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Direct Taxes Code Uncoded

July 2010


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Overview of DTC Originally proposed

Roll-backs in Revised Discussion Paper

MAT

Residence Test

Anti-Avoidance Measures

Controlled Foreign Companies (CFC)

GeneralAnti-Avoidance Rule (GAAR)

Treaty Override

Capital Gains

Summary ofRepresentations

Contents

Slide 2PricewaterhouseCoopersJuly 2010Direct Tax Code


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PricewaterhouseCoopers Slide 3Direct Tax Code

Overview of DTC Originally Proposed

Corporate tax proposals

Corporate tax rate to be reduced to 25%, including foreign companies

Broadening the definition of residence

Shift in methodology of computing business income from business profits

with specified adjustment to income expense model

Introduction ofBranch profits tax

Interest, Royalty, FTS to non-residents Taxed at 20%

Status quo on Dividend Distribution Tax

MAT Transition from book profits to value of gross assets @ 2%

Discontinuation of Profit based tax incentives

Introduction of Expenditure / Investment based investment scheme

Weighted deduction @ 150% forR&D extended to all IndustriesJuly 2010


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PricewaterhouseCoopers Slide 4


Corporate tax proposals

No distinction between long term and short term capital gains

Bifurcation of capital asset into business capital asset and investment asset

Slump sale to be taxed as business income

Abolition ofSTT and taxing of Capital gains on securities

Base date of indexation revised to April 1, 2000

Business continuity condition applies for losses in merger / demerger

Indefinite carry-over of capital loss 8 years limit removed

All losses lapse on belated filing of tax return

Stringent withholding tax regime

Treaty or the provisions of the Code, whichever later point in time will

prevailJuly 2010Direct Tax Code


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Corporate Re-organisation & General Anti Avoidance Rules (GAAR)

Tax Neutrality ofBusiness Reorganization unclear

GAAR to be introduced - Deterrent against tax avoidance and evasion

Unfettered powers to Tax Authorities

Presumption of Tax avoidance in Cross Border Deals

Tax avoidance vs Tax planning Avery thin line !!

July 2010Direct Tax Code


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Roll-backs in Revised Discussion Paper


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Roll-backs made in Revised Discussion Paper

MAT computation with reference to book profits to continue

Treaty override to continue, except in certain cases

Certain recommendations on GAAR accepted

Concept of residence aligned to place of effective management

Grandfathering of profit-linked deduction for existing SEZ units



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Minimum Alternative Tax (MAT)


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MAT

Roll-back of asset-based MAT A positive move MAT computation with reference to book profit to continue

Relief particularly for loss-making companies and companies having long

gestation periods

Open

Issues /

Representations made

MAT credit under the current law to be allowed under DTC as well

Entire book loss should be eligible for being carried forward and set off

Rate forMAT to be maintained at moderate level (not more than 7.5%)

MA

T credit under DTC be carried forward and set off indefinitely Current methodology of computation of book profit to continue?



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Residence Test


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Residence Test

Concept of Place of effective management applied for residency test

Place of effective management' means:

the place where the Board of Directors or executive directors, make

decisions; or

the place where executive directors or officers of the company perform

their functions, in cases where the Board routinely approves thecommercial and strategic decisions taken by them

Open issues / Recommendations

Definition is not satisfactory Could result in a company having a place of

effective management in every location where the company has executive

directors or officers

Guidelines in the form of FAQ may be issued



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GeneralAnti-Avoidance Rule (GAAR) provisions retained butproposed with certain safeguards

Controlled Foreign Company (CFC) concept introduced

Denial of treaty benefits in cases of tax avoidance



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General Anti-Avoidance Rule (GAAR)

GAAR provisions intended to be invoked only in following cases:

Arrangement is not at arms length; or

It represents misuse or abuse of the provisions of the DTC; or

It lacks commercial substance; or

It is not for bona fide business purposes

Every arrangement for tax mitigation is not intended to be treated as an

impermissible avoidance arrangement



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General Anti-Avoidance Rule (GAAR)

Following safeguards proposed:

CBDT guidelines to provide where GAAR can be invoked

threshold limit for triggering GAAR to be specified

recourse to Dispute Resolution Panel (DRP) would be available

Open issues

Delegation to CBDT desirable?

DRP can relief be expected?



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PricewaterhouseCoopers Slide 16July 2010

Controlled Foreign Company (CFC)

Introducing CFC concept Passive income of a foreign company to be taxed where:

such company controlled by a resident, directly or indirectly; and

such income is not distributed

Objective is to counter deferral of tax

CFC rules have been adopted by many countries (e.g. US, UK, Japan,

Germany, etc.) in various forms

Details needed on CFC provisions

Direct Tax Code


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Controlled Foreign Company (CFC)

Open Issues What constitutes passive income?

What constitutes control?

Conditions and threshold limits

What is indirect control?

Downstream entities covered?

Impact on outbound investments?

India needs to develop a model suitable to its requirements



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Treaty Override

Treaty override provisions rolled back partially

Preferential status of the treaty vis--vis the domestic tax law except in

the following circumstances:

when GAAR is invoked; or

when CFC provisions are invoked; or

when Branch Profits Tax is levied

Treaty benefits diluted to that extent



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PricewaterhouseCoopers

Capital Gains


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Capital Gains

Favourable treatment for long-term capital gains

Gains from the transfer of asset held for more than one year treated

differently

Gains from transfer of listed equity shares or units in equity-oriented

funds to be scaled down through a deduction varying depending on the

period of holding

Losses relating to such assets to be similarly scaled down

Indexation benefit to be allowed for other assets

No deduction/indexation for assets held for a year or less

The end of the financial year in which an asset is acquired to be the

starting point for computing the above period of one year



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Transfer of Listed Equity Shares/Units of Equity Oriented Funds

Transfer of Other Assets

Held for > 1 year

No indexation benefit allowed

Deduction allowed at specified percentage of

gains - % not yet prescribed

Gains net of deduction taxable at applicable

rate

Held for > 1 year

Indexation benefit allowed

base date ofApril 1, 2000 to be adopted

for determining cost of acquisition forassets acquired before that date

(Unrealised capital gains as of 1 April

2000 not liable to tax)

Balance gains after indexation benefit

taxable at applicable rate

Held for < = 1 year

Taxable at applicable rate without any

deduction or indexation benefit

Held for < = 1 year

Taxable at applicable tax rate without any

deduction or indexation benefit

Capital Gains

Direct Tax Code


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Capital Gains

Securities Transaction Tax (STT) to be calibrated based on revisedtaxation regime for capital gains and flow of funds to capital market

Originally intended as substitute for capital gains tax now an additional

tax

Transition regime promised for gains currently exempt

Open Issues

Set-off of capital losses against other income

Nature of transition regime

Grandfathering of existing investments

Big negative for capital markets and investors



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Capital Gains - FII

Income earned by FII

Deemed to be taxable as capital gains and not business income

Gains not subject to tax deduction

Advance tax payment to continue on such gains

Benefit under tax treaties?



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OtherAspects


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Special Economic Zone

Profit-linked deduction extended to existing Special Economic Zones

(SEZ) units

Deduction available for unexpired period

Profit-linked deductions not available to new units

Issues / Representations

New units in DTC regime should be entitled forSEZ tax incentives

Profit-linked deductions should be made available to SEZ units

Migration ofSTP/EOU Tax holiday to be allowed for unexpired period

DDT &MAT exemption to be continued for Developers / Operators

Big negative in terms of development of new SEZs



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Thank You

2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network

of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independentlegal entity.

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