According to news reports, the proposal to levy a super-rich tax (at 35%) on those earning above R10 crore yearly did not find favour with some senior officials, leading to a deferment of the Bill. As one would recall, the proposal to tax the super-rich was neither included in DTC 2009 nor did it find mention in DTC 2010, but was apparently included by the Cabinet.
Aiming to replace the voluminous tax law of 1961, the DTC Bill was proposed in 2009 as a path-breaking law based on accepted principles of taxation, best international practices, elimination of ambiguities and simplified language. However, the Bill is yet to see the light of the day and with the general election due in 2014, its fate seems to be uncertain as DTC may not be a priority with the next government! It is fascinating to observe how both, the revenue and the taxpayers, are equally excited about the final form in which DTC would be introduced.
Going by the latest information, concepts like Controlled Foreign Company (CFC), Place of Effective Management (POEM), Branch Profit Tax, Super-rich tax and Wealth Tax are few of the key new regulations that DTC will bring. In the last few years, the government has already amended the Income Tax Act, 1961, (Act hereafter) and introduced a number of new provisions including General Anti-Avoidance Rule (GAAR), Advance Pricing Agreement, etc to shape the Act in the image of the proposed DTC. Let us now consider some of the new regulations that will be in place once the DTC Bill is passed.
With POEM implemented, a company incorporated outside India will be deemed to be 'resident in India' if its 'place of effective management' at any time of the year is located in India. The concept itself is not a new one, globally, that is; it was in the year 2001, when the Organisation for Economic Co-operation and Development (OECD) introduced the concept and issued drafts for discussion.
Thus, in case a foreign company's place of effective management is in India even for a part of the year, it could still be considered for residence-based taxation in India on its global income. This may lead to a situation where the said foreign company becomes a tax resident of two countries, potentially triggering double taxation exposure, due to lack of effective provisions under Double Taxation Avoidance Agreements (entered into by India with other countries) addressing such an eventuality.
These provisions have been brought in as an anti-avoidance measure. Under CFC, passive income earned (and not distributed) by a foreign company controlled directly or indirectly by a resident in India will be subject to tax in India. CFC provisions will bring additional complexity in the tax legislation and could significantly impact Indian companies having outbound investment structures.
Specifically, CFC provisions could create cash flow problems for Indian companies since they would be subject to tax without corresponding receipt of actual dividends. Further, there could be possible double taxation on account of the interplay between transfer pricing and CFC provisions.
Taxing Richie Rich
DTC proposes a higher levy on the super-rich class by introduction of another slab for those earning income over R10 crore at a higher rate of 35%. Additionally, it has also been proposed to widen the wealth tax ambit and levy tax at 0.25% for those with assets exceeding
R50 crore. DTC also proposes to tax the dividend income at the rate of 10% where dividend income exceeds R1 crore.
The aforesaid provisions, if implemented, may result in a significant inflow of taxes for the government. However, it may be argued that in a growing economy, a tax policy should be aimed at widening the tax base rather than capitalising on the opulence of the affluent.
With the above as a background, a number of corporate and high net worth taxpayers are apprehensive and anxious about the final form in which the DTC would be introduced. Some key concerns of the taxpayers, culled from a KPMG survey, Tax Trends in Emerging India, are listed in the accompanying chart.
The government today is completely cognisant of the fact that it has a wonderful opportunity to make the DTC a model tax code, eliminating distortions in tax structure, providing greater simplification, reducing the scope for litigation and improving compliance. Further, the government may also use this occasion to simplify the administrative hurdles faced by the taxpayers and provide defined roles and responsibilities for them and the revenue authorities, in order to mitigate tax litigations.
Whilst the wish list of items to be included in such a model DTC can be inexhaustible, the key concerns expressed by taxpayers include amongst others, higher TDS rate in case of absence of PAN, delay in issuance of refund, DDT as an additional cost (thus should be changed into a withholding tax for the shareholder), arbitrary administration of penalties and requirement for obtaining accountants certificate for international transactions.
Alls well that ends well
As the government seeks to hasten the pace of liberalisation and rebuild investors confidence in the India story, both revenue and the taxpayers anxiously await for the final draft of the DTC to unfold and present before them such changes that would help reduce the mammoth tax litigations and bring about clarity in the laws. The road ahead for DTC seems indecisive, given the current political situation in the country. In these times of wavering investor confidence and an overall feeling of anxiety (falling rupee, plunging Sensex) it would be the persevering commitment of the future elected government on which all our hopes are pinned, to fulfil our aspirations and provide us this much awaited gratification.
(Co-authored by Ravi Shingari, director (tax), KPMG in India)
The author is co-head (tax), KPMG in India. Views are personal