DTC 2010: prudent rationalization of optimism!!

DTC 2010: prudent rationalization of optimism!!

The wait is finally over; following the Cabinet approval, the Prime minister presented the revised Direct Taxes Code Bill (DTC) Bill for parliamentary debate approval on Monday. The first look of the revised Bill is indeed fresh and would need a thorough recap before one can comment how significantly the latest version improvised on the original Bill.

A cursory glance indicated some important rationalization of the original proposals in the DTC . To begin with, the proposal to introduce the DTC Bill with efect from 1 April 2012 should stall the worried rush to transition. As expected the corporate tax rate has been proposed at 30% (a tad higher than originally mooted 25%) including surcharge and cess; re-thinking of tax rate was anticipated considering the original proposal for tax rates would have sunk in with less favor given the cautious estimates of budgetary deficits. The marginal increase in the personal income tax slab rates is all but exuberant to individual taxpayers.

On the corporate tax front, minimum alternate tax (MAT) has been re-aligned to book profit, as under the Income tax Act, 1961; the carry forward of credit has been extended to 15 years. Clearly, levy of MAT with respect to ‘book profits’ as against the ‘gross asset basis’ shall be cheered by the trade and industry, perhaps more joyously by NBFCs and insurance companies who have been on tenterhooks right since the 2009 version of the DTC was unveiled. Increase in the MAT rate to 20% (higher than current rate of 18%) however, is a disappointment. The only logical reason we can can think of for rate escalation is a skepticism on account of unrevealed dent in the budgetary deficit figures on account of letting loose on tax rates a bit too early. An important aspect which would need some thought is whether increased MAT rate is consistent with the withdrawal of most of tax incentives!

As indicated in the revised discussion paper released in June earlier this year, the residence definition for a foreign company has been substituted by the internationally accepted definition of ‘effective management test’ instead of loosely understood ‘control and management’ test. Introduction of CFC provisions and treaty override in the revised Code reflects clear thinking of the government to introduce best of the anti-abuse prevention practices in the domestic legislations. The trade and industry fraternity, and the experts alike would however, continue to debate with extreme involvement whether introduction of sophisticated anti-avoidance measures such as CFC and treaty override would prove premature in Indian context. We would still believe that the adequate administrative guidance is bestowed upon for taxpayers as well as for tax administration, for smooth implementation of this noble piece of legislation.

Sweeping powers accorded to tax administration for overriding the tax treaty provisions have been rightly fettered in line with spirit of Vienna convention. The limited provisions have been enabled for domestic law overriding tax treaty in circumstances where General Anti Avoidance Rules (GAAR) or Foreign Controlled Corporation (CFC) provisions are invoked or where foreign companies are paying branch office tax. To our surprise, the last rider category is a trick and can still have the MNCs in tizzy until clear guidelines are prescribed for implementation.

The revised Bill proposes to rationalize tax rates on capital gains; the impact was positively perceived as the securities market went to close in positive with the news that long term capital gains on shares shall continue to be exempt if transaction is subject to Securities transaction tax. Graded taxability of short term gains on securities (specified exemption of 50% prescribed) is also a welcome move. The move to define an objective test of taxability of offshore transfer of shares in a foreign company is a bold proposal; hopefully, some of the bona fide business planning and restructuring should borrow heart from the revised proposal to tax such offshore transfer.

In another encouraging proposal for industry, the revised Bill proposes to grandfather tax holiday for existing SEZ units (in addition to SEZ developers); the grandfathering for SEZ units has been generously extended until 1 April 2014 in a move which will be cheered by the IT-ITES and Real Estate sector in particular. While the Bill proposes new methodology for computation of tax incentives, retention of tax incentives for specified business should alleviate the pain for taxpayers.

Like mentioned at outset, one needs to plod through over 400-odd pages of what looks like a newly drafted code than an improvised version of DTC Bill 2009. It would not be an overstatement to pat the working group and the FM in particular for sticking to its promise of introducing the new code in Monsoon Session of the Parliament. Before passing any verdict, the right thing to do shall be to analyse the revised Bill considering this is the future of the Direct tax law, than being critical of tremendous efforts put in by the working group. Having said that, there is no gainsaying that the revised Bill is well intentioned to simplify archaic Income Tax Act, 1961 with adequate flavor of international best practices!

Rajeshree Sabnavis is a partner with BMR Advisors. Views expressed are personal.

(Sumit Singhania, Manager, BMR Advisors, contributed to this column.)