DTC: There’s hope in waiting

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SummaryThe deferring of the DTC Bill means more time for addressing taxpayers’ concerns

On August 22, the Cabinet deferred the much-awaited Direct Taxes Code (DTC) Bill, a move that elicited mixed reactions from the industry and tax payers.

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.

POEM

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

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