Historically, the Britishers laid down the pillars of the current taxation system in 1860 which was modified in 1918. Subsequently, a comprehensive Income-tax Act was introduced in 1922 which got evolved into the Income-tax Act, 1961, post Independence.
After five decades, the government decided to revamp the Act and introduced DTC for public debate in August 2009. The intention was to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The object was to simplify the language, to enable better comprehension and to remove ambiguity and foster voluntary compliance. The finance minister clarified that, while drafting DTC, the ministry adopted the principles that have gained global acceptance and DTC should be read without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Act.
DTC 2009 had several path-breaking changes as compared to the existing principles under the Act. The corporate tax rate was proposed to be reduced to 25% from the existing 30%. Individual tax rates were moderated and slabs widened. The concept of previous year was replaced with that of financial year. Income was proposed to be classified into two broad groupsfrom ordinary sources and from special sources. The losses arising from ordinary/special sources would be eligible for carry forward and set-off without any time limit.
The base for computation of minimum alternate tax (MAT) is currently the book profits which was proposed to be changed to gross assets of the company. Further, the profit-linked incentives under the Act were proposed under a scheme wherein any capital expenditure incurred for specified businesses would be allowed as a deductible expenditure and the loss would be allowed to be carried forward till it was absorbed completely.
On international tax front, DTC 2009 provided that the provisions of tax treaties or DTC, whichever are enacted at a later point in time, would prevail. In addition to normal income-tax, the branch profits tax was introduced on foreign companies at the rate of 15% of the post tax profits.
In light of the Vodafone controversy, it introduced a set of provisions dealing with indirect transfer of capital asset situated in India. Detailed anti-abuse provisions were introduced under the General Anti-Avoidance Rules (GAAR) in order to curb the use of tax avoidance mechanisms and misuse of tax treaties. On the Transfer Pricing front, DTC 2009 proposed introduction of Advance Pricing Agreement (APA) mechanism.
The provisions of DTC 2009 evoked widespread criticism on a number of points and representations were made against several of the new proposals. After considering stakeholders major concerns, the government revised DTC 2009 and introduced DTC in 2010, and placed it before Parliament and was referred to the Standing Committee for Finance.
New Controlled Foreign Company (CFC) provisions were introduced to tax passive income of overseas subsidiaries of Indian companies. Several of the taxpayers were addressed and accordingly:
l It was clarified that as between the domestic law and the relevant tax treaty, the one which is more beneficial to the taxpayer would apply except in cases where GAAR was invoked.
l In line with international practices, it was proposed that the residential status of foreign firms will depend on its place of effective management (POEM).
l MAT on book profits was restored as against the earlier suggested levy of MAT based on gross assets.
l DTC 2010 proposed to grandfather tax holiday for existing SEZ units (in addition to SEZ developers).
l An objective test of taxability of offshore transfer of shares in a foreign firm was a welcome proposal.
The government, while accepting many of the representations made, also cautioned that due to the reduction in tax base originally proposed in DTC 2009, the indicative generous tax slabs, rates and other monetary limits for deductions will be reconsidered. That said, the DTC Bill substantially diluted several provisions of the original framework and, rather than provide a new framework, what we now have is a refined and better drafted version of the Income-tax Act, 1961.
Standing committee recommendations
The DTC Bill, after being presented to Parliament, was referred to the Standing Committee of Finance. The committee, after deliberating with various stakeholders, submitted its report to Parliament on March 9, 2012. The committee recommended certain welcome provisions like increase in the threshold limit and tax slabs for individuals and in the wealth tax, grandfathering of SEZ provisions vis-a-vis levy of dividend distribution tax and availability of tax credit to non-resident shareholders on the additional dividend distribution tax paid by the Indian domestic companies.
On the international tax front, the committee sought to obtain clarity in areas like residence rules (POEM), GAAR, CFC, etc, to avoid litigation. While the committee has recognised the need and rationale for introducing the CFC provisions, it has also recommended a suitable mechanism to grant tax credit in India.
Provisions already in the Act
Though DTC has not seen the light of the day, some of the far reaching provisions under DTC have already been introduced under the Act.
The GAAR provisions have been introduced which are proposed to be effective from April 1, 2016. Taking a cue from DTC, the scope of income deemed to accrue or arise in India was enlarged in the Act by providing that the income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from April 1, 1962. The royalty income for non-residents now includes computer software transmission by satellite, cable, optic fibre or any such technology, with retrospective effect from June 1, 1976.
The concept of obtaining the tax residency certificate (TRC) has been introduced. It has been provided that in order to claim tax treaty benefit, the taxpayer should obtain TRC from the respective resident country. Under the existing transfer pricing regime, APA related provisions have also been introduced. The key DTC provisions are still pending to be introduced are the CFC provisions and the concept of POEM.
The finance minister, while presenting Budget 2013, mentioned that DTC would be finalised and a revised Bill will be brought before the Lok Sabha before the end of Budget session. As per recent reports, he expressed his disappointment with the current DTC as it substantially dilutes his original proposals. However, he said that he will do his best to integrate the original proposals as envisaged by him with DTC and also incorporate the proposals of the Parliamentary panel.
He has indicated that DTC would be a new code and reference would not be made to the current Act. The Bill presented before Parliament is more or less akin to the current law. Is then DTC a good idea at all It took more than 50 years for the courts to settle down the principles. A new law could lead to increased litigation, which would again take years to crystallise the principles on taxation. Such increased litigation could frustrate the object of introducing DTC. That said, DTC is far better worded compared to the existing law and is easier to comprehend.
The government had constituted an expert committee to deal with various issues arising under the provisions of GAAR, indirect transfer of capital assets, etc. The expert committee has considered the representations made by various stakeholders and submitted its reports to the government. Let us hope that the expert committees recommendations would be considered before introduction of DTC.
On the other hand, India Inc has long advocated its preference for a modern, stable and simple tax regime. Whether DTC meets these criteria is something that will be undoubtedly debated after the final version of DTC is introduced. However, it is the tax administrations implementation that will determine the long-term impact of the new tax regime.
The author is deputy CEO, KPMG in India