Direct Taxes Code (DTC)

The Direct Taxes Code Bill, 2010 introduced in Parliament, seeks to consolidate and amend the laws relating to all direct taxes, that this income-tax, dividend distribution tax, and wealth tax so as to establish an economically efficient, effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP ratio. The salient features of the DTC are:

It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax Act 1957 with a single legislation. It simplifies the language of the legislation. The use of direct, active speech, expressing only a single point through one sub-section and rearranging the provisions into a rational structure will assist a layperson to understand the provisions of the DTC.

It indicates stability in direct tax rates. Currently, the rates of tax for a particular year are stipulated in the Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is proposed. The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent and raises the exemption limit as well as broadens the tax slabs for personal income tax. It strengthens taxation provisions for international transactions. In the context of a globalized economy, it has become necessary to provide a stable framework for taxation of international transactions and global capital. This has been reflected in the new provisions. The new provisions with regard to international taxation are:

Advance Pricing Agreements for International Transactions

This will bring in certainty in transfer-pricing issues as any taxpayer can enter into an agreement with the tax administration, which will be valid for a period up to five years, regarding the manner in which the taxpayer would compute arm’s length price in respect of the taxpayer’s international transactions.

Alignment of concept of residence (of a Company) with India’s tax treaties by introduction of concept of ‘place of effective management’ instead of ‘wholly controlled’ in India.

Controlled Foreign Company Regulations

This is a provision which will assist in taxation of profits of a foreign company in the hands of resident share-holders who may have incorporated such a company in low tax jurisdictions and are accumulating passive income (i.e. interest, dividends, capital gains, etc.) in the company without repatriating the income to India.

Branch Profit Tax on Foreign Companies

Currently, foreign companies are taxed at the rate of 42.2 per cent (inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2 per cent (inclusive of surcharge and cess) plus a dividend distribution tax at the rate of 16.6 per cent when they distribute dividend from accumulated profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the rate at 30 per cent and levying a branch profit tax (in lieu of dividend distribution tax) at the rate of 15 per cent. This will provide tax neutrality between a branch and a subsidiary of a foreign company in India.

Taxation of assets held abroad under wealth tax: It is proposed to include certain assets of residents which are held abroad, such as deposits in bank accounts in the case of individuals and interest in a foreign trust or in a controlled foreign corporation. This will create a reporting requirement mechanism for assets held abroad.

Phasing out Profit-linked Tax Incentives and replacing them by Investment-linked Incentives: It has been observed that profit-linked deductions are inherently discriminatory, prone to misuse by shifting of profits from non-exempt to exempt entity or by reporting higher profits in exempt income entity, and also lead to high level of litigation and revenue foregone. They also impede the Government’s efforts to give a moderate tax rate to other taxpayers as the higher taxes paid by others by implication cross-subsidize the lower tax rates of the profit-linked deduction sectors.

Such profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC. They are being replaced by investment-linked deductions for specified sectors. Investment-linked incentives are calibrated to the levels of creation of productive capacity and therefore are superior instruments. Profit-linked deductions currently being availed of have been protected for the unexpired period in the DTC.

Rationalisation of Tax Incentives for Savings

In order to focus savings incentives on long-term savings for social security of the taxpayer during his non-working life, deduction of up to Rs 1 lakh has been provided for investments in approved provident funds, superannuation funds, and pension funds.

General Anti Avoidance Rule to Curb Aggressive Tax Planning

Direct tax rates have been moderated over the last decade and are in line with international norms. A general anti-avoidance rule assists the tax administration in deterring aggressive tax avoidance in a globalised economy. Such general anti-avoidance rules already form a part of the tax legislation in a number of G-20 countries.

Taxation of Non-profit Organisation

It is proposed to tax non-profit organisations set up for charitable purposes on their surplus (at the rate of 15 per cent), after allowing for accumulation of a specified proportion for creation of assets or for long-term projects, a further carry forward for receipts of the last month of the year, and also after a basic exemption limit of Rs 1 lakh. Donations to these non-profit organisations will be eligible for tax deduction in the hands of the donor.