Direct Taxes Code 2013

In August 2009, the Government unveiled the Direct Taxes Code, 2009 (DTC 2009)
along with a discussion aer !or u"lic comments to relace the Income#tax Act,
$9%$ and the &ealth tax Act, $9'() In *une 20$0, the Government released the
+evised Discussion ,aer to address concerns over some ma-or issues arising
there!rom)
In August 20$0, the Government ta"led a revised Direct Taxes Code, 20$0 (DTC
20$0) in the .o/ 0a"ha which was then re!erred to the 0tanding Committee on
1inance (0C1) !or its review and comments) 2arious sta/eholders have su"mitted
their suggestions to the 0tanding Committee on the DTC 20$0) The 0C1 a!ter
deli"erating with various sta/eholders su"mitted their reort to the ,arliament on 9
3arch 20$2)
The 1inance 3inister has now released the Direct Taxes Code, 20$4 (DTC 20$4) !or
u"lic discussion5comments) As r news reorts, out o! $90 recommendations made
"6 0C1, $'4 are roosed to "e acceted wholl6 or with artial modi7cations) 8e6
rovisions o! DTC 20$4 are as !ollows9
General Anti-Avoidance Rules
General Anti#Avoidance +ules (GAA+) were originall6 introduced in DTC 2009)
0u"se:uentl6, GAA+ has "een included in the Income#tax Act, $9%$ (the Act) with
certain modi7cations) GAA+ alies to transaction which are ;imermissi"le
avoidance arrangement<) =nder the Act, the entire arrangement ma6 "e declared as
imermissi"le arrangement even i! a art o! arrangement is imermissi"le
arrangement) The 0C1 had roosed that onl6 such art o! the arrangement would
"e invo/ed which is roved as ;imermissi"le< and not the whole art o! it) DTC
20$4 has roosed that entire arrangement ma6 "e declared as imermissi"le
arrangement even i! a art o! an arrangement is imermissi"le arrangement)
The Act also de7nes the meaning o! term ;tax "ene7t<) DTC 20$4 roosed to
exand the scoe o! the term ;tax "ene7t< so as to include a reduction or avoidance
or de!erral o! tax or other amount that would "e a6a"le under this code, as a result
o! a tax treat6) 1urther it also includes an increase in a re!und o! tax or other
amount under this code, as result o! a tax treat6) As a result, such transaction
would also "e covered under GAA+)
The 0tanding Committee had recommended that the onus o! roo! should rest on
the tax authorit6 invo/ing the rovisions o! GAA+) >owever, DTC 20$4 roose to
rest the onus o! roo! on the taxa6ers)
Indirect transfer of capital assets
DTC 20$0 had introduced rovisions to tax income o! a non#resident, arising !rom
indirect trans!er o! a caital asset situated in India) 1urther the 0C1 had
recommended that exemtion should "e rovided to trans!er o! small share#
holdings and trans!er o! listed shares outside India) In the meantime, the 0ureme
Court in the case o! 2oda!one International >oldings ?)2) held that the trans!er, "6 a
non#resident to another non#resident, o! shares o! a !oreign coman6 holding an
Indian su"sidiar6 Coman6 does not amount to trans!er o! an6 caital asset situated
in India) 0u"se:uentl6, the Act has "een amended to tax the indirect trans!er o! a
caital asset situated in India with retrosective e@ect !rom $ Aril $9%2)
DTC 20$4 has roosed that in case o! indirect trans!er o! asset situated in India i!
20 er cent o! the total assets o! a coman6 are located in India, then the income
arising !rom such a transaction will "e taxed in India) >owever, DTC 20$0 had
rovided that such transactions would "e taxed i! '0 er cent o! the total assets
were located in India)
1urther 0C1<s recommendations relating to excetion to intra grou restructuring
outside India and trans!er o! listed shares outside India have not "een acceted in
DTC 20$4)
Place of eective !ana"e!ent
The earlier versions o! DTC introduced a concet o! ,lace o! e@ective management
(,AB3) where it was rovided that ,AB3 means the lace where the "oard o!
directors o! the coman6 or its executive directors, ma/e their decisions) In a case
where the "oard o! directors routinel6 arove the commercial and strategic
decisions made "6 the executive directors or oCcers o! the coman6, the lace
where such executive directors or oCcers o! the coman6 er!orm their !unctions)
The 0C1 had recommended that the re!erence to executive directors or oCcer ma6
"e removed !rom the de7nition o! ,AB3) It should "e determined on the "asis o!
internationall6 acceted standards and -udiciall6 settled rinciles, where the !ocus
is on the lace, where the /e6 management and commercial decisions as a whole
are made or where the Dhead and "rainE o! the coman6 is situated)
Accordingl6, DTC 20$4 has rovided that ,AB3 means the lace where /e6
management and commercial decisions that are necessar6 !or the conduct o! the
"usiness o! an entit6 as a whole are in su"stance made)
Conversion of partners#ip $r! into %%P
,resentl6, conversion o! a artnershi 7rm into a .imited .ia"ilit6 ,artnershi (..,)
or a coman6 is exemt !rom tax under the Act on !ul7llment o! certain conditions)
There was no clarit6 on this asect in the earlier version o! DTC) The Committee had
recommended that tax neutralit6 ma6 "e rovided on conversion o! a artnershi
7rm into a .., or a coman6)
DTC 20$4 has rovided that trans!er o! an6 investment asset "6 a 7rm to coman6
as a result o! conversion o! the 7rm into .., coman6 in accordance with the
rovisions o! relevant Act shall "e exemt i! seci7ed conditions are satis7ed)
&ini!u! Alternate Tax
=nder the Act, the taxa6ers are eligi"le to carr6 !orward taxes aid on "oo/ ro7ts
i)e) 3inimum Alternate Tax (3AT)) The 0C1 had recommended that a grand!athering
rovision ma6 "e introduced in DTC !or carr6 !orward o! unutilised 3AT credit under
the Act) >owever, DTC 20$4 is silent on this asect)
Additional tax at t#e rate of 10 per cent on recipient of dividend (lia'le to
Dividend Distri'ution Tax( exceedin" one crore rupees
=nder the Act as well as under DTC 20$0, the dividend distri"ution tax (DDT) is to
"e levied at the rate o! $' er cent) As er news osted on an oCcial Government
site, this treatment !avours high net worth taxa6ers who a6 onl6 a !raction o!
their earnings as tax on their investments in the caital mar/et) Accordingl6, DTC
20$4 rooses to lev6 $0 er cent additional tax on the resident reciient i! the
total dividend in his hand exceeds IF+ $ crore)
Deduction for C)R expenditure in 'ac*+ard re"ions and districts
The Comanies Act, 20$4 rovides that ever6 coman6 on !ul7llment o! certain
conditions is re:uired to incur exenditure on Cororate 0ocial +esonsi"ilit6 (C0+))
There is no seci7c rovision to allow such exenditure either under the Act or DTC
20$0) 1urther the Committee had recommended that the C0+ exenditure cannot
"e allowed as a "usiness deduction as it is an alication o! income) Allowing
deduction !or C0+ exenditure would iml6 that the government would "e
contri"uting one third o! this exenditure as revenue !oregone) In line with the
same, no rovision has "een roosed in DTC 20$4 to allow C0+ exenditure)
3, per cent tax rate for individual- ./0 #avin" inco!e exceedin" I1R 10
crore
DTC 20$4 roose to introduce a !ourth sla" !or individuals, >=1s and arti7cial
-uridical ersons) In their case, i! the total income exceeds IF+ $00 million, it is
roosed to "e taxed at the rate o! 4' er cent)
2ealt# tax
DTC 20$4 has roosed to increase the threshold limit o! lev6ing wealth tax to IF+
'00 million !rom IF+ $0 million and IF+ 4 million rovided in DTC 20$0 and &ealth
Tax Act, $9'( resectivel6) As er roosed rovisions, the wealth tax is roosed to
"e levied at the rate o! 0)2' ercent on the net#wealth exceeding '00 million as
comared to $ ercent rovided in DTC 20$0 &ealth Tax Act) DTC, 20$4 roose to
cover all assets, h6sical or 7nancial, as against onl6 unroductive assets rovided
in DTC ?ill, 20$0) 1urther, the outstanding lia"ilit6 o! wealth tax is seci7call6
excluded !rom the scoe o! de"ts incurred in relation to seci7ed assets)
DTC 20$4 has acceted most o! the recommendations o! the 0tanding Committee,
excet rogressive rate o! taxation)