dtc overview_dhinal shah

DIRECT TAXES CODE BILL, 2010 - AN OVERVIEW

Dhinal ShahChartered Accountant

Contents

► Background

► Tax Rates

► Scheme of overall computation under DTC

► Income from Employment, personal taxation, tax deductions to individuals

► Income from house property

► Business Income

► Finance Lease and Security deposit

► Presumptive taxation

► Capital Gains

► Income from residuary sources

Contents

► Life Insurance Policies – Taxation in Investors’ hands

► Business Reorganisation

► Non resident taxation

► Minimum Alternate Tax (MAT)

► Dividend Distribution Tax (DDT)

► Concept of WHC/CHC and deemed dividend

► TDS/TCS

► Return, Assessment, DRP, reassessment, rectification, Settlement

commission, Authority for Advance Ruling

► Penalties

► Books of Account, Tax Audit

► Wealth Tax

► 12 August 2009: DTC Bill, 2009 and Discussion Paper released

► Inputs received from large number of organizations & individuals

► News reports: over 10,000 responses from stakeholders

► Key areas of concern identified

► 15 June 2010: Revised Discussion Paper (RDP) released

► Addressed 11 major issues arising from draft DTC

► 2010: DTC Bill introduced before the Parliament on 30 Aug 2010

► DTC Bill now to be effective from 1 April 2012

► Bill referred to Standing Committee of MPs for further deliberations

► Committee to have one more round of public consultation

Background

Tax rates for corporate entities

Particulars Current Tax Rates* Tax rates under DTC 2010

Domestic company 30% 30%

Foreign company 40% 30%

Branch profit tax (BPT) Not Applicable 15% (New Tax)

Dividend distribution tax (DDT) 15% 15%

Minimum alternate tax (MAT) 18% of adjusted book profits

20% of adjusted book profits

Wealth tax 1% on net wealth exceeding INR 3 mn

1% on net wealth exceeding INR 10 mn#

*Exclusive of surcharge and education cess# DTC 2010 proposes to widen the category of assets subject to wealth tax to include , inter alia, helicopters, drawings, paintings, archaeological collections, sculptures, interest in foreign trusts, controlled foreign companies abroad.

Personal Tax rates

Current tax rates Proposed tax rates *

Income levels % Income levels %

0 – 160,000 Nil 0 -200,000 Nil

160,001 – 500,000 10% 200,001 – 500,000 10%

500,001 – 800,000 20% 500,001 – 1,000,000 20%

Above 800,000 30% Above 1,000,000 30%

*No education cess. Special exemption for women withdrawn. Senior citizen to get additional benefit of Rs 50,000.

Scheme of overall computation under DTC

Computation of Total Income under DTC

Ordinary Source (OS) Special Source

Income from •Employment.•House property.•Business.•Residuary 1

•Capital gain (for residents as also non residents)

Resident Non Resident

Card game, lottery winning, horse

race, etc.

Dividend, (excluding on which DDT is paid) Royalty, sportsman,

etc.

Excludes income attributable to PE in

India

1 CFC income is part of residuary source

Income from Employment, personal taxation, tax deductions to individuals

Income from employment

► No change or no major changes1,2 as compared to ITA► Leave Encashment► Gratuity► VRS compensation / retrenchment compensation under Industrial

Disputes Act► Commutation of pension from approved Superannuation Fund upto

specified limit► Withdrawals from approved Provident Fund and New Pension Scheme► Non-chargeability of perquisites by way of specified medical

treatment/expenditure reimbursement► ESOPs

1 Pension fund, Superannuation fund, Provident fund. Contribution to superannuation fund in excess of Rs. 1 lakh is disallowable in hands of employer but deductible in hands of employee.2 Though concept of NOR is done away with, exemption for income accruing outside India is provided for individuals satisfying the conditions of NOR


► No change or no major changes as compared to ITA…

► House Rent Allowance

► Conveyance allowance for journey to and from residence and office

► Prescribed allowances1 to meet employment related expenses (eg. Living/ Tour

allowance, uniform allowance, etc)

► Prescribed allowances to meet personal expenses (eg. Hilly/difficult area

allowance, children education allowance, etc)

► Employer’s contribution to approved funds and accumulations thereon up to

specified limits

► Income accruing outside India for not ordinarily residents

.

1 Press report suggest that LTC will be included


► Beneficial changes compared to ITA► Medical expense reimbursement limit enhanced from Rs. 15,000/- to

Rs. 50,000/-► Sponsored foreign medical treatment limit liberalised► Employers contribution to approved superannuation fund not taxable even in

excess of Rs 1,00,0003

► Adverse changes compared to ITA► Accelerated taxation of employer’s contributions to unapproved funds► Withdrawal of leave Travel concession4

► No option for paying tax sheltered non-monetary perquisites► Reimbursement of mediclaim premium for family members of employees made

taxable► Salary for rest/leave period preceded ‘or’ succeeded by services in India

3 However, contribution in excess of Rs 100,000 is disallowable in hands of employer4 Press report suggests it will be included as part of prescribed allowance to meet personal expenses.

Definition of employer

► ‘Employer’ is not defined in ITA.

► DTC defines as follows :-

“employer” means a person who controls an individual under an express

or implied contract of employment and is obliged to compensate him

by way of salary

► Withholding obligation on an employer who makes the payment which

is in the nature of salary [S. 384(187)(a)]

Other aspects concerning personal taxation

► Withdrawal of tax benefits for non-resident Indians/Persons of Indian Origin (PIOs)

► Facility of longer stay ( 60 to 181 days) while on ‘visit’ to India without triggering tax residence in

India withdrawn. Such persons will become resident in India if the stay during the year ≥60 days

and the stay in the preceding 4 years ≥ 365 days.

► Exempt- Exempt regime extended

► EEE regime will continue to apply for :-

► Public Provident Fund

► Statutory/ Approval Provident Fund

► New Pension Scheme

► Pure life insurance policy (premium is less than 5% of capital sum assured)

► Transitional protection for existing qualifying insurance policies appears to be missing

► Formal concept of NOR dispensed with – but, ITA implications for the initial years

remained unchanged in view of exemption under para 29 of Schedule VI. (But, refer slide

dealing with Wealth Tax implications)

Deductions from income (sub chapter IV of chapter III)

Nature of deduction ITA DTC 10

Amount paid towards: - life insurance premium - health insurance premium - tuition fees

100,0001

15,000100,0001

Aggregate not to exceed Rs 50,000

Deduction on account of disability of the assessee 50,000 (disability)

100,000 (severe disability)

50,000 (disability)


Medical treatment and maintenance of a dependent person with disability

50,000 (disability)


50,000 (disability)


Interest on housing loan on self occupied property 150,0002 150,0002

Rental payment for house taken on hire Maximum of 2,000 per month

Maximum of 2,000 per month

Interest paid on loan for higher education of assessee or specified relatives

Allowed for a period of 8 years

Allowed for a period of 8 years

1 Aggregate of these items, amongst others, not to exceed 100,000 2 As per DTC 10, interest is allowed as a deduction from ‘total income’. Thus, in a scenario where total income is NIL or insufficient to absorb the interest amount, the benefit will lapse unlike in case of ITA where loss from house property could be carried forward

Income from house property

Income from House property - Scheme of taxation Particulars ITA DTC 2010

Basis of charge Ownership of house property Ownership of house property 1

Basis of taxation Property which is let as also vacant property (excluding one SOP)

Property which is actually let

Exclusions from charge

► Property which is occupied for the purpose of business

► Property which is occupied for business is not a let property and hence, stands excluded from the charge in which is w.r.t actual letting.

► Chapter does not apply to property used as hospital, hotel, convention centre, cold storage and as part of SEZ2

1 Under ITA, lessee of a lease of more than 12 years was considered to be the owner. This fiction is absent in DTC2 The conjunction in section 24(5)(ii)should have been ‘or’ instead of ‘and’. Lease income of SEZ developer may be business income under S.33(3)(c). This makes it easier for SEZ developer to claim incentive by claiming the income to be business income. There is no such specific provision in respect of Industrial Park.

Income from House property - Scheme of taxation

Particulars ITA DTC 2010

Basis of gross rent ► Notional amount can also be part of annual value or annual rent.

► No scope for notional addition. Gross rent comprises of rent actually received 3

► Receipt of arrears is chargeable in the year of receipt

► No change

► Unrealised rent is, in specified cases chargeable only in the year of realization.

► Rent is chargeable on “receivable” basis. There is no back up provision to exclude unrealised rent.

Standard deduction 3 ► 30% ► 20%

Interest on unlet property

► Upto Rs 1.5 lakhs for a property which is self occupied

► Upto Rs 1.5 lakh under S.74 provided the property is not at all let throughout the year 4

Interest on Loan for let property

► No cap on deduction ► No cap on deduction

Pre-construction interest

► Amortization over 5 years from the year of acquisition / construction

► Amortization over 5 years from the year of acquisition/ construction

3 The service tax collection may form part of gross rent. Unlike in DTC 2009, there is no specific back up deduction in respect of payment of service tax.4 Deduction allowed to individual and HUF as tax incentives from gross total income. Unlike in ITA which permits carry forward of loss, in DTC, taxpayer will forfeit the claim if there is no positive gross total income.

Income from House property - Scheme of taxation

► Income from house property under DTC

► The chapter is applicable for house properties ready for use [section 24(5)(b)].

► Subject to exception in respect of SEZ, hotel etc, if income is assessable as business income, the chapter is applicable notwithstanding that letting is in the nature of trade, commerce or business.

► The definition of term ‘house property’ may leave litigation prone scope for one to suggest that the chapter cannot apply when there is bare letting without facility or service.

► Security deposit against long term leasing of 12 years or more is considered as income under residuary head. Amount allowed as deduction in the year of repayment.

Business income

Snapshot of business income computation under DTC

Ordinary Source

Business income

► Speculative business

► Activity of owning and maintaining race horse

Tonnage Tax cases

Mineral oil, Natural gas (XI Sch).

SEZ Development (XII Sch)

Specified business entitled to investment linked deduction (XIII Sch)

Presumptive taxation

cases (XIV Sch)

Other business

Each business result (whether +ve or –ve) to be aggregated though S. 30(2) requires separate

calculation for each business

Losses ring fenced

Losses ring fenced

Classification of Assets

Business Trading Asset Capital Asset

Business capital asset3. Investment asset.

► Stock-in-trade.(can include land held as such)

► Raw material.► Consumables.

► Capital asset self generated in the course of business.

► Intangibles being goodwill, trademark, brand name, right to manufacture, right to carry on business, tenancy right, licence, etc.

► Tangibles1 being building, machinery, plant or furniture.

► Any other capital asset2 connected with or used for business purpose.

► By definition of capital asset excludes business trading assets

► It is a capital asset other than business capital asset.

► Includes specifically undertaking / division of a business

► Includes specifically, any security (including derivatives3) held by FII.

Business income taxation ► Taxation as capital gain ► No distinction in rate of tax for

capital gains

1 Even if not connected to business?2 Specifically excludes land. Can issue arise for shares in subsidiary etc with business linkage ?3 By definition, generally, these assets will not constitute investment assets.

Set up of business

► Business defined to include profession

► Date of setting up of business defined

► Successful trial run of plant in case of business of manufacture, production or processing.

► Readiness to commence ‘commercial operations’ in any other case.

► Distinct & Separate business

► General test : Absence of interlacing or interdependence

► Deemed to be distinct and separate

► Unit manufacturing, processing, producing or trading in same goods but located physically apart

► Manufacturing, processing producing in same goods, but utilizing different raw material or manufacturing

process

► Maintenance of separate books of account or ‘capable’ of being maintained

► Presumptive basis of taxation

► Special source income

► Speculative transactions in nature of business

Implications of distinctive business

► Pre-set up period expenses not allowable as deduction

► Prescribed expenses may qualify for Deferred Revenue Expenditure Allowance

► Separate or distinct business

► For presumptive and scheduled items, need to allocate common overheads

► Loss from all businesses in ordinary source segment largely fungible for the

purpose of set off. Loss of Specified / Scheduled business (except tonnage

tax) is also freed from ring fencing

► Does this render distinct business fiction milder?

Gross Earnings

► Rent Income of SEZ developers, hospital, hotel, convention center,

cold storage excluded from House Property chapter. Such rental

income is business income.

► Sale of business undertaking/ division is part of capital gains chapter.

► Reimbursements to be taxed only on receipt basis (S.33(2)(xxi)

► Expenses may still be allowed on accrual basis

► Interest income is residuary source income except in case of financial

institution (33(3)(b)

Scheme of business income computation

► Normal Scheme

Normal scheme will not apply to business of : Insurance, Mineral Oil & Natural gas, SEZ

developer, businesses eligible for Investment linked incentives and presumptive cases. [But,

losses of these activities now available for set off]

Shipping business governed by tonnage tax not subject to the above

Gross earnings A

Less:

i. Operating expenditure (B)

ii. Permitted Finance

charges.

(C)

iii. Capital allowances (D)

Profits of business A- (B+C+D)

Business Income scope widened

► Inclusion of certain items connected with business

► Subsidy from any person or the Government ‘for or in connection with

business’.

► Profit on sale any licence obtained in connection with business

► Profit on transfer of any right or benefit under any scheme of Government,

etc.

► Remission, drawback or refund of any tax, duty or cess from Government

► Any amount received on cessation, termination or forfeiture of any agreement entered

in the course of business

► Any amount received or accrued on transfer of carbon credit

► Value of benefit or perquisites along the lines of ITA irrespective of whether they are

convertible into money or not

Business Income scope widened

► Amount of reduction, remission or cessation of any liability by way of loan, deposit, advance or

trade credit.

► Stagnant trade creditor > 5 years from year of last transaction is presumed to be a case of

remission. [Retroactive application for past accumulation will need to be guarded]

► Remission enjoyed by successor in business permits charge in the name of successor. For

this purpose, succession includes cases of business reorganisation and any other successor

in business

► Following receipts in relation to business capital asset1:

► Consideration in respect of transfer of any self generated business capital asset.

► Sale of any asset used for R&D

► Profit on transfer of asset under block adjustment concept (excludes sale of business

undertaking / division).

► Advance, Security Deposit (SD), etc. from long term leasing (>12 years) or transfer of whole or

part of or any interest in business asset [May have prospective application since it is linked to

receipt] [Provision for grant of deduction in the year of payment (S. 35(2)(xliii) now introduced]1Refer back earlier slide for scope of ‘Business Capital Asset’

Operating Expenditure


S. 35(1)

Allowable Expenditure [S. 35(2)] Allowable Deductions / Losses [S. 35(3)]

Laid out or expended wholly and exclusively for purposes of the business.

Specified Trading losses, including payments for remitted liability taxed in the past, bad debt provision for financial institution, notified NBFC etc

List of 42 items + Residuary item viz. ‘the amount of any other expenditure’, provided ‘any other expenditure’ is not listed as disallowance under some other provision


► Significant additions / clarifications to list of allowable expenses:

► Remuneration to any working participant of unincorporated body. Limits on

deductibility to be now prescribed.

► Selling expenses (including warranty charges)

► Expenditure for protecting or safeguarding the goodwill of the person which

has necessarily to be preserved for the purpose of his business.

► Entrance fees paid to club facility used for business

► Sales promotional expenses1

► Deduction admissible for payment made in respect of remission/ cessation of

liability assessed in the past

1DTC 09 limitation on allowability only to the extent charged to P&L A/c now deleted


► Quantum of H.O. expenses of NR attributable restricted to 0.5% of total turnover or gross receipts

of business in India (instead of existing limit of 5% of total income).

► Provision for doubtful debts for bank and FIs restricted to 1% of average advances (instead of 7.5%

of total income & 10% of rural advances).

► Provisions along the lines of section 43B of ITA introduced in DTC ,10 w.r.t items being land

revenue, taxes, employers contribution, bonus/ commission, leave salary, gratuity

► Employers’ contribution towards superannuation fund in excess of Rs One Lakh disallowed1

1Under ITA, employee paid tax in excess of Rs 100,000

Permitted Finance Charges

► Deduction specifically permitted for :

► Interest payable to trade creditors

► Proportionate amount of discount or premium payable on bonds or debentures as per method to be

prescribed.

► Interest payable to working participant of unincorporated body. Limit on deduction to be prescribed (ITA

permits deduction @ 12%)

► Deduction not permitted in respect of:

► Pre-set up finance expenditure.

► Expenditure pertaining to period up to the date the asset is put to use (and, unlike ITA, this is not

restricted to cases involving extension of existing business)

► Issue expenses of convertible debentures, bonds or share capital

► Specific disallowance is provided for interest paid to SME in terms of section 23 of Micro, Small and

Medium Enterprises Development Act. The Allied Act specifically has provision prohibiting deduction of

interest paid or payable by any buyer

► Definition of ‘interest’ aligned to ITA

Deduction for Scientific R & D allowance

► Limit continues to be @200% as in ITA

► Scientific R&D definition modified. Scope restricted to basic research, applied

research and experimental development in field of technology, natural or applied

science [Refer S 314(227)]

► Specifically excludes following activities:-

► Market research or sales promotion

► Quality control

► Research in social sciences or humanities

► Prospecting, etc of minerals, petroleum or natural gas

► Commercial production or use of a new or improved material, device or product

► Style changes

► Routine data collection

Weighted Deduction for approved inhouse R&D facility (S. 41)

► Limit continues to be @ 200% as in ITA

► Scope expanded :

► Condition of being in manufacturing business removed

► Scope restricted :

► Available only for expenditure incurred for carrying out R&D ‘in’ the inhouse facility

► Expense on clinical trials and patent registration would not qualify.

► DTC ‘10 now excludes cost of land/ building along the lines of ITA

► Benefit not available where R&D is the business of the assessee [S. 41 (4)]

► Benefit approval continues for the successor in business reorganisation

Items not allowable as deduction

► Expenditure ‘attributable’ to exempt income (contrast ‘in relation to’ as per existing ITA)

► Provision for unascertained liability

► Expenditure, including capital expenditure, in favour of an associated person to the

extent it is excessive/unreasonable*.

► Scope of disallowance on account of TDS

► Deduction permissible if TDS paid before return filing due date

► Else deduction, in the year of payment of TDS

► Interest paid to financial institution** allowable only in the year of payment.

*Applicable to all heads of income.

** Financial Institution defined to include (a) a banking company or a scheduled bank; NBFC, a public financial institution; state financial corporations; state industrial investment corporations; etc

ITA DTC

Employee contribution to welfare funds

Deductible only if paid by Statutory Due Date

►Deductible even if paid before due date of return [s.35(6) r.w.s 35 (2) (xxx)]

► Beyond that, in year of actual payment

Employer’s contribution to welfare funds

Deductible even if paid before due date of return

►Deductible only in year of actual payment [s.35(2)(xxix)]

Items not allowable as deduction

Actual cost of assets and depreciation

► Actual cost to be deemed WDV notionally calculated on stand alone basis for assets acquired :-

► From any holding or subsidiary company. Subsidiary means as per Cos Act and includes overseas subsidiary. As a result, fiction applies regardless of whether:1

► Holding is 100%.

► Transfer is taxable2

► New categories of depreciable assets added [E.g Rails] (Refer separate slide for major changes compared to ITA)

► Amortization for certain expenditure (E.g. preliminary expenses, VRS compensation, etc.) provided. Chief additions are non compete, Premium for obtaining asset on lease, VRS, loss on any agreement etc (Refer separate slide for comparative analysis).

► Lessee in a financial lease is owner eligible for depreciation

► Depreciation will be allowed even on cessation of block if block value is positive. [Refer S. 38(2)]

► Loss on transfer of non depreciable business capital asset allowed as business loss (Refer S. 42(3)

► If block value falls below Rs. 1 L, full depreciation for residual value. [Refer 15 th Schedule]

1 Can this have retrospective application in respect of concluded transaction?

2 Capital gains exemption still requires 100% holding

Amortization of expenses

Sr No

Deferred Revenue Expenditure Amortization Period Year from which deduction allowable

ITA DTC

1 Non compete fees Not specified 6 Year in which such amount is actually paid

2 Premium for obtaining any asset on lease or rent Not specified 6 Year in which such amount is actually paid

3 Amount paid to an employee on account of VRS 5 6 Year in which such amount is actually paid

4 Expenditure by an Indian company on account of business re-organization

5 6 Year in which business reorganization takes place

5 Expenditure incurred by a resident Indian on any operations relating to prospecting of mineral oil or development of mine or other natural deposit of any minerals

10 10 Year in which such amount is actually paid

6 Loss on forfeiture of any agreement entered in the course of business

Not specified 6 Year in which the loss has been incurred

7 Preliminary expense in connection with setting up, extension of business or before the commencement

10 6 Year of setting up, extension of business or commencement

Comparison of Depreciation rates – Schedule 15

Description of Asset ITA DTC ’10Buildings used as – (1)Hospital and Convention Centre 10% 15%(2) Buildings acquired on or after the 1st day of September, 2002 for

installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of Section 80-IA(4)

100% 10%

Rails – (1)Engines, coaches and wagons (2)Rolling Stock

--

40%15%

Books – Any other book other than used in profession or in libraries 100% / 60% 25%

Scientific Research Assets 100% (U/s.35) 100%Family Planning asset (available only to companies) 1/10th amortisation

(U/s. 36)25%

Intangible Assets:(1)Any right by way of licence or franchise to operate a business(2)Asset or project constructed, set up or erected by the assessee and the benefit arises for a period not exceeding ten years and it is not owned by the assessee(3)Asset or project constructed, set up or erected by the assessee and the benefit arises for a period exceeding ten years and it is not owned by the assessee

25% 25%-

20%-

15%

Finance lease and security deposit

Implications of Finance Lease

► A business capital asset obtained under Finance lease is considered to be owned by the lessee

► Impacts right to claim depreciation.► There may also be MAT implications depending on the accounting

treatment. But, evaluate the measure of actual cost in the assessment of lessee

► Lease is finance lease if the following conditions are fulfilled cumulatively► contract for lease is entered into between two parties for leasing of a specific

asset;► such contract is for use and occupation of the asset by the lessee;► the lease payment is calculated so as to cover the full cost of the asset

together with the interest charges; and► the lessee is entitled to own, or has the option to own, the asset at the end of

the lease period after making the lease payment;► Aggressive planning of a transaction may be subject to the implications of

GAAR

Security deposit receipt

Security deposit receipt (SD) from the long term lease or transfer of

an asset is chargeable as income, while repayment of security

deposit is deductible as expense. [S. 33(2)(xx) and S.35(2)(xliii)]

“long term leasing” means,-

(a)lease for a term of not less than twelve years; or

(b)a lease which provides for the extension of the term ‘thereof’ by a further term

or terms, if the aggregate of the term for which such lease is to be granted and

the further term or terms for which it can so extended is not less than twelve

years

Similar provisions under Residuary head of income

Presumptive taxation

Determination of Income on Presumptive basis

Nature of business (Refer Schedule XIV of DTC)

ITA DTC 10RemarksProfit as %

of revenueProfit as % of revenue

Business of operation of ships 7.5% 10% Applies to NR

Business of operation of aircraft 5% 7% Applies to NR

Services or facilities in connection with the prospecting for, or extraction or production of, mineral oil or natural gas

10% 14% Applies to NR

Supplying plant and machinery on hire in the prospecting for or extraction or production of mineral oil or natural gas

10% 14% Applies to NR

Any business of a resident (other than a profession and business of plying and hiring of goods)

8% 8%* Limit increased to 1 crore (from 40 lacs as per ITA)*applicable only to resident individuals, HUF or firms excluding LLP

Determination of Income on Presumptive basis► Schedule XIV specifies presumptive basis of taxation

► Presumptive income determination exhausts every other allowance, loss, deduction,

depreciation, remuneration to participant, allocation of common costs, etc. under DTC

► Rules to be prescribed for allocation of common costs

► If income actually earned is established to be more than presumptive rate, such higher

amount is to be considered.

► Taxpayer can avail of net income taxation at lower rate if

► All books of account and other documents maintained;

► Accounts are audited;

► Accounts are correct and complete to AO’s satisfaction;

► Income can be properly deduced from accounts;

► Accounts, documents are produced before AO when called for.

Determination of Income on Presumptive basis► Income in presumptive cases falling within special source is

computed independently. E.g. Royalty, or interest income, etc of NR if not connected with PE

► Question will arise about applicability of BPT in addition to presumptive tax income

► Litigation about applicability of MAT as subsists in ITA continues

► Lower rate TDS certificate may be required

Grandfathered units / taxpayer

► Incentive deductions grandfathered for unexpired period for following sections

Current Section

Profit linked tax holiday in respect of Cut off date Schedule in DTC

80-IA Industrial undertakings or infrastructural development 1 April 2012 XIII

80-IAB Development of SEZ SEZ notified before 31 March 2012

XII

80-IB Specified industrial undertakings and units

1 April 2012

XIII

80-IB(9) Natural Gas Exploration & Refining

80IC Area based incentive

80ID Hotels & Convention centers

80IE Undertaking situated in North-Eastern States

80JJA Collecting and processing of Bio-degradable waster

80JJAA Employment of New workmen

80LA Offshore Banking unit/ International financial service centre 31 March 2014

XIII

10AA Units of SEZ XII

l .

Capital gains

► Other than shares and business reorganisation

► Shares

Capital gains : Other than shares and business reorganisation

Scheme of taxation

► Taxation as capital gain restricted to transfer of ‘investment asset’.► Investment asset excludes

► Business trading assets.► Business capital assets as defined in S.284(39)1

► Investment asset is defined as under:► Capital asset which is not a business capita asset► Security held by FII► Undertaking or division of a business

► Asset being land constitutes an investment asset even if it is connected with business since the asset is excluded from scope of business capital asset. Land forming part of building may also constitute an investment asset.

► Capital gains taxed at the same rate as is applicable to any other income for taxpayers.

1. Gain from these is chargeable as business income. A residential house property of a taxpayer is his investment asset

Scheme of taxation

► Gain on transfer of investment asset transferred after the end of financial year

next following the year of acquisition is computed separately. Such gain is

calculated after considering:► Substitution of FMV as at 1.4.2000, at the option of taxpayer as cost of acquisition

► Indexation of costs of acquisition2

► Roll over exemption (restricted to individual/ HUFs)3.

► None of the above adjustments permitted if asset is sold within one year from end

of the year of acquisition

► Provision for including holding period of previous owner is absent.

► Losses from any other source available for set off against capital gains income.

► Capital loss is ring fenced.

► Capital loss can be adjusted against any other capital gain income (short term and

long term without distinction) and carried forward for indefinite period.

2. Unlike in ITA, indexation benefit available w.r.t bonds and debentures3 Refer S.55(6) of DTC, 10 for permitted roll over exemptions. Refer, specific slides dealing with rollover exemption.

Scheme of taxation

► Subject to deviations, most other exemption provisions, charging provisions are similar with provisions under ITA.

► Holding –WOS inter se transfer in favor of Indian transferee to continue to be tax sheltered

► Subject to conditions (as to lock in period of 8 years and non conversion into stock in trade by transferee) as provided in ITA

► Tax liability trigged in the year of violation of condition (as against trigger in the year of original transfer under ITA).

► Money or asset received by a participant on account of his retirement from Firm / LLP is taxable in the year receipt. [Refer S. 48(2)(b)]. Capital gain to be calculated by granting deduction in respect of capital balance [S.53(6)].

► Firm / LLP is also taxed in respect of transfer by way of distribution of money or asset to participant. [Refer, S.48(1) – Table item 7].

► Will transaction results into double taxation ?

► Can double taxation be challenged on the strength of S.17?

Scheme of taxation

► Consideration for transfer of land or building is stamp duty value of the asset regardless of higher actual consideration received4 !!. [See overriding impact of S.50(2)(h) r.w. S.50(1) ]

► ‘NIL’ cost to be fictionally adopted [S.53(7)(c)] ► For all self generated assets

► if cost of acquisition is not capable of being determined or ascertained for any reason

► CBDT to prescribe manner to determine ‘fair market value’ for capital gains purposes

► For determining full value of consideration [S.50(2) r.w S.314(93)]

► For determining value as on 1.04.2000 [Refer, S.53(1) / (3) r.w.S.314(93)]

4. ITA provides adoption of stamp duty value only if actual consideration received is lower than stamp duty value.

Scheme of taxation

► No back up provisions for cost of acquisition/ cost step up to transferee made in following cases.

► Transfer of investment asset between holding – subsidiary chargeable to capital gains on violation of condition resulting in taxation for transferor

► Transfer of investment asset under corporatisation of firm / proprietary concern chargeable to capital gains on violation of condition.

► Shareholders assessed to capital gains w.r.t value of asset received from company under liquidation.

► Participant assessed to capital gains w.r.t value of asset received from firm /LLP on his retirement.

► Cost of acquisition of asset received on dissolution of Unincorporated Body (UB) is provided at cost to the U.B – though, UB is made liable to tax w.r. to F.M.V.

Scheme of taxation

Original Investment asset (OIA)

New Investment asset (NIA) Conditions5

Agricultural land Purchase of one or more pieces of agricultural land one year before or three years from the end of the financial years in which OIA is transferred6

► OIA was agricultural land during two immediate proceeding years to FY in which asset is transferred

► OIA was acquired at least one year before the beginning of FY in which asset is transferred

Roll over Investment (S. 55(6))

5 Unlike ITA,,DTC does not provide condition of 3 years lock in period for NIA and cost substitution in case of violation 6 If amount is not invested in purchase of asset by the end of the FY, amount is to be deposited in Capital Gain Deposit Scheme (CGDS) within six months from date of transfer or end of FY whichever is later. Amount in CGDS to be utilsed in purchase of NIA within stipulated time.

Scheme of taxation

Original Investment asset (OIA)

New Investment asset (NIA)

Conditions

Any investment asset7

Purchase or construction of one residential house one year before or three years from the end of the financial years in which OIA is transferred8

► Taxpayer does not own more than one residential house other than NIA

► OIA was acquired at least one year before the beginning of FY in which asset is transferred

► NIA not to be transferred within one year from the year of FY from which NIA was acquired or constructed

7. Will include residential house also 8.Refer footnote 5 on earlier slide.

Capital gains : Shares

Taxation of investors – Shares1

Particulars Position under ITA DTC 2010

► LTCG Exempt Exempt by way of full deduction of gain

► Period of holding for LTCG More than 1 year More than 1 year

► STCG rate 15% ►No special rate►50% deduction for gains.

Particulars Position under ITA DTC 2010

► LTCG ►For listed shares, taxable at 10% without indexation or 20% with indexation benefit

►For others, taxable at 20% with indexation benefit.

Taxation at normal rates with indexation benefit

► Period of holding for LTCG More than 1 year More than 1 year from end of F.Y. of acquisition.

► STCG rate Normal rate Normal rate

STT based sale of listed shares

Non-STT based sale of shares

1 No specific provision for adjustment of currency fluctuation impact when shares are acquired by NR in foreign currency.

Income from residuary sources

Scheme of taxation

► Residuary head attracted only if income not included under any other specified heads. Certain sources of income, however, specifically covered1. [E.g. interest income, except in case of permitted financial institutions is chargeable under residual head]

► Applies only to income from ordinary sources; does not apply to income from special sources, such as e.g. interest income of non resident is covered as a special source.

► Dividend income is a residuary head income. S. 58(2)(a) of DTC’ 10 relieves charge only in case where, in respect of dividend, DDT has been paid. Unlike DTC, ITA s. 10(34) provides exclusion in respect of dividend referred to in section 115-O of ITA. Hence, if there is default of DDT payment under DTC, question may arise whether the exclusion of dividend income is permitted2.

1 Better view is that an item of income specifically covered in section 56 of DTC’10 is covered under this head, except where section 58 of DTC itself restricts under this head to charge cases which may be covered as business income. [Refer, slide on this topic enlisting such income]2 The expression “paid” has been defined S.314(178) of DTC to mean “actually paid”. Doubt may arise whether the reference to method of accounting and expression “incurred” in definition Clause (a) of the section is safe enough to protect the case of recipient of dividend.

Scheme of taxation

► On a combined reading of s. 59(1)(a)(i) r.w.s 59(2) of DTC ’10, it is doubtful whether, against dividend income from foreign company or against chargeable interest income or against any other form of chargeable dividend income, expenditure in the nature of interest will be allowable as deduction. (contrast the language employed in s. 57(1)(a)(i) r.w.s 57(2)(e) of DTC ’09 ; refer also section 57 (iii) of ITA.) In DTC ’10, the deduction seems restricted to amount paid by way of remuneration or commission.

Significant expansion of scope compared to ITA

► Amount of voluntary contribution received by any person [other than individual / HUF] from another3.

► Value of any property, being shares of a closely held company, received for inadequate consideration or, without consideration, by a firm or a company. Unlike ITA, there is no exclusion in a case where the receipt is by a Widely Held Company (WHC). However, the scope of “closely held company” (CHC) under DTC is different compared to ITA (refer different slides enumerating the concept of CHC and WHC)

► Attributable income of Controlled Foreign Company is chargeable under this head (subsequent dividend receipt will not be subject to charge under the Twentienth schedule)

3 Is this wide enough to cover a gift receipt of any kind by all other entities? Can it cover a case of transaction for inadequate consideration? Is expression “amount” wider enough to cover a receipt in kind?


► Advance, security deposit from the long term leasing or transfer of an investment asset, with consequent deduction in the year of repayment.

► In case of individual and HUF, value of money or specified property received as gift, including for consideration which is not adequate, continues to be chargeable. In case of immoveable property, the charge is limited only in case of a pure gift. Benefit received from a relative4 continues to be excluded.

4. The term “relative” has been defined in DTC ’10 under S.314(214). r.w.s 58(4)(a). It has a wider as also restrictive scope depending on the circumstances of the case


► Following income taxable if not included under “income from

business”5.

► Amount received/ retained for settlement/breach of contract.

► Amount received for termination or forfeiture of any agreement.

► Transfer of any self generated business asset, if not included as business

income.

5. Refer foot note no 1 to slide under the caption “Scheme of Taxation”

Taxation of life insurance policies for investor

Taxation of Life insurance policies for Investors

Particulars Position Under ITA DTC 2010

Premium threshold for tax benefit qualifying policy

20% of actual capital sum assured

5% of capital sum assured1

Tax benefit for investment in qualifying policy

Deduction u/s. 80C within overall cap of Rs.1 L for individuals / HUFs.

Deduction u/s. 70 within overall cap of Rs. 0.50 L for individuals / HUFs.

Interim/ Maturity proceeds of qualifying policy.

Exempt u/s. 10(10D) Exempt (by way of full deduction)

Interim/ Maturity proceeds of non qualifying policy

Debatable whether excess over premiums paid is Capital gains or Income from other sources.

►Receipts of Approved equity oriented policy on which distribution tax u/s.110 is paid @5% is exempt (by way of full deduction)

►Receipts of other policies taxable as Income from residuary source subject to deduction of premiums paid* . Receipts liable to withholding of 10% / 20% for residents and 30% for non residents subject to threshold of Rs.10,000/- p.a.for non corporates

Death claim proceeds Exempt Exempt

* Premiums paid till date of interim receipt not deductible against subsequent receipts. 1 Past policies not grandfathered


► Sum received from insurance company, would be assessed as under.

Amount including bonus under Life Insurance Policy on maturity or otherwise (Amount received on demise of insured person exempted) Less –

A

Amount received in respect of pure insurance policy6 B

Amount received in respect of equity oriented Life Insurance policy 7 on which insurer has paid DDT

C

Amount of insurance premium paid8 D

Excess of amount received from insurance company over premium paid [E = A-(B+C+D)]

E

6. Premium payable does not exceed 5% of capital sum. Further, past policies not grandfathered .7. Popularly known as ULIP 8. Premiums paid till interim receipts not deductible against subsequent receipts.

Business reorganisation

Business reorganisation

► Defined to mean reorganisation of business of two or more residents*, involving –

[S. 314(41)]► An amalgamation which includes:

► Merger of companies in accordance Companies Act.

► Merger of co-operative societies.

► Corporatisation of unincorporated body (firm, LLP, AOP) or the proprietary concern leading to succession.

► Merger involving banking companies

► Demerger

► Separate set of provisions apply to conversion of a company into LLP [Refer separate

slides]

► Tax neutrality in respect of gain arising on transfer of ‘investment asset’ ► Investment asset includes

► land (except held as stock in trade)

► Undertaking or division of a business► Any other capital asset other than business capital asset

* Can include an overseas company with POEM in India

Business Reorganisation

► Test of continuity for effective transition of losses:

► Successor is expected to continue to hold three fourth of the fixed assets of predecessor

► Continue the business of predecessor for five financial years succeeding the year of

reorganization

► Power retained to prescribe further conditions

► Test of continuity not relevant for tax exemption

► Interestingly, section 46(2)(b) provides for charge back of capital gain if exemption

conditions are breached. Issue arises about relevance thereof given the provisions

which do not have any continuing requirement of compliance.


► Proportionate deduction in respect of all capital allowances (including

depreciation, amortisation, scientific research expense etc ) in the year of

transition

► WDV for the successor in all cases of business reorganization is calculated

on the principle of “stepping into shoes” of predecessor

► In-house Scientific Research approval continues for the successor.► Expenditure on business reorganisation to be amortised over 6 years (ITA 5

years)► No specific provision for counting predecessor’s holding period of Investment

asset-though, cost base is substituted for computing capital gains income► However, no specific provision for cost substitution of non depreciable

business capital asset for computing business income

*There is no clarity on losses computed under ITA.


► No specific provision along the lines of s. 43C of ITA in DTC providing for cost substitution for stock in trade of predecessor

► Is specific exemption required for ‘business capital asset’? Presently, exemption sections operation for capital gain from investment asset.

► No specific provision (except for tonnage tax scheme) for continuing tax benefit.

► Losses of Investment incentive linked eligible activities transitioned as part of ordinary source loss*

*There is no clarity on losses computed under ITA.

Amalgamation of companies

► Unlike ITA, scheme of amalgamation to be in accordance with Companies Act 1956 [and as between two residents]

► Losses transition : Comparative conditions

ITA DTC*

Amalgamating Co need to meet qualifying activity test

No requirement of qualifying activity

Pre amalgamation condition of asset holding, etc. to apply

No such conditions

Post amalgamation, test of continuity apply

Same conditions to apply; further power of notification of additional conditions

Results in transition of business/depreciation losses

Results in transition of all losses including capital/speculation losses!!

Losses reckoned upto the date of amalgamation, if appointed date is in the middle of the year

Complex issues likely to arise for mid year amalgamation [S.64(1) of DTC]

* Can GAAR be involved to deny exemption or to deny transition?

Demerger : Specific issues

► Like ITA, demerger has to be under Companies Act► Unlike ITA, only equity shares* can be issued by Resulting Co to shareholders of

Demerged Co► No specific provision for split of W.D.V of demerged assets.► No specific provision for determination of proportionate capital allowances, etc.

pertaining to demerged unit► Losses transition : Comparative condition

ITA DTC

No conditions pre-post demerger No conditions prescribed though power in ITA

since 1999 to ensure loss transition benefit to genuine demerger

Post demerger, business continuity test to apply as in case of merger. Power of notifying further conditions taken

Specific sub-section for quantification of losses pertaining to the undertaking

No specific provision for calculation of loss of undertaking

Results in transition of business/depreciation losses

Results in transition of all losses including capital/speculation losses

Losses reckoned upto the date of amalgamation, if appointed date is in the middle of the year

Complex issues likely to arise for mid year amalgamation [S.64(1) of DTC]

* Can have differential voting right

Merger/ demerger involving foreign company

► S. 47(1)(g)/(h) of DTC provides exemption along the lines of ITA for transfer of shares of I Co as a result of merger/demerger of two foreign companies

► Specific exclusion that demerger scheme need not be under Companies Act (Refer S 47(2) of DTC)

► S. 47(1)(g) of DTC provides exemption when transfer effected as between two foreign companies ‘under a scheme of amalgamation’► Does this contextually dilute requirement of ‘amalgamation’ to be under

the Companies Act ?► Threshold for parity of shareholding increased from 25% to 75%► Contrast with S. 47(2) of DTC which specifically excludes requirement of

Cos Act compliant scheme for demerger► Can AO argue (and virtually render provisions redundant) by contending that tax

protection is restricted to amalgamation/demerger between two residents ?

Corporatisation of non corporates

► Covered within the definition of ‘amalgamation’ in DTC► Scope extended to corporatisation of AOP/BOI also► Capital gains exemption condition largely along the lines of ITA

subject to the following: ► Lock in period of 5 years, for 50% of value of shareholding is not a

condition of tax neutrality► Interestingly, sole proprietary concerns succession to a company

covered separately in section 47(1)(n) of DTC and provides 5 year lock in on 51% voting parity for capital gains computation

► Section 47(1)(f) of DTC requires Indian Company to be a successor though, no such specific restriction in section 47(1)(n) dealing with proprietary concern’s corporatisation

► Transition of losses permitted to company if► Test of continuity of business satisfied (Refer earlier slide for details )► 50 % ownership parity continued for 5 years

Conversion of company into LLP [S.47(1)(j)]

► Conversion of unlisted company into LLP is tax sheltered- but, not part of Business Reorganisation

► Tax neutrality conditions are along the lines of ITA – except, condition of continuity for 5 years of 51% stake is linked to total capital of LLP as against 51% parity of voting rights provided in ITA

► No specific provision for ► Depreciation apportionment in the year of conversion► Transition of WDV base or unamortized amount of other capital allowances► Substitution of cost and holding period for capital asset, business capital asset

etc.► LLP can carry forward unabsorbed business losses / unabsorbed

depreciation [S. 64(1)]. ► No carry forward of MAT credit to LLP [S. 106(7)].► Violation of tax neutrality conditions leads to transferor company paying

tax in the year of violation on ► Capital gains exempted in the hands of company [S. 46(2)(c)]► Forfeiture of loss claimed by LLP [S. 64(3) / (4)]

Conversion of company into LLP : Specific issues

► Exemption limited to capital gains tax implication► No provision for cost step up for LLP if capital gains

exemption forfeited requiring transferor company to pay tax

Non resident taxation

Source Rules : Basics

► Resident to pay tax on overseas income regardless of taxation in overseas jurisdiction

[s. 3(4)]1

► Income deemed to accrue or arise in India (including in case of non residents) defined to

cover:

► ‘Business connection’ in India2

► Any property or source of income in India

► Income from transfer of a capital asset situated in India2

► Royalties or fees for technical services

► Interest in respect of any debt for purpose of earning any income sourced in India2

► Income of NR from activity confined to purchase of goods for export not deemed to accrue in

India. Concessions contained in Explanation 1 to S. 9(1) of ITA for news agency and certain

cinematographic producing entities withdrawn

1 Attempt seems to overrule SC decision in CIT v/s. P.V.A.L. Chettiar (267 ITR 654). See also notification issued under s.90(3)2 Definition of PE has also been inserted in S.314(183).

Source Rules : Basics

► Deeming fiction for FTS, royalty, etc. applies regardless of1:

► Payment outside India

► Rendition of services outside India

► Income ‘otherwise’ not accruing in India2

► NR does not have residence or place of business or business connection

in India

1 Applies to transportation charges and insurance premium in addition to interest, royalty & FTS2 Attempt is to dilute Ishikawajima ratio

Deemed accrual scope expanded : Transportation charges/ insurance premium

► Transportation charges for carriage by aircraft or ship 1,4

► Accrued from non-resident if charges are in respect of carriage to or from a place in India2

► Accrued from resident except where charges are in respect of carriage between places outside

India3

► Insurance premium including re-insurance premium accrued from or payable by any

resident or non-resident in respect of insurance covering any risk in India4

1 See definition of ‘transportation charges’ in s.314(269). Defined widely to cover cases or courier and different forms of charter contracts2 This would cover import transaction3 Exception may not apply where the airport or departure port of origin of departure of such carriage is in India (Refer s.5(4)(f) 4Applicable treaty may mitigate the charge

Taxation of royalty/ FTS

► Enlarged definition of royalty/ FTS

► FTS to cover development and transfer of a design, drawing, plan or software, or any other service of a similar

nature

► Royalty to cover payment for use/right to use of transmission by satellite, cable, optic fibre or similar technology,

transfer of all or any rights in respect of cinematograph films & live coverage of events

► Royalty & FTS of non-resident to be taxed on gross basis at 20%.

► Existing treaties are not overridden and may still protect the recipient.

► Tax withholding obligation as per beneficial DTAA except in specified cases of non furnishing of PAN

► Net basis of taxation if effectively connected to a Permanent Establishment (PE)

► As in ITA, no deemed accrual

► When payment towards interest*/ royalty/ FTS is by resident for business outside India or for earning income from

source outside India

► When payment towards interest/ royalty/ FTS for royalty/ FTS by NR is for services utilised in a business or

profession carried on by NR outside India or earning any income from any source outside India

* interest definition aligned to ITA

Source rule: Cross-border financing

► FCo acquires debt fund for investing in Ind Co/ granting loan to Ind Co

► Under the ITA, Interest taxable in India if debt used by NR for purpose of business carried on in India

► Source rule expanded under DTC to also include interest on debt used for earning income from any source in India. (For example, funds used by F Co for acquiring shares or FCCB / convertible debentures in Ind Co or for granting loan to Ind Co)

► Deemed accrual is, however, relieved if F Co (NR payer of interest) “has not claimed” deduction of such interest against his chargeable income in India (for example, (i) no deduction is claimed1 or allowed against dividend income, or (ii) a case of such NR being taxed on interest from Ind Co on gross basis)

► Monitor past concluded transactions► Applicable treaty may protect the lender

F CO

Ind Co

India

Overseas

Issue of debt instruments/

loan

1 Question may arise whether taxpayer can exercise any optionAlso, is interest expenditure ‘claimed ‘ even if disallowed due to TDS default (versus – disallowed by taxpayer voluntarily)

Income from transfer of capital asset

► ITA position - Income accruing directly or indirectly through the transfer of capital asset situated in India is taxable

► DTC proposes to cover income accruing directly or indirectly, ‘through or from’, the transfer of a capital asset situated in India

► Controversy:

► Transfer of controlling or partial interest in Ind Co when shares of F Co1 are sold by one NR to another NR

DCoPCo

FCo1

IND Co

WOS

WOS

India

Overseas

Transfer of Shares in F Co1 to D Co

FCo2Overseas

WOS

Transfer of capital asset

► Income accruing directly or indirectly through or from transfer of capital asset situated in India is a

case of deemed accrual of income in India [s.5(1)(d)]

► However, no accrual in India if income is from transfer outside India of share or interest in F Co 1

unless FMV1 of assets owned by F Co 12, directly or indirectly3, in India represents 50% of FMV of

all assets of F Co 1 at any time in 12 months4 preceding the transfer of share or interest5 in F Co 1

[s.5(4)(g) of DTC] – Is this an independent charge or is it to mitigate litigation?

► If income is deemed to accrue in India under s.5(4)(g), the measure of such accrual will be

1 FMV is defined in s. 314(93) as “price” of asset which may be prescribed 2 Ownership of associates is not to be aggregated . 3Expression

‘indirectly’ suggests intent to cover value chain of step down subsidiaries. The Rules may provide for computation of derivative interest owned by

company 4 The period is a running period of 12 months preceding the date of transfer 5 Unless relieved by the prescribed method (i.e. unless the test

is frozen w.r.t. defined date), theoretically, one needs evidence of each day/ hour valuation to make the relief effective 6 Interest may be in foreign

company as partner or through some other instrument other than shares!! 7In case of business capital asset, charge may be as business income.

Does this fail if there is no PE? 8Should be as on date of transfer of shares of F Co though no such specific provision

Income from transfer6 as if transfer was in India

XFMV of company assets in

India7

FMV of all assets of F Co8

Transfer of capital asset: Interpretation issues

► If charge is attracted under s. 5(1)(d), the question will survive whether shares of F Co 1 is at all an asset situated in India?

► Does S.5(4)(g) support that specific share or interest in F Co 1 is an asset in India only if conditions are satisfied

► Is it necessary to proceed to s.5(4)(f) if the charge fails under s. 5(1)(d) for any reason? Is s. 5(4)(f) a charging section? (But, await

judgement in Vodafone case)

► If company of whose shares are transferred is considered resident by virtue of POEM, would fiction of s.5(4)(f) cease to apply on the

ground that company is not foreign company

► Assuming the charge is attracted under s.5(1)(d) read with s.5(4)(g), would it matter that the subject matter of sale by a shareholder

of F Co 1 is a small stake in F Co 1, or, that F Co 1 is a listed company or, that value of assets of F Co 1 in India was less than 50%

except on the date of transfer?

► Treaty may protect the seller from charge

► How would treaty operate if income is considered as business income from transfer of business capital asset?

► Can foreign merger/ demerger involving indirect transfer of I Co shares be governed by same rules?

Branch Profit Tax (S.111)

► Applicable to a Foreign Company (FC1 )

► BPT is payable ‘in addition to income-tax payable’. There may be no BPT if tax is otherwise not payable on ‘total

income’.

► BPT can be on income of FC

► (i) which is branch profit; and

► (ii) which forms part of total income

► Income from one PE can be set off against loss of other PE before calculating BPT

► Branch Profits’ is specified income included in the total income of FC. At the stage of computation of ‘total income’,

all other provisions of domestic law should apply2

► BPT is not payable on royalty income, etc if it is not attributable to PE

► At the stage of computation of ‘total income’ for determining tax payable on total income, the provisions of DTAA

should prevail3

► But, in the matter of levy of BPT, the treaty needs to yield in favour of domestic law (s.291)

► BPT being Income tax, it should arguably be considered as such for tax credit in home country of FC 4

1 Company ceases to be a FC if it is a resident by virtue of POEM2 For example, if dependent agent has been remunerated at ALP, no income needs to be attributed to FC, or if there are no operations in India, no income need to be attributed to FC. There is therefore no impact on ‘total income’ at the stage of computation3 The implications as “Permanent Establishment” (and, hence, attribution under Article 7) will need to be seen as per DTAA (and not DTC) at the stage of computation of ‘total income’4 FC may need to seek advice in home jurisdiction

Branch Profit Tax (S.111)

► If charge is attracted, the charge can be on income directly or indirectly, attributable to

PE1 or immovable property2 situated in India.hyuhu Tax analysis may be as under:

1 PE is defined in s.314(183). Refer recent Mumbai ITAT decision in the case of Linklaters for concept of income “directly or indirectly attributable to PE”.2 Not defined in DTC, to be understood as per general law3 No linkage with remittance of income

Royalty (not attributable to PE) 100

Branch profits (PE income) 100

Total income 200

Normal tax@ 20% on royalty = 20@ 30% in branch profits = 30 50

BPT on PE

Income attributable to PE and included in total income

100

Less: Income tax on such PE attributable income3

30

Branch profit base 70

BPT @ 15% 10.5

Normal Tax

Comparative table for FC’s Indian income

Through WOS Through PE (irrespective of

repatriation)

FTS / Royalty,

etc.1Dividend declared

Not declared

Gross 100 100 100 100

Less: Corporate Tax 30 30 30 20

PAT 70 70 70 80

Less : DDT 9.1 NIL - NIL

Less : BPT NA NA 10.5 NIL

Post tax income in India

60.9 75 59.5 80

► FTC / UTC availability in home country for DDT / BPT will impact net take home calculation.

1 Without deduction of expenses

Definition of Permanent Establishment (PE)

► Expression ‘PE’ has been defined in Section 314(183) of DTC► PE, inter alia, includes:

► Construction PE, Supervisory PE, Service PE

► Even one day presence in India can trigger PE

► No specific mention that services need to be rendered in India

► Agency PE (i.e. delivery agents, order securing agents, agents with authority to conclude

contracts covered)

► Excludes independent agent acting in the ordinary course of business

► Presence of substantial equipment in India► Farm, plantation, etc► Installation/ structure for exploration/ exploitation of natural resource► Person acting in India for collecting premium in India or insuring risk in India

► Income attributable to PE of NR in India is ordinary source income and hence net taxation at

headline rate plus liable to BPT► No specific exclusion for:

► Preparatory and auxiliary services► ‘Purchase for export’ PE

► Business taxation restricted to operations in India

Concept of Place of Effective Management (POEM)► A Company formed or registered outside India may be considered as resident of India

by virtue of its POEM in India1

► Residency if POEM, at any time in the year, in India

► Refer following extracts from revised Discussion Paper which reflect legislative

thinking on the subject

“Generally, the test of residence for foreign companies is the ‘place of effective

management’ or ‘place of central control and management’.

“The place of effective management is the place where key management and commercial

decisions that are necessary for the conduct of the entity’s business as a whole, are, in

substance, made.”2

► These observations would be of relevance for [may, arguably, control the]

interpretation1 Resident company has exposure to tax on global income and larger wealth base. It is liable to DDT and MAT. However, for the owner, CFC does not get triggered.

2 The test of residence for a non corporate person is linked to the place of control and management of the affairs at any time in India. We believe, central control and management is similar to the concept of POEM.

POEM - Definition

► POEM has been defined in section 314(192) as under:

(i) the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or

(ii) in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions:

► The second test is internationally recognised to ignite the trigger having regard to actual conduct and performance

► The emphasis on the Board, and the Directors / Officers, demonstrates that the parental control as shareholder is not the determinative factor.

POEM issues

► The requirement “make the decisions” should fairly refer to the final decision and not the pre-decision making process – though, such is also a viewpoint expressed in the dictionaries

► In the context of Executive Directors (EDs) under clause (i) of section 314(192) : ► should trigger be limited to case of ED making decisions affecting the

Central Management and not when it relates to one of the divisions?► Evaluate impact of presence / absence of authorization in the Articles► Evaluate impact of supervision by the Board► Should the terms “executive director” and “officers” be construed as per

Companies Act? ► Impact of presence of directors or officers in different jurisdictions?

► Do widening of residency test, introduction of GAAR, tightening of TP Regulations dilute requirement of introduction of CFC?

POEM - Cautions

► It may be risky to hold a board meeting in India, given that POEM at any time of the year may result in the residence of a company

► It is advisable to hold physical meetings in the location of desired residency; conference calls may advisedly be avoided

► It is absolutely advisable that the decisions of the Board at such meeting are well debated from all business and strategic angles and there is evidence to support democratic process of taking decisions

Foreign Tax Credit (FTC)

► Unilateral FTC is provided in terms of S. 207 of DTC ‘10

► It is available to resident. DTC 2010 makes it comparable to ITA and

restricts it to a resident. DTC ‘09 had provided for relief to every

person

► Ordinary FTC is available in respect of income accruing outside India.

The credit is available in respect of income from any overseas

country or specified territory.

► 207(3) seems to be a clarificatory provision. It clarifies that FTC will

not exceed Indian Tax payable in respect of overseas income as also

overall tax liability of the assessee.

► The right to prescribe mode and manner of FTC is provided for (may

have rules surrounding CFC also)

Transfer pricing

► Determination of arm’s length price (ALP) similar to that existing under the current rules

► Safe Harbour rules to be framed by the Board for determination of ALP

► Associated Enterprise (AE) definition widened to include [S. 124(5)] :

► Clause (x): Provision of services (directly or indirectly) to another enterprise or

person specified by it, if the amount payable and other terms relating thereto

are influenced by such other enterprise

► Presently such provision subsists only for sale of goods manufactured, processed

etc by AE’s

► Clause (xiv): If any of the enterprises to the transaction are situated in any

specific or distinct location which may be prescribed1

1 Is it likely to lead to specification of Black Listed Jurisdictions?

Transfer pricing

► ‘ALP’ definition is modified and now reads as under [Section 124(2)]:

“arm’s length price” means a price which is applied, or proposed to be applied, in a

transaction between persons, enterprises or undertakings, other than associated

enterprises, in uncontrolled, unrelated or independent conditions”

► Transfer Pricing assessment

► TP Accountants Report to be filed with TPO within due date

► Notice for assessment to be served within 2 months from end of

FY.

► Best judgement ALP determination if taxpayer fails to co-operate.

► TP assessment to be completed within 42 months from the end of FY in which the

transaction is entered into (current ITA limit is 43 months)

Transfer pricing…

► Penalties rationalized/modified as under:

► Board empowered to enter into Advance Pricing Agreements (APA) in respect of determination of ALP.

► APA can be valid for a period not exceeding five consecutive FYs. Not binding in case of change of law and change in basis.

► APA is single track, binding only on applicant in India.

Particulars ITA DTC

Under reporting of tax base

100% to 300% of tax base under reported

100% to 200% of tax base under reported

Failure to maintain documentation

2% of value of international transaction

INR 50,000 to 2,00,000

Failure to furnish documents

2% of value of international transaction

No specific provision

Failure to obtain or furnish accountants report

INR 1,00,000 INR 50,000 to 2,00,000

Approach to tax avoidance

► Application of anti-avoidance principles emerging from judicial

decisions (i.e. judgemade law)

► Enactment of General Anti-avoidance Rules (GAAR)

► A broad rule that has the effect of invalidating an arrangement that has

been entered into by a taxpayer for the purpose of obtaining a tax benefit.

► Enactment of Specific/ Targetted Anti-avoidance Rules (SAAR/

TAAR). Eg:

► Transfer Pricing

► Anti-treaty shopping provisions

► Anti-deferral/ CFC Rules

► Thin Capitalization

► Exit Taxes

Judicial Doctrine: India Snapshot…

► Tax planning is legitimate provided it is within the framework of law

► A tax-saving motive does not justify the taxing authorities or the

courts to nullify or disregard otherwise proper and bonafide

transaction

► An act which is otherwise valid in law cannot be treated as non-est by

looking at underlying tax saving motive or by suggesting economic

detriment or prejudice to the national interests

► It would not be permissible for the Court to treat the intervening legal

steps as non‑est based upon some hypothetical assessment of the

‘real motive’

► Law does not oblige a trader to make the maximum profit that he can.

Income which he could have, but has not been earned, is not

taxable.

► Tax avoidance is legal, tax evasion is illegal.

► Doing any trade, activity or planning affairs, within the framework of

law is permissible, unless the same falls in the category of colourable

device which may properly be called a device or a dubious method or

a subterfuge.

…Judicial Doctrine: India Snapshot

Relevant extracts from M/s Walfort Share & Stock Brokers Pvt Ltd1

“The fact that the dividend received was tax-free is the position recognized under Section

10(33) of the Act. The assessee had made use of the said provision of the Act. That such

use cannot be called "abuse of law". Even assuming that the transaction was pre-planned

there is nothing to impeach the genuineness of the transaction. With regard to the ruling in

McDowell & Co. Ltd. v. Commercial Tax Officer [154 ITR 148(SC)] = (2002-TIOL-40-SC-CT),

it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao

Andolan [263 ITR 706(SC)] = (2003-TIOL-13-SC-IT) it has been held that a citizen is free to

carry on its business within the four corners of the law. That, mere tax planning, without any

motive to evade taxes through colourable devices is not frowned upon even by the judgment

of this Court in McDowell & Co. Ltd's case (supra).”

1 2010-TIOL-47-SC-IT

Revised Discussion Paper

► Rationale for GAARIn the past, the response to tax avoidance has been the introduction of legislative

amendments to deal with specific instances of tax avoidance. Since the liberalization of the Indian economy, increasingly sophisticated forms of tax avoidance are being adopted by the taxpayers and their advisers. The problem has been further compounded by tax avoidance arrangements spanning across several tax jurisdictions. This has led to severe erosion of the tax base. Further, appellate authorities and courts have been placing a heavy onus on the Revenue when dealing with matters of tax avoidance even though the relevant facts are in the exclusive knowledge of the taxpayer and he chooses not to reveal them. In view of the above, it is necessary and desirable to introduce a general anti avoidance rule which will serve as a deterrent against such practices. This is also consistent with the international trend.

Safeguards proposed in RDP► CBDT to issue guidelines to provide circumstances when GAAR may be invoked

[refer s. 123(2)/ (3) of DTC]► To be invoked only where tax avoidance is beyond a specified threshold limit ► DRP available where GAAR is invoked

DTC : GAAR

► Codification of anti-abuse rules in DTC which permit declaration of an arrangement as an “impermissible avoidance arrangement”

► Main purpose of the arrangement should be to obtain a tax benefit and it ► Is not for bona fide business purpose

► Creates rights and obligations which would not normally be created between persons

dealing at ALP

► Results, directly or indirectly, in the misuse or abuse of the provisions of DTC

► Lacks commercial substance in whole or in part

► Presumption of purpose► Burden of proof on taxpayer to establish that tax benefit was not the main purpose

► Powers to invoke GAAR bestowed only upon the Commissioner

DTC : GAAR

► “Tax benefit” means

► A reduction, avoidance or deferral of tax

► Increase in refund of tax

► Reduction, avoidance or deferral of tax that would be payable under the DTC but

for a tax treaty

► An increase in refund of tax under the DTC as a result of a tax treaty

► A reduction in tax bases including increase in loss

► The arrangement for this purpose is defined exhaustively to mean any step in,

or a part or whole of, any transaction, operation, scheme, agreement or

understanding, whether enforceable or not, and includes any of the foregoing

involving the alienation of property.

Wide canvass of the provisions may affect residents as also non-residents alike. Court approved schemes are not excluded from scrutiny.

DTC : GAAR

► “Arrangement” includes or involves round trip financing and includes round

tripping.

► with regard to the funds other than the original funds;

► intermediate transaction to which the round tripped funds can be traced;

► The transaction has:

► presence of ‘accommodating’ and ‘tax indifferent party’.

► Elements which offset or cancel each other.

► where the legal substance of the whole of the arrangement differs from individual

step.

DTC : GAAR

► Tax consequences if GAAR is invoked► Disregard, combine, recharacterize steps or parts of the arrangement

► Treating impermissible avoidance arrangement as if it had not been carried out or in such other manner

► Disregard any accommodating party or treating accommodating party and any other party as one and the same

person

► Deem persons who are connected to be one and the same person

► Recharacterize or re-allocate income

► Recharacterize debt financing as equity or vice versa

► Implications/ concerns► Are SAARs and toning up of TP provisions sufficient safeguard?► Promotes uncertainty and has scope for litigation► Burden of proof is put wholly on the taxpayer► Places significant discretionary powers with the Commissioner

Tax treaties

► Power given to Government to enter into Tax Treaties

► Relationship between Treaty law and domestic tax law

► Preferential treatment for Treaty law over domestic tax law

► In case of conflict between Treaty law and domestic tax law, taxpayer can choose the

more beneficial provision

► Treaty benefits not available until a tax residency certificate is furnished in

such form a may be prescribed

► Treaty rates can be considered for TDS

► CFC impacts residence and treaty may not relieve the charge

Possible implications of Treaty override

► S. 291(9) permits treaty override in the following specific cases:► GAAR is invoked

► BPT is levied

► CFC is invoked

► Interpretation issues:

► Does there exist any scope for challenge, given, in particular, the express

legislative intent?

► Will the anti-abuse rules and BPT apply even to prior tax treaties?

► What if existing tax treaty has narrower anti-abuse provision?

Treaty override - Concept

► Concept of Treaty Override

► The enactment of domestic legislation intended by the Legislature to have effects in

clear contradistinction to international treaty obligations

► Vienna Convention on the Law of Treaties (VCLT)

► Article 26 – every treaty in force is binding upon the parties to it and must be

performed by them in good faith

► Article 27 - internal law cannot serve as justification for non-compliance with treaty

obligation

► OECD Treaty Override Report (1989)

► Treaty overrides violate international law, although they may still be binding as a

matter of domestic law

► Constitution of India

► State Directive Principle : India shall endeavor to foster respect for international law

and treaty obligations

Treaty override – international practice

► In most countries, tax treaties have a status superior to that of ordinary domestic laws (e.g.

France, Germany, the Netherlands)

► “lex posterior generalis non derogate legi priori speciali” (a subsequent general law does

not override a prior special law)

► In some countries (primarily the US, but also to some extent the UK and Australia) treaties

can be changed by subsequent domestic legislation

► “lex posterior derogate legi priori (a subsequent law overrides a prior law)

► IRC Sec. 7852(d): “for purposes of determining the relationship between a provision of a

treaty and any law of the United States affecting revenue, neither the treaty nor the law shall

have preferential status by reason of its being a treaty or law” - Identical language used in

DTC!

► Senate Report: “A treaty will not be deemed to have been abrogated or modified by a

later statute unless such purpose on the part of Congress has been clearly

expressed”

MAT provisions

Minimum Alternate Tax (S. 104)

► MAT continues to be payable by a company on book profit 1. Controversy on applicability to foreign company will continue.

► MAT rate is increased to 20% from 18%2

► MAT is a likely huge burden on companies enjoying investment linked incentive (being the companies who will need to maintain their accounts under Schedule VI as per applicable accounting standards).

► There is no protection extended to SEZ developers and SEZ units who hitherto availed immunity from MAT under section 115JB(6)3 of ITA

► Tonnage tax companies are exempted from MAT on book profit / loss derived from core shipping activities. [Refer para (12) of the Tenth Schedule]

1. The concept of book profit is largely the same as in ITA. 2. Effectively 19.93% inclusive of surcharge and cess3. Taxpayer may need to explore legal advice on the question whether SEZ Act may still have overriding impact.


► MAT credit carry forward extended to 15 years from existing limit of 10 years.

► S. 106 has a specific provision offering MAT credit advantage in respect of tax

paid ‘under this section’ making it litigation prone to carry forward MAT credit

outstanding on the transition date. No specific grandfathering provision for

MAT credit accumulated under ITA4.

► Income of Controlled Foreign Company (CFC) may be included in total

income of a resident company in year 1. Fairly, actual dividend receipt from

CFC in year 3 should not form part of total income (and, hence, should not be

part of book profit either. Section 17(i) r.w section 59(c) of DTC may support

this 5).4. Implications of repeal provisions and General Clauses Act will need to be examined for claiming the credit. Explore also if such companies can extend the credit period to 15 years.5. This is likely to be litigative. It is hence desirable that there is a specific legislative clarification to eliminate double taxation.


► Expenditure on wealth tax (which was hitherto deductible in the computation of book profit) will not be admissible under DTC

► There is no clarity on whether amount credited to P&L account by transfer from the provision/reserve which was added back in the computation of book profit under ITA will be allowed to be reduced under section 104(2)

► Litigation may ensue on the ground that such amount was not taken into account in the computation of book profit under DTC

► Profits of sick company continue to be out of MAT till net worth becomes positive

► Definition of ‘net worth’ borrowed in ITA from Sick Industrial Companies Act (SICA), has been omitted in DTC

► As per SICA, reserves which are not free reserves (say, capital reserve) are not considered as part of net worth. The position may differ with the omission of reference to SICA

► Like ITA, specific clarificatory provision to deny MAT credit to successor LLP in the event of conversion of a company into LLP

► Like ITA, specific provision that no interest is payable on amount of MAT credit awaiting set off

Dividend Distribution tax

Dividend Distribution Tax (DDT)1

► Continues to apply to a domestic company (being a company resident in India)2 @ 15% of the amount declared, distributed, paid

► Deemed dividend income in the nature of loan or advance by specified CHC continues to be chargeable as income of the beneficiary of loan / advance and is not subject to DDT

► One tier exemption is liberalized. The exemption from tax is now available in respect of distribution out of receipt of DDT paid dividend income from a subsidiary even if the distributing company is a subsidiary of another company.

► Deemed dividend excludes distribution on liquidation / reduction in favour of shareholder who is not entitled to participate in surplus in company assets, even if shares were not issued to him for full cash consideration

► Under ITA, SEZ Developers are excluded from DDT. The benefit is not extended under DTC3

1 Income distribution tax payable by MF or insurance company is captured in sector specific slides.2 By virtue of POEM, a foreign company may be considered as a resident and hence a domestic company.3 Legal advice may be obtained to explore the impact, if any, of SEZ Act override.

Dividend Distribution Tax (DDT)

► Under ITA, SEZ Developers are excluded from DDT. The benefit is not extended under

DTC3

► Time frame for payment of DDT : 14 days from the relevant date.

► Unlike ITA, the residual head of income excludes dividend income from purview of the

head provided DDT has been paid under section 109.

► The expression “paid” has been defined to mean actually paid. Default of payment of

DDT may, therefore, have consequences for the shareholders4.

► Consequences for delay / default in payment of DDT

► Delay triggers interest @ 1% p.m.

► Default of non payment makes company an ‘Assessee in Default’ liable for payment of

principal sum.

3 Legal advice may be obtained to explore the impact, if any, of SEZ Act override.4 See separate slides for implications of the language employed in the residuary head as also in the schedule of TDS rates.

Tier exemption implications

ITA Scenario DTC Scenario

A Ltd. A Ltd.

≥ 51% ≥ 51%

B Ltd. B Ltd.

≥ 51% ≥ 51%

C Ltd. C Ltd.

• Dividend distribution by B subject to DDT. Exemption not available as B is subsidiary of A

• No tax payable by A on onward distribution if A is not a subsidiary

• B would not be subject to DDT despite being subsidiary of A

• A would pay tax on onward dividend distribution

DDT Paid

DDT Paid

DDT relieved

DDT Paid

Anomalies and challenges surrounding dividend………. Contd.► ITA section 10 (33) exempts dividend income referred to in S.115- O. S.194

& S.195 of ITA relieves tax withholding obligation in respect of dividend referred to in S.115-O.

► DTC, 2010 excludes dividend from the computation of income as per item 19 of VI schedule as follows:

► Income not included in total income‘Any dividend declared, distributed or paid to a company or to a non resident in respect of which dividend distribution tax has been paid under S.109’

► DTC 2010 relieves TDS obligation provided DDT has been paid under S.109 (Schedule III and Schedule IV)

► Similar provision appears for income distributed by MF► The word ‘paid’ has been defined in S.314(178) as under:

(a)in relation to “Income from business” or “Income from residuary sources”, means incurred or actually paid, according to the method of accounting on the basis of which the income under those heads are computed; and

(b)in all other cases, mean actually paid;

Anomalies and challenges surrounding DDT

► Issues for debate:► Will TDS obligation be attracted at the stage of declaration or distribution on the

basis that DDT liability has been incurred, but, not actually paid?► Dividend income is chargeable as residuary income except in a case where DDT

has been paid? Is there scope for litigation in the assessment of shareholder if DDT has not been paid by the company?

► Rationale for limiting clause 19 of Schedule VI to a company or non resident► Payment of dividends by holding company after taking benefit of on tier exemption

while discharging DDT liability► Payment of dividends by VCC to its investors which is exempted from DDT2

2 ITA specifically exempts VCC from withholding obligation but DTC does not

Concept of WHC/CHC and deemed dividend

Concept of Widely Held Company (WHC)

► ITA refers to WHC as a company in which ‘public are substantially interested’. DTC formally introduces definitions of WHC and a Closely Held Company (CHC)

► The status as CHC may have impact:► Taxation of loan as deemed dividend, ► Carry forward of loss, ► chargeability of income under residuary head1 [Section 58(2)(j)] of DTC ‘10► Section 200 (A)(c)2, grants relief from tax withholding obligation when bonds are issued by a

WHC

► There is no separate entry in S. 314(293) dealing with a listed company. But, a public company as per section 3 of Companies Act is, by its status, considered to be WHC. [Refer S. 314(293)(f)► Significant scope expansion of WHC compared to ITA► No attached conditions as to ownership pattern or listing etc► Issue may arise w.r.t status of a subsidiary of a public company which is public company in

terms of section 3(1)(iv) of Companies Act

1 Along the lines of section 56(2)(viia) of ITA2.Along the lines of section 193(v) of ITA

Deemed dividend taxation

► Definition of deemed dividend under DTC includes payment by a CHC if such payment is:► Advance or loan to a shareholder being the beneficial owner holding ≥ 10% of

voting power► Advance or loan to a concern in which such shareholder holds substantial interest

(> 20%)► Payments on behalf of or for individual benefit of such shareholder

► Person is regarded having a substantial interest in a concern if:► An individual with his relative holds ≥ 20% voting power / income► Any other person holds≥ 20% voting power / income

► Definition of “relative” widened beyond the scope presently available. The lineal descendant of a brother / sister of individual or spouse is also a relative. This tightens the scope in case of CHC.

► Under DTC, distribution of accumulated profit by a company upon liquidation or reduction of capital in favour of shareholders not entitled to participate in surplus assets, will not constitute dividend regardless of whether the shares were or were not issued for full cash consideration

TDS and TCS

Changes in withholding provisions –Residents

► Withholding rates for payments to contractors specified at uniform

rate of 2% for all deductees. ITA carves out distinct rates for

individual/HUFs (1%) and others (2%)

► Scope of withholding on contract payments expanded to ‘service

contracts’. Service contract defined inclusively to include a contract

for job work

► TDS obligation restricted to cover specified streams of income

► Proposed expansive coverage of withholding @ 10% for ‘any other

income’ on omnibus basis in DTC 09 omitted

NR TDS [Fourth Schedule r.w.s. 195(3) / (4) and 314(187)(b)]► Having regard to provision of s.195(4) of DTC treaty provision can be considered for the purposes

of effecting TDS except when payee does, not have PAN► Salary TDS is provided along the lines of section 192 and permits TDS rate reckoning with

reference to average rate of income tax ► Royalty / FTS attracts TDS @20% whether or not related to PE, and, whether or not from Indian

concern► Residuary entry (8) in Schedule IV attracts 30% charge by a specific mention that the obligation in

respect of sum chargeable to tax► Is condition of ‘chargeability’ required to be provided specifically for other earlier entries

enlisted in the schedule? Can the pre-requisite of ‘chargeability’ be presumed in absence of specific mention?

► Exemption in ITA for Offshore Banking Units located in SEZ from withholding tax on interest on deposits placed or borrowings made from non-residents omitted in DTC. These units will need to withhold tax as per specified/DTAA rates

► Payment of interest to foreign banks to whom Banking Regulation Act applies3 will be exempted from withholding

► Withholding rate on interest on FCCB/FCEB and bonds of PSEs sold by Government enhanced to 20% as against 10% in ITA

Issue may arise whether the exemption will be restricted to Indian branches only or once Indian branch is established, Banking Regulation Act applies to overseas branches and HO also

TDS : General Provisions

► The provision of DTC corresponding to S.206AA of ITA makes it clear that the provision does

not apply if the deductee is not required to obtain PAN. The conditions and requirements

under which PAN needs to be obtained will be prescribed by rules under DTC.

► Incidentally, under ITA regime, Rule 114C exempts non-residents from obtaining PAN.

► Provisions for self declaration for NIL DTC omitted. Deductee will necessarily need to obtain

lower or NIL withholding certificate from Tax Authority.

► Incidentally, DTC 09 did not permit issue of lower withholding certificate. This has been

restored in DTC 10. (Refer S.197 / 195(2) of ITA)

► Employee can declare additional income from any other employer for higher TDS. Other

income (including losses) cannot be considered by employer

► TCS rates aligned to uniform rate of 3% instead of differential rates of 1% -5% under ITA

Return, Assessment, DRP, reassessment, rectification, Settlement commission , AAR

Rectification proceedings – [S.161]1

► Provisions are substantially along the lines of ITA

► Like in ITA, limitation period is 4 years

► Deemed rejection of rectification application on expiry of 6 months

triggering right to Appeal

1 K&S has largely restricted itself to changes compared to ITA

Filing of Return & Regular assessment – [S.144 to 157] 1

► Provisions largely along the lines of ITA. ► Significant deviations in DTC are:

► Concept of assessment year discarded. Income computation and assessment are for ‘financial year’.

► Common return of tax base for Income tax, Wealth tax, DDT and BPT ► Due date for submission of return 2

► Non- corporate taxpayers not having business income-30th June ► Others (including tax audit cases and all companies) – 31st August.

► Mandatory filing of return for following entities regardless of income level► Firm / AOP/ BOI► Societies ( including co-operative societies)► Local authorityCBDT can notify additional classes of persons

► Delayed filing of return will result in lapsing of losses (including depreciation losses) of relevant year.

1 This presentation has largely restricted itself to changes compared to ITA2 TP Audit Report to be separately furnished to TPO by due date.

Filing of Returns & Regular assessment

► Power of A.O to call for records of earlier years in scrutiny assessment

enhanced to 6 years. [3 years in ITA]

► Time limit of 6 months introduced for Valuation Officer to submit report to

A.O.

Dispute Resolution Panel - [S. 158] 1

► DTC provisions largely along the lines of ITA with following deviation

► DRP mechanism widened. In addition to cases where there is TP adjustment

and the cases of foreign companies 2, DRP can be approached 3 in cases of :

► Assessment based on GAAR order

► Any class or classes of persons as may be prescribed

1 This presentation has largely restricted itself to changes compared to ITA2. DTC (09) had proposed condition of minimum variation to total income in scrutiny assessment of an amount ≥ 2.5 M in every taxpayer’s case as criteria to approach DRP .That proposal has been dropped.3.CBDT Circular dated 20 January 2010 provided option to avail conventional remedy to file appeal to CIT(A) as an alternative to DRP

Reassessment procedure – [Section 159 to 160]1

► Provisions are largely along the lines of ITA ► Significant deviation in DTC are:

► Scope of deemed escapement of tax base enlarged to include:► Assessment not in accordance with CBDT order, direction, instruction or

Circular 2.► Assessment not made in accordance with order, direction, instruction or circular

of authority superior to the A.O issued before making of the assessment. ► Objection or observations in report of CAG on correctness of assessment of

the taxpayer 3.► Reopening notice can be issued within seven years from the end of relevant

F.Y 4 in all cases including search cases regardless of whether original assessment was a scrutiny assessment.

► Search assessments (including third party) are covered under reassessment

1 This presentation has largely restricted itself to changes compared to ITA2 Fairly CBDT circular should be available prior to the date of order and should be indisputably applicable to the facts of the case 3 Fairly, it should be with respect to taxpayer specific4 ITA provides limitation period of 6 years from the end of the relevant assessment year. DTC provision matches with ITA

Appellate proceedings – CIT(A) [S.178 to 181]*► Deemed rejection of rectification application on expiry of 6 months

triggers right to Appeal

► Remand to AO by CIT(A) possible only on new question of fact or law

► Power of condonation of delay restricted to one year of delay

► Subject to above, provisions are largely along the lines of ITA

► Unlike DTC 2009, no Appeal to CIT(A) may lie against stay rejection order.

* This presentation has largely restricted itself to changes compared to ITA

Appellate proceedings – ITAT [S. 183 to 186]1

► Appeal against order of A.O. pursuant to CIT’s revision order will lie to ITAT.► In the case of Public sector company appeal to lie before AAR [and, cannot

be to ITAT] against order of CIT(A) or CIT Revision2.► ITAT empowered to rectify its order suo motu within 4 years► Pursuasive time limit of disposal by ITAT curtailed to 2 years [against 4].► Power of condonation of delay restricted to one year of delay.► ITAT cannot grant cost. ► 5 Member Special Bench shall be constituted on reference from CBDT.► Appeal against ITAT order to lie before High Court. Unlike DTC (2009), no

reference to National Tax Tribunal.► Like ITA, ITAT can grant stay. Stay order is vacated if appeal not disposed of

within 365 days irrespective of fact that delay is not attributed to the taxpayer.

1 This presentation has largely restricted itself to changes compared to ITA2 In relation to DRP directed order of A.O, DTC provides option to approach either ITAT or approach AAR. [Refer, S.183(1)(e) r.w. S.183(3) and S.256(4) / (5)]

Revision proceedings – [S.191 and 192]

► Order prejudicial to the revenue1.► Order deemed to be erroneous:

► if passed without making inquiries or verification. ► Allowing relief without probing into the claim. ► Order not in accordance with CBDT’s directions or instructions.► Order not as per decision of appellate tribunal or Court in case of taxpayer or

other person under tax laws or under any other law.► SLP admitted by SC against favourable order of jurisdiction HC followed by

A.O► Order not erroneous if it holds one of the two views sustainable in law. ► CIT can direct enhancement or modification but cannot set side or cancel an

assessment.► Matter before CIT(A), or concluded by CIT(A) not to be revised. Likewise, “order

considered by and passed in pursuance of direction of DRP”2 cannot be revised. ► Appeal to now lie to ITAT against A.O order giving affect to CIT Revision order.

► Provisions dealing with revisional orders favourable to taxpayer are similar to those in ITA.

1 In substitution of Section 263 of ITA. 2 The conditions which exclude the power of revision appear to be cumulative.

Settlement Commission - [S.273 toS.290] –Deviation compared to ITA

Particulars ITA DTC

Scope coverage

Following pending proceedings 2

► Assessment ► Covered except assessment set aside in appeal or revision.

► Covered except assessment set aside in revision.

► Search assessment ► Covered ► Covered

► Reassessment ► Excluded ► Covered3

1.This presentation has largely restricted itself to changes compared to ITA2.In DTC, entry is barred in cases of assessment or reassessment where prosecution proceeding initiated . 3.Issuance of notice for reopening of assessment should be considered as pendency of assessment.

Settlement Commission - [S.273 to S.290] –Deviation compared to ITA

Particulars ITA DTC

2 Conditions► Complexity of

investigation► No such requirement ► Required

► Is filing return mandatory?

► No ► Yes

► Minimum additional income tax (refer foot notes 4 and 5 )

► Rs. 5M for search cases.

► Rs. 1M for other

► Same

► Same

3 Bar on subsequent application (subject to other conditions – Refer S.245K of ITA / S.288 of DTC)

► Only one time opportunity in all cases

► If there has been no search till date or if incriminating material found in a search on another, there seems no restriction. Otherwise, only one time opportunity.

► If earlier search was under ITA regime, perhaps, no restriction

4 Procedural provisions ► Various time limits prescribed

► Minor time limit changes

4. For wealth tax, there is no requirement of minimum additional tax liability.5 . Tax to be paid before the date of application. Under DTC, as between payment of income tax or payment of wealth tax, compliance of any one of them should meet with the condition

Authority for Advance Ruling and Dispute Resolution

► In addition to the cases covered in ITA, the scope has been widened to cover cases of dispute resolution in case of

public sector companies (PSC). A PSC may carry an appeal to AAR against the Order of AO pursuant to DRP direction

or against an order of CIT (A), or against a revision order of the Commissioner1. The order or direction of the Authority in

the matter of an Appeal shall be final and binding2

► The Authority may now comprise of a Vice-Chairperson as well. The Vice Chairperson should be one who has been a

Judge of the High Court. The Bench may comprise of Chairperson3 or Vice-Chairperson apart from a legal member and

a revenue member. Revenue member could be one who is CCIT (against the requirement of, he being qualified to be a

member of CBDT). A legal member should be one who is an Additional Secretary

► The Commissioner can carry an Appeal, in case of PSC, against order of CIT (A) or against revision, penalty or

rectification order of the Commissioner4

► The Authority may condone delay in submission of Appeal by PSC if the delay does not exceed a period of one year.

The Authority may grant stay of demand to PSC for a period of six months which may be extended not beyond a period

of 365 days

► There are some other consequential changes providing power of rectification of mistakes1Check the slide dealing with Appellate power. Entry of PSC to ITAT has been barred in certain cases.2 The controversy could arise whether matters pending before ITAT may continue to be governed by ITA. Fresh appeals furnished after introduction of DTC,

10 may lie to the Authority. There is no clarity on the applicable law should PSC cease to be PSC at some stage.3 The word ‘Chairperson’ substituted for the word ‘Chairman’4 It is not clear whether this provides scope to Commissioner to appeal against his own order of revision

Penalty

Penalty for under reporting

► Levy of penalty if there is under reporting of tax base.

► Under reporting presumed in a case of:

► Non filing of return

► Assessment of income over income disclosed in return.

► Any disallowance or addition in the assessment / reassessment.

► Penalty levy = 100% / 200% of tax payable on additions or disallowances made.

► Tax payable is determined at rates specified in First Schedule/Second Schedule.

► Exposure to penalty for additions made by CIT in revisional proceedings and CIT(A) in appellate proceedings.

Immunity from levy of penalty

► Furnishing bonafide explanation with disclosure of facts.

► If addition is based on estimate after rejection of method of

accounting.

► If addition is due to variation in estimate of disallowance / addition

offered also by the taxpayer in return.

► Income upto threshold exemption limit [Applicable to Individuals /

HUF/NPO].

Right of CIT to waive penalty taken away

Penalty in search cases

Penalty leviable as per status on date of search

Earlier F.Y Year of search or F.Y where

Return not due

Return filed but income

not included

Default in filing

return; due date has expired

Penalty @ 10% if UDI is admitted in

search, substantiated the manner&

taxes paid

Penalty 20% if UDI is not admitted in

search but is declared in return

and taxes paid

Penalty @ 100% /200% if UDI not

admitted in search nor declared in

return

Penalty on Undisclosed income at

100%/200%

► In search cases, provisions for penalty are largely along the line of ITA

Penalty : Other defaults

► Penalties for various defaults consolidated in one section.

► By and large, list of defaults is same as per ITA.

► As in ITA, no penalty leviable when there is reasonable cause.

► As against fixed quantum of penalty under existing ITA; DTC provides range of minimum & maximum penalty leviable. E.g.

► Penalty for non obtaining Tax audit or TP audit report, minimum: Rs. 50,000/- & maximum Rs. 2 Lac. [against Rs. 1Lac in ITA]

► Non obtaining or non quoting PAN, minimum : Rs.5,000 & maximum Rs.1 Lac [against Rs. 10,000/- in ITA].

► Acceptance or repayment of loan or deposit in an amount exceeding Rs.50,000 otherwise than by account payee cheque [Penalty equal to amount of loan or deposit]

Penalty procedure

► Show cause notice to impose concealment penalty to be issued

during pendency of proceedings for relevant financial year.

► Show cause notice to impose other penalties to be issued within three

years from the end of the financial years in which default is committed

► Order imposing penalty to be passed within one year from end of

financial year in which show cause was issued.

Books of accounts, tax audit

Books of accounts, information & documents

► Turnover limits of Tax Audit are revised as under:

► Books of accounts for persons in business include cash book, ledger, register of daily inventory of business trading asset.

► Bills or receipts in value exceeding Rs. 200/- should carry name, address & other prescribed particulars.

► Specific exemption relief from obligation to tax audit has been provided in certain cases of presumptive taxation (E.g., approved turnkey power projects, services / facilities for prospecting production, etc. of mineral oil, shipping companies, aircraft companies).

► No specific exemption to presumptive taxation cases from obligation to maintain books of account or from maintaining details of international transactions.

► TP audit report to be furnished to TPO. ITA requires report to be furnished to A.O

Particulars ITA DTC

Profession 15L 25L

Business 60L 100L

Wealth tax

Wealth Tax

Particulars WTA DTC 10

Taxpayers covered

► Individual, HUF and companies @ 1% on threshold > Rs. 30 Lakhs

► All taxpayers except NPOs @ 1% on threshold > Rs. 1 Crore

► Firms,1 AOPs, Trusts, etc will be taxed in their own capacity

► Local authority also covered

Deduction for related debts owed

► Available ► Available

Method of valuation ► Prescribed in Schedule III ► To be prescribed

Clubbing provisions for individuals

► Assets held by spouse, minor child, revocable trust, etc and converted HUF property

► Continues broadly on similar lines with certain modifications

1.Partner/Member should not be taxed again on same wealth

Wealth Tax

Particulars WTA DTC 10

Specified assets ► Urban land, building (including farm house located within 25 kms of any municipality or Cantonment Board), motor cars, jewellery & bullion, yachts, boats, aircrafts and cash in hand 2

► All existing specified assets 3 plus following additional assets :-

► Helicopter

► Archaeological collections, drawings, paintings, sculptures, or any other work of art 4

► Watch having value in excess of Rs. 50,000/- 4

► Deposits located in bank located outside India in case of individuals and HUFs (even if recorded in books of account)

► Deposits located in bank located outside India in case of other persons only if not recorded in books of account. [Does not however include units of overseas mutual fund / debentures of F Co. and shares of F Co. which is not CFC].

► Any interest in a foreign trust or any other body located outside India (whether incorporated or not) other than a foreign company

► Any equity or preference share held by a resident in a controlled foreign company (as referred to in the Twentieth Schedule)

2 Cash in hand in excess of Rs. 50,000 in hands of individuals/HUFs and unrecorded cash in hands of others3.Threshold for cash in hand for individuals/HUFS enhanced to Rs. 2 lakhs and not chargeable in hands of others4.Whether held as capital asset or stock in trade

Exempted assets – Immoveable property

WTA DTC 10

► Residential house allotted by company to employee having gross annual salary < Rs. 5 L

► Condition of gross annual salary < Rs. 5 L removed

► Residential property let out for 300 days in a FY ► House (including commercial property) let out for 300 days in a FY

► House held as stock in trade

► House occupied for business or profession

► Commercial establishment or complexes

► One house or part of house or vacant plot of land < 500 sq. mtrs owned by an individual or HUF

► Official residence of Ruler

► All these assets continue to be exempt

► Assets located outside India for foreign citizens and non-resident/not ordinarily resident individuals and HUFs

► Assets located outside India continue to be exempt for non-residents

Exempted assets – Immoveable property

WTA DTC 10

► Urban land on which construction is not permissible or on which building is constructed with approval of appropriate authority

► Unused land held for industrial purposes upto two years

► Urban land held as stock in trade upto ten years

► Exemption not available

► Assets5 acquired from moneys brought from outside India by returning Indians and PIOs


5 Exemption restricted to seven years from year of return

Exempted assets – Movable assets

WTA DTC 10

► Motor cars used in business of running them on hire or as stock in trade

► Jewellery, bullion, etc used as stock in trade

► Heirloom jewellery of Ruler

► All these assets continue to be exempt

► Yachts, boats and aircrafts used for commercial purposes

► Exempt (including helicopters) if used in business of running them on hire or as stock in trade

► Assets located outside India for foreign citizens and non-resident/not ordinarily resident individuals and HUFs

► Assets located outside India exempt for non-residents

► Assets6 brought from outside India or acquired from moneys brought from outside India by returning Indians and PIOs


6 Exemption restricted to seven years from year of return

Deemed ownership

WTA DTC 10

► Building allotted or leased by co-operative society, company or AOP to its members

► Holder of impartible estate deemed individual owner of all properties comprised in the estate

► These provisions continue in present form

► Possession of building under part performance of contract under TP Act

► Omitted for wealth tax purposes but retained for house property income taxation purposes.

► Hence, legal owner may need to check wealth tax while economic owner will enjoy the property

► Leasehold rights of building for more than 12 years

► Omitted for both wealth tax and house property income tax purposes. But, wealth tax exemption available for lessor if house let out for 300 days in a FY.

Financial assets

► Financial assets (including shares in a company – whether equity or preference, and whether, of Indian or foreign company) are ordinarily not liable to WT.

► Other financial assets like insurance policies, bonds, debentures, bank deposits etc, are also not liable for WT.

► Following are plausible exceptions which create tax exposure► Equity and preference shares held by a resident company in CFC.

► Properties owned by the CFC may not necessarily be specified assets► Interest in foreign trust or any other body7 located outside India (whether

incorporated or not) for both residents and non-residents 8

► Properties owned by the trust/body may not necessarily be specified assets► Interest in a discretionary trust is not identifiable, but a discretionary trust is a

taxable entity► If both trust and beneficiaries are resident in India, whether double taxation can

arise 9?

7.Not being a foreign company8. Whether non-residents protected by exclusion for assets located outside India if assets of trust are also located outside India?9. S.17 of DTC protects double taxation of ‘income’ only and not ‘net wealth’ or ‘tax base’

Non-residents, Expatriates, Foreign companies

► Unlike WTA, there is no specific exemption for specified assets located outside India granted to :-► Foreign citizens► Not ordinarily residents

An expatriate who turns resident in India may have tax exposure10 in respect of all specified assets located outside India (including bank deposits, interest in foreign trust or body, immovable properties, motor cars, cash in hand, jewellery, paintings, etc)

► All non-residents (including foreign companies) exposed to widened scope of chargeable assets in India like archaeological collections, paintings, watches, etc

► All non-residents can claim exclusion with regard to assets located11outside India.

10. He can explore treaty protection 11. Old WT Circular of 1957, inter alia, clarifies that (a) tangible movable property is located in India if such property is located in India or if it is in

transit to India and (b) ships or aircrafts are located in India if they are registered in India

THANK YOU FOR YOUR PARTICIPATION

dtc overview_dhinal shah

Documents

revised discussion paper

life insurance policies

tp audit report

minimum alternate tax

individuals hufs

long term leasing

ltcg stcg rate

closely held company