Discussion Paper on DTC - CBDT seeks comments
CBDT has released the Revised Discussion Paper on the DIRECT TAXES CODE and has asked for response which may be sent to directtaxescode-rev@nic.in by 30th June, 2010 . The major changes are:-
MAT: The DTC has proposed a Minimum Alternate Tax (MAT) on companies calculated with reference to the "value of gross assets". The economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets, hence it provides an incentive for efficiency. However, considering the practical difficulties and unintended consequences, particularly in the case of loss making companies and companies which have a long gestation period (infrastructure companies), it is proposed to compute MAT with reference to book profit. Issues like MAT Credit will be addressed later by making appropriate changes in the proposed scheme.
EXEMPT EXEMPT TAX (EET) VIS-À-VIS EXEMPT EXEMPT EXEMPT (EEE): it is proposed to provide the EEE method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund Regulatory and Development Authority. Approved pure life insurance products and annuity schemes will also be subject to EEE method of tax treatment.
TAXATION OF INCOME FROM EMPLOYMENT – RETIREMENT BENEFITS AND PERQUISITES: The method of valuation of perquisites will be appropriately provided in the rules. It is proposed that perquisites in relation to medical facilities/reimbursement provided by an employer to its employees shall be valued as per the existing law with appropriate enhancement of monetary limits. It is clarified that the DTC does not propose to compute perquisite value of rent free accommodation based on market value.
TAXATION OF INCOME FROM HOUSE PROPERTY
(a) In case of let out house property, gross rent will be the amount of rent received or receivable for the financial year.
(b) Gross rent will not be computed at a presumptive rate of six per cent of the rateable value or cost of construction/acquisition.
(c) In case of house property which is not let out, the gross rent will be nil. As the gross rent will be taken as nil, no deduction for taxes or interest etc., will be allowed. However, in case of any one house property, which has not been let out, an individual or HUF will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The overall limit of deduction for savings will be calibrated accordingly.
TAXATION OF CAPITAL GAINS: Income under the head “Capital Gains? will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer .
SECURITIES TRANSACTION TAX: The Securities Transaction Tax (STT) is a tax on specified transactions and not on income. Accordingly, STT is proposed to be calibrated based on the revised taxation regime for capital gains and flow of funds to the capital market.
TAXATION OF NON-PROFIT ORGANISATIONS: NPOs already registered under the Income-tax Act, 1961 and holding valid registration on the date on which DTC comes into effect, would not be required to apply for fresh registration under the DTC. However, they would be required to provide additional information to facilitate the administration of the new provisions.
SPECIAL ECONOMIC ZONES – TAXATION OF EXISTING UNITS: Profit linked deductions are distortionary in nature as they create an incentive to inflate profit as well as to transfer profits from a taxable entity to a non-taxable one. As a policy, it has, therefore, been decided not to extend the scope or the period of profit linked deductions. However, specific provisions for protecting such deduction for the unexpired period have been provided in the DTC in the case of SEZ developers. A similar provision to protect profit linked deductions of units already operating in SEZs for the unexpired period will also be incorporated.
CONCEPT OF RESIDENCE IN THE CASE OF A COMPANY INCORPORATED OUTSIDE INDIA: It is proposed that a company incorporated outside India will be treated as resident in India if its “place of effective management? is situated in India. As an anti-avoidance measure, in line with internationally accepted practices, it is also proposed to introduce Controlled Foreign Corporation provisions so as to provide that passive income earned by a foreign company which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed. Consequently, it would be taxable in India in the hands of resident shareholders as dividend received from the foreign company.
DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) VIS-À-VIS DOMESTIC LAW: it is proposed to provide that between the domestic law and relevant DTAA, the one which is more beneficial to the taxpayer shall apply. However, DTAA will not have preferential status over the domestic law in the following circumstances:- when the General Anti Avoidance Rule is invoked, or when Controlled Foreign Corporation provisions are invoked or when Branch Profits Tax is levied.
WEALTH TAX: Wealth tax is an anti- abuse measure in the integrated tax system. It ensures reporting of significant assets held by a tax payer. It is proposed that Wealth Tax will be levied broadly on the same lines as provided in the Wealth Tax Act, 1957. Accordingly, specified “unproductive assets” will be subject to the wealth tax. However, it will be payable by all taxpayers except non-profit organizations. The threshold limit and rate of tax will be suitably calibrated in the context of overall tax rates.
GENERAL ANTI-AVOIDANCE RULE: The proposed GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be classified as an impermissible avoidance arrangement. It is only in a case where the arrangement, besides obtaining a tax benefit for the assessee, is also covered by one of the four conditions i.e. it is not at arm's length or it represents misuse or abuse of the provisions of the Code or it lacks commercial substance or it is entered or carried on in a manner not normally employed for bona-fide business purposes , the GAAR provisions would come into effect.