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FinMin reverses tax reform momentum

FinMin reverses tax reform momentum
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First Published: Tue, Jun 15 2010. 10 39 PM IST

Filling blanks: Revenue secretary Sunil Mitra says tax rates will be finalized in the legislation on DTC to be introduced in the monsoon session. Indranil Bhoumik / Mint
Filling blanks: Revenue secretary Sunil Mitra says tax rates will be finalized in the legislation on DTC to be introduced in the monsoon session. Indranil Bhoumik / Mint
Updated: Tue, Jun 15 2010. 10 39 PM IST
New Delhi: The revised draft of the direct tax code (DTC) has diluted stringent tax proposals for companies and individual taxpayers that will shrink the tax base and thereby limit the possibility of transitioning to a regime of lower tax rates.
By doing so, it reverses the first draft of DTC that had largely scrapped exemptions and opted for lower rates for individuals and companies to ensure better tax compliance. To be sure, the revised draft does not specify the rates.
According to Sunil Mitra, revenue secretary in the finance ministry, the tax rates will be finalized in the legislation on DTC to be introduced in the forthcoming monsoon session of Parliament. Mitra signalled that a revision to the August 2009 draft DTC meant there might have to be corresponding changes to rates.
Tax consultants were upbeat about the changes in the revised DTC introduced on Tuesday as contentious provisions that had attracted the bulk of the 1,600 representations were largely diluted.
“The big gains are MAT (minimum alternate tax), dilution of GAAR (general anti-avoidance rules) and prescription of conditions for treaty override,” Mukesh Butani, partner at BMR Advisors, said about the revised DTC.
Filling blanks: Revenue secretary Sunil Mitra says tax rates will be finalized in the legislation on DTC to be introduced in the monsoon session. Indranil Bhoumik / Mint
“The provisions in the discussion draft with regard to several of the recommendations made by the industry are very welcome. In particular, the decision to impose MAT (minimum alternate tax) on book profits instead of assets will be greeted by the Industry,” Dinesh Kanabar, deputy chief executive officer and chairman-tax, KPMG, said.
For companies, the revised draft provided relief by sticking to the existing method of calculating MAT. The August 2009 draft wanted to use gross assets to work out MAT, but the revised draft said it would stick to book profits.
During the open house meetings between the income-tax department and industry last year, MAT attracted considerable attention as industry feared the methodology would affect investment plans and also force loss-making companies to pay tax.
The relief for domestic companies was complemented by clarity in international tax provisions of DTC. The August draft effectively allowed the changed domestic law to override tax treaties, potentially jeopardizing investments coming through tax havens such as Mauritius.
The revised draft clearly details circumstances in which it can be done, thereby, providing clarity on the potential tax liability to foreign investors.
Simultaneously, the GAAR provisions have also been diluted to mitigate fears among overseas companies of harassment by assessing officers.
The revised DTC has defined residence, in the context of international acquisitions, along international norms. This should benefit both Indian companies acquiring assets overseas as well as foreign firms acquiring assets in India.
It has tweaked rules to allow for a greater degree of consistency in tax rule for units in special economic zones (SEZ) as India transitions from one tax law to another. Tax benefits for units located in SEZs will run their course according to the revised DTC.
The revised code gives individuals relief on small savings schemes and other long-term savings schemes as it was felt that in the absence of a social safety programme it would not be fair to tax the returns from investments such as Public Provident Fund (PPF). The revised DTC proposed to continue with the current system of exempt-exempt-exempt (EEE) for long-term savings.
The government has armed itself with discretionary power to grant tax exemptions to select non-governmental organizations.
The finance ministry has said it would be open to receiving suggestions from stakeholders on the revised DTC till the end of the month. Subsequently, it would begin the process of preparing a draft Bill.
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First Published: Tue, Jun 15 2010. 10 39 PM IST