As part of its reform agenda, the government introduced the Direct Taxes Code (DTC) with the intent to bring about a tax legislation which is simple and reflective of the current global and Indian economic scenario. The DTC has evolved since its introduction in 2009 and currently exists in the form of the Direct Taxes Code 2013 which was released by the finance minister recently and is available for public comments. The DTC 2013 seeks to strike a balance between reining in fiscal deficit and at the same time providing a fillip to the country’s economic growth.
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