developers grandfathered under DTC
• No similar proposal for grandfathering tax holiday for SEZ units – Section 10AA of the Act
Pro
po
sed
Proposal to grandfather tax holiday for SEZ units for the unexpired period
Rev
ised
No clarity as to transition date for grandfathering tax holiday – March 31,2010 or March 31, 2011
Uncertainty as to manner of computation of tax deduction for unexpiredperiod for the SEZ units
Whether incentive available for SEZ units which have set-up the units in theSEZ but have not commenced operations till March 31, 2010 / March 31,2011
Inte
rpre
tati
on
SEZ – TAXATION OF EXISTING UNITS(Cont)
Out of a total 578 formally approved SEZs, 353 are notified and only about111 are operational, which themselves are not fully developed yet;developers have already committed huge amounts towards land and are atvarious stages of development
Tax holiday for new units set up post commencement not provided - Are thedevelopers still ready to commit huge amounts towards developing thezones with a risk of not finding any takers at the end
Inte
rpre
tati
on
INCOME FROM EMPLOYMENT
INCOME FROM EMPLOYMENT
• Amount received towards gratuity, commuted pension and voluntary retirement to be exempt only if the same is deposited in a Retirement Benefit Account (RBA) maintained with the permitted saving intermediary
• Any withdrawals from RBA were to be subject to tax in the year of withdrawal
• All perquisites, allowances except travel allowance were proposed to be taxable, leave encashment also taxable
• Valuation of RFA for government employees at market value
Pro
po
sed
• The RBA scheme discarded Current regime to continue; receipts for voluntary retirement, gratuity, commuted pension, leave encashment continue to be exempt, subject to specified limits
• Current valuation norms for perquisite in relation to medical facilities / reimbursements to be retained; exemption limits to be enhanced
• Valuation of RFA on market values for government employees has been removed
Rev
ised
INCOME FROM EMPLOYMENT(Cont)
• Perquisites ruled to be notified
• Exemptions in respect of HRA, LTC still not considered
Inte
rpre
tati
on
TAX TREATMENT OF SAVINGS
TAX TREATMENT OF SAVINGS
• EET scheme of taxation proposed for tax saving instruments
• Initial contribution deductible from income and accretions not taxable
• Withdrawal from scheme taxable at any stage of withdrawal, taxable as ‘income from residuary sourcesP
rop
ose
d
• Most countries that follow the EET method of taxation of savings also have a social security system in place for all their citizens
• In absence of a universal social security system, the proposed EET method of taxation of permitted savings would be harsh
• Switching over to a complete EET system for all savings would entail administrative and technological challenges as a central authority is required to keep records and deduct taxes
Issu
es
• Roll back to EEE scheme for specified Provident Funds, Superannuation Funds, Approved Pension Funds, Pure Life Insurance Products and Annuity Schemes
• EEE status grandfathered for investments made before commencement of DTC in the instruments currently enjoying EEE status such as ULIPs, NSCs, FDs etc
Rev
ised
INCOME FROM EMPLOYMENT(Cont)
• Perquisites ruled to be notified
• Exemptions in respect of HRA, LTC still not considered
Inte
rpre
tati
on
TAX TREATMENT OF SAVINGS
TAX TREATMENT OF SAVINGS
• EET scheme of taxation proposed for tax saving instruments
• Initial contribution deductible from income and accretions not taxable
• Withdrawal from scheme taxable at any stage of withdrawal, taxable as ‘income from residuary sourcesP
rop
ose
d
• Most countries that follow the EET method of taxation of savings also have a social security system in place for all their citizens
• In absence of a universal social security system, the proposed EET method of taxation of permitted savings would be harsh
• Switching over to a complete EET system for all savings would entail administrative and technological challenges as a central authority is required to keep records and deduct taxes
Issu
es
• Roll back to EEE scheme for specified Provident Funds, Superannuation Funds, Approved Pension Funds, Pure Life Insurance Products and Annuity Schemes
• EEE status grandfathered for investments made before commencement of DTC in the instruments currently enjoying EEE status such as ULIPs, NSCs, FDs etc
Rev
ised
TAX TREATMENT OF SAVINGS(Cont)
• Definition of Pure Life Insurance Products has not been provided
• No deduction for savings in instruments like NSC, post office saving account, term deposits, etc
• No benefit for principal repayment on housing loans
Inte
rpre
tati
on
INCOME FROM THE HOUSE PROPERTY
INCOME FROM THE HOUSE PROPERTY
• Gross rental value of let out property to be computed at contracted rental value or presumptive rent, whichever is higher
• Presumptive rent to be calculated at 6 percent per annum on– the rateable value fixed by the local authority; or
– on the cost of construction / acquisition of the property, if rateable value is not fixed
• No deduction on interest payable on borrowed capital for construction / acquisition of a house property for self occupation
Pro
po
sed
• Inequitable – It discriminates against recent owners as construction cost is a
function of inflation
• To incentivize investment in housing, the deduction for interest on borrowed capital should be retained for self occupied property
Issu
es
• Gross rent proposed to be computed on the basis of amount of rent received or receivable on contractual basis – Presumptive basis has been dropped
• Individual or HUF will be eligible for deduction on account of interest on capital borrowed for construction / acquisition of a house property for self occupation, subject to a maximum of INR 150,000
Rev
ised
INCOME FROM THE HOUSE PROPERTY(Cont)
• Removal of presumptive basis of determining gross rent would benefit owners of properties which are not let out - under the Income-tax Act only one self occupied property is exempt, rest are treated as ‘deemed to be let out’
Inte
rpre
tati
on
TAXATION OF NON-PROFIT ORGANIZATIONS
TAXATION OF NPOs
• NPOs under the Income-tax Act, 1961 required to re-register
• NPOs not permitted to accumulate and carry forward surplus
• No provisions for exemption for public religious trusts and religious-cum-charitable trustsP
rop
ose
d
• Fresh registration – increase in the compliance cost for NPOs and also workload of the income-tax department
• Where NPOs receive grants at the end of the financial year and are unable to spend due to reasons beyond their control - In the absence of any window for carry forward of surplus for use in the subsequent years, taxation of the surplus of income over expenditure will be harsh
• Phrase ‘charitable purpose’ should be used instead of ‘permitted welfare activity’ in order to emphasize the charitable intent of the activities
• Option to choose cash or mercantile system should be allowed
Issu
es
TAXATION OF NPOs(Cont)
• No need for existing NPOs to re-register – only required to submit information to facilitate administration under the new scheme
• NPOs permitted to accumulate and carry forward up to 15 percent of their surplus or 10 percent of their gross receipts, whichever is higher, for use within 3 years from relevant financial year
• To maintain continuity and minimise litigation, phrase ‘charitable purpose’ would be used instead of ‘permitted welfare activity’
• However, to the extent surplus is accumulated, donation to another NPO is not a permissible application
• Surplus not applied and not eligible for carry forward to be subject to tax only beyond a basic exemption limit
• Cash system of accounting retained, being simple to follow and easy to administer
• Tax exemption and eligibility criteria for public religious trusts and religious-cum charitable trusts provided for’
Rev
ised
WEALTH TAX
WEALTH TAX
• Assets chargeable to wealth-tax shall mean all assets, including financial assets and deemed assets, as reduced by exempted assets
• Net wealth of an individual or HUF in excess of INR 50 crore shall be chargeable to wealth-tax at the rate of 0.25 per centP
rop
ose
d
• Productive assets should be exempted from wealth tax as under the Wealth tax Act
• Threshold limit of INR 50 crore for levy of wealth tax is too high
• Tax on financial assets will be harsh as they are currently exempt
Issu
es
• Wealth Tax will be levied broadly on the same lines as the current regime
• Threshold limit and rate of tax will be suitably calibrated in line with overall tax ratesR
evis
ed
UNADDRESSED ISSUES
UNADDRESSED ISSUES
• No clarity on taxability of indirect transfer of capital assets
• Business reorganisation:
• Term business reorganization defined to mean the reorganization of two or more residents, Companies Act, 1956 and Companies Bill, 2009 permits merger of a foreign company with Indian company
• Only transfer of investment assets in business reorganisation is exempt, no similar provision for business assets
• Slump sale
• Cost of acquisition of investment asset/ depreciable business asset based on the cost / WDV for the previous owner
• No provisions for determining the cost of acquisition of non depreciable business assets in the hands of the successor
• Absence of the provisions giving precedence to the terms of the Production Sharing Contract (PSC) – inter-play of the DTC with the PSC unclear
Issu
es
ACT vs DTC vs RDTC
Provisions Act DTC Revised DTC
MATMAT levy on bookprofitsRate 19.93 percent
MAT levy on grossassetsRate – 2 percent (0.25percent for banks)
Mat levy on bookprofitsRate – to be decided
Taxation of savings
instruments
EEE schemeapplicable
EET scheme
EEE scheme tocontinue for specifiedsavings viz PPF, GPFEET to apply for othersaving instruments
NPOs
Income of NPOsexempt, subject to thespecified thresholdlimit, and conditions forutilization of funds
NPOs to be taxed at15 percent of totalincome on the basis ofcash system ofaccounting
Basic exemption limitto be prescribed inrespect of income ofNPOPublic religious trustsand religious-cum charitabletrusts eligiblefor exemption, subjectto specified conditions
ACT VS DTC VS RDTC
Provisions Act DTC Revised DTC
Foreign Company –
Tax residency
Resident in India if the‘whole of control andmanagement’ of itsaffairs is situated inIndia
Resident in India if the‘control andmanagement’ of itsaffairs is situated‘wholly or partly’ inIndia
Resident in India if its‘place of effectivemanagement’ is inIndia‘Place of effectivemanagement’ defined
DTAA
DTAA to prevail overdomestic law, if DTAAprovisions morebeneficial to thetaxpayer
In the case of a conflictbetween the provisionsof DTAA and DTC, theone later in time willprevail
DTAA or DTC, which isbeneficial will apply,except in case ofGAAR / CFC / branchprofit tax
Income fromEmployment –
retirement benefits andperquisites
Retirement benefitsexempt subject tospecific monetary limits
Retirement benefits tobe exempt only ifdeposited in RBA andwill be subject to tax onwithdrawal
Specified retirementbenefits to continue tobe exemptScheme of setting upRBA dispensed with
ACT VS DTC VS RDTC(Cont)
Provisions Act DTC Revised DTC
Capital gains ontransfer of otherinvestment assets
LTCG - taxable at therate of 20 percentSTCG – taxable atapplicable rates
LTCG and STCG –taxable at applicablerates for residents; fornon-residents at 30percent
LTCG and STCG –taxable at applicablerates for residents andnon-residents
CFC No concept of CFC No concept of CFC
Foreign companiescontrolled by Indianresidents and earningpassive income whichis not distributed to betaxed in the hands ofresident shareholdersas dividends
ACT VS DTC VS RDTC(Cont)
ABOUT US
ABOUT US
• Arkay & Arkay Chartered Accountants (Arkay & Arkay) is a premier fullservices firm, providing quality Tax, Assurance and Advisory services tostalwarts of the Indian Industry.
• We at Arkay & Arkay, strive to help our clients and our people in attainingtheir goals and exceeding their potential. Our team is a mixture of youth andexperience possessing the energy and enthusiasm of a start-up and the maturitythat being in the business for over 30 years brings.
• Arkay & Arkay are advisors in thick and thin, while we serve industry giantsour Entrepreneur’s Cell ensures that help is available for the bright stars of thebusiness world while they are still in the fledgling state.
• Our Entrepreneur’s Cell provides help from the very inception of the business,assisting in fleshing out the business plans, providing guidance through theprocess of incorporation, aiding in securing the requisite capital whilesimultaneously assisting in business management through its growth.
• Arkay & Arkay shall help the client navigate the troubled seas that the Indianlegal and compliance system while ensuring that the client can stay focused onits business objective. We help you mind your own business.
OUR TEAM
OUR TEAM
• Our team of Chartered accountants, Company Secretaries, MBA’s and Lawyersis determined to help you leverage your business to help it grow and to attainthe lofty heights of success. We provide a suite of services in the realms ofTaxation, Assurance and Advisory to manage, measure and improve yourbottom-line, respectively
OUR CLIENTS
56
SOME OF THE INDUSTRIES SERVED
* Individual client names have not been disclosed in compliance with ICAI guidelines
57
www.arkayandarkay.com
+91-9910124927
+91-9818014509
+91-11-27940068
+91-11-27947030