The DTC, once implemented, would replace the Income-tax Act, 1961, which would mean that all the controversies created on account of lack of clarity on various issues (such as depreciation on goodwill, scope of the royalty definition etc which have been addressed under the DTC 2013) and retrospective amendments to the Income-tax Act would be put to rest.
Investment-linked incentives in areas of infrastructure, power and energy endeavour to address the bottlenecks faced by the country today. The proposal to substitute all profit-linked incentives with investment-linked incentives, wherein capital expenditure incurred for specified business will be allowed as a deductible expenditure, would foster growth since profit-linked incentives have been found to be inefficient, leading to increased administrative burden, revenue loss and litigation.
The proposal to embed the non-discrimination principle in the DTC by reducing the tax rate for foreign companies from 40% to 30% would be a cause of cheer for foreign investors.
The investments made by the FIIs would be considered as investment assets and, consequently, be taxed as capital gains; the DTC provides clarity on this matter. Also, the intent to extend the tax neutrality for transactions of amalgamation and demergers to non-resident companies seeks to harmonise the DTC with the Companies Act, 2013, which now permits outbound merger.
All the aforesaid provisions provide clarity on various impending issues and ought to reduce tax litigation.
The DTC proposes to introduce concepts of General Anti Avoidance Rules (GAAR), taxation of Controlled Foreign Companies (CFC), Place of Effective Management (POEM) and indirect transfer of Indian assets within the taxable net in India.
The knee-jerk reaction that the aforesaid proposals would be anti-FDI may prove to be counter-intuitive since the international investor community is already acclimatised to these well-recognised international tax principles and all that they seek is clarity and consistent application of these tax policies.
A calibrated implementation of these policies would assist India to overcome its fiscal deficit woes and would assist in tapping high capacity/income and evasion prone categories within the Indian tax net.
On similar lines, provisions with regard to increased tax rate, i.e. 35% for individual/HUF with income exceeding R10 crore, widening the asset base for the purview of wealth tax, would look to bridge the gap in income distribution, thereby lowering the prevailing income inequality in the economy and safeguard the majority, i.e lower and middle income groups. One must admit that the government has communicated the right fiscal intent and has made a good attempt to strike a balance between promoting economic growth and containing the fiscal deficit through the DTC.
There are areas in the DTC that would need to be revisited, especially with regard to taxability of indirect transfers, no reduction in individual tax rates, levy of additional tax on dividends exceeding R1 crore, etc, but those are issues that could be ironed out during the consultative legal drafting process that the government has adopted for the DTC.
The DTC 2013 does provide a valuable insight into the thought process of the Indian revenue department and one can only hope that the new government carries forward this legislative intent to its logical conclusion of a renewed tax law for India.
(With inputs from Vikram Naik, director, KPMG in India)
The author is co-head of tax, KPMG in India. Views are personal
Promised as a remedy to the stressed and aged tax law, the DTC has meandered for five long years, circling back to its starting pointdebate in the public domain! In the Budget speech in July 2009, the then finance minister put forth the governments intent to pursue structural changes in direct tax laws by replacing the Income-tax Act, 1961. In August 2009, the finance minister rolled out first draft of the DTC Bill with the stated intent of improving efficiency and equity of tax system, and expansion of tax base at moderate level of taxation.
Pursuant to barrage of representations to the government, the first draft was modified and a revised one was presented in Parliament in August 2010 with targeted implementation from April 1, 2012. In spite of being debated for four years, including review by the Parliamentary Standing Committee, the draft legislation has not been able to muster Parliaments assent. Whilst presenting the Vote on Account for FY15, the finance minister thus expressed his disappointment: We have also got ready a Direct Taxes Code that will serve us for at least the next 20 years. I intend to place it on the website for a public discussion without partisanship or acrimony. I appeal to all political parties to resolve to pass the GST laws and the DTC in 2014-15. By releasing a revised draft of the DTC Bill for public comments in March, the outgoing government has rekindled the public debate over DTC. Because the tenure of the current Lok Sabha expires on May 31, the current draft of the DTC Bill has a future that is a subject matter of speculation. The new government, in its desire to shed the past, may decide to walk a different path of tax reforms, making it an opportune time to re-evaluate the policy decision to replace I-T Act by DTC.
There are three broad reasons to not pursue with the text of the current DTC. First, most of the policy changes that were proposed such as introduction of capital gains tax on indirect transfer and general tax avoidance rules have already been incorporated in the prevailing law, i.e. the I-T Act. Second, the DTC, so long delayed, can well wait to address the global tax principles emerging from the debate on the Base Erosion and Profit Shifting reports by the G20 and OECD. Finally, the vast body of work by the Tax Administration Reform Commissionunder chairmanship of Parthasarathi Shomefor review of implementation and administration of tax legislation and policies in context of global best practices is likely to come out with significant recommendations warranting changes to the tax law. Thus, introducing the DTC Bill may not be a relevant option for the new government. The ideology of the new government to set right the investor sentiment and use tax as a tool to propel the economy on growth path needs determination.
India is in midst of a political battle that could have far-reaching consequences on its reputation globally as an investment destination. It is disconcerting that despite sound macro-economic fundamentals, India lags behind on the index of ease of doing business (134 out of 189 countries, as per 2014 report by World Bank; Indias performance on the index of ease of paying taxes and ease of starting business is worse, ranking 158 and 179, respectively).
It has become imperative for India to rethink its tax policies and administration practices with a view to align the same with developed economies. But this alone should not be a reason to usher in DTC without analysing other feasible alternatives; it is advisable that the new government should re-evaluate the policy move for introducing DTC after making a cost-benefit analysis of the visible advantages and unintended disadvantages move. As an alternative, the government can consider dropping various provisions of the extant I-T Act that have become ineffective. To restore taxpayer communitys decreasing faith in Indian tax administration, the government should consider improving practices for tax administration, making efforts to increase efficacy of the existing dispute resolution forums along with developing alternate dispute resolution forums on the lines of global best practices.
(With inputs from Vishwendra Singh, manager, BMR & Associates LLP)
The author is leader, Direct Tax Practice, BMR & Associates LLP. Views are personal