Seminar on Direct Tax Code: Corporate Tax

Presented by: Vishal Shah, Executive Director, PwC

August 11, 2010
Snapshot … Corporate Tax Proposals
Key Proposals Original DTC Revised Discussion Paper
Corporate Tax 25% Could be increased
Rate
MAT Gross Asset Based Roll-back to Profit based
Incentive Regime “Expenditure based” proposed Not commented
Business Tax neutral reorganization Not commented
Reorganizations continued for residents
Controlled Foreign Not proposed Introduced at conceptual level
Corporation
GAAR Anti-avoidance measure Recognition of need to restrict
introduced GAAR trigger
Capital Gains Distinction between short-term Distinction restored –
& long-term eliminated Special Scheme for listed equity
/ equity MFs

Slide 2
Business Income computation
Computation Methodology
Adoption of income expense Key Changes
model

• Gross Earnings - All receipts • Capital receipt brought to tax

• Expenditure – operating • Profit from sale of business

expenditure and permitted capital assets / slump sale of
financial charges business undertakings – now
taxable as Business Income
• Capital allowances

Convergence with IFRS roll out ?

Slide 4
 Capital / Revenue – Identity Loss
Capital Receipt - Taxable Capital Loss – Deductible

Remission of loan
? (No provision)

Non Compete
Fees

 (25% Depreciation)

Goodwill
 (No Depreciation)

 (Deferred by way of
Sale of assets

depreciation claim)

Dichotomy – Capital receipt taxable in year 1 but

Capital loss allowable on staggered basis – Matching
principles ?

Slide 5
 Separate computation for each business
• Business deemed to be separate if :
- No inter-dependence between
units
- Separate physical location Administrative Allocation of
Hassles Common Cost ?
- Use of diff mfg process
• Income of all businesses ultimately Issues
to be aggregated
• Separate a/cs maintainable

Rationale ? Additional
Expenses

Should be restricted only to speculative /

specified incentive businesses
Slide 6
MAT
 MAT
• Under Current Law
• MAT currently levied @ 18%* on book profits
• MAT Credit available for 10 years
• As per Revised Discussion Paper on DTC
• Tax base for MAT to be retained as “Book Profits” (not Asset based)
• No clarity on MAT rate
• MAT Credit – likely to be introduced

MAT base retained at “Book Profits”

* Excluding surcharge and cess

Slide 8
Incentive Regime
 Investment Linked Incentive Scheme
• “Profit based tax incentive” for specified sectors replaced with
“Expenditure-based incentive scheme”
• New Scheme – akin to Investment-based allowance
- Basically, allowing capital expenditure on day one instead of yearly
depreciation

Key Issues
• Losses ring-fenced against other businesses
• Lack of clarity on deduction for land purchase cost

Competitiveness of India’s CORE sector to attract Capital

vis-à-vis other Economies–not to lose sight of;

Tax policy – while not the driver, can certainly be a catalyst

Slide 10
 Grandfathering Provisions
Open Issues
• Cut-off date - currently linked to FY0910 – should be FY1011
• Projects under commissioning on cut-off date
• Year election (10 out of 15 years)
• Profit Computation under DTC
• SEZs

Clarity needs to emerge

Slide 11
Business Reorganizations
 Business Reorganizations – Amalgamation/
Demerger
• Amalgamation or demerger between two or more residents
• Tax neutral reorganization continued
- Cross border transactions - tax neutral ?
- Business reorganization under SICA – tax neutral ?
• Loss set-off available
- Irrespective of industry
- Business continuity test extended to demergers as well
• Demerger definition satisfied only on issue of “Equity Shares”

Cross border mergers – should be tax neutral

Slide 13
 Business Reorganizations – Slump sale
Implications - Transferor
• Income from slump sale to be computed as Sale consideration less Net
worth
- Taxable under head ‘Business Income’
- Unlike capital gains, no separate exemption for transactions with WOS

Implications - Transferee
• Ambiguity as to allowability of depreciation on the actual purchase price

Slide 14
 Business Reorganizations – Transactions
with WOS
Exemption
Nature of Transaction
Current Proposed

Transfer of investment asset

Transfer of business capital asset


Slump sale


Review period
(8 years) Open Ended

Transfer of business trading

asset  

Slide 15
Other Proposals
 Controlled Foreign Corporation (‘CFC’)
• Primarily seeks to tax passive
Indian Co income without repatriation to India

Open Issues
Dividend / • What constitutes “passive income”
Hold Co Interest
• Nature of subsidiaries subject to
CFC taxation
Loan + Equity
• Computation mechanism
Operating Operating Operating • Credit mechanism
Co Co Co
• Record Keeping

Clarity awaited on CFC proposals

Slide 17
 General Anti-Avoidance Rules (GAAR)
• Revised Discussion paper clarifies GAAR not to apply to every
arrangement of tax planning
• CBDT guidelines to provide circumstances for GAAR trigger
• Threshold limit to be provided
• DRP mechanism available

Need of the hour

• Objective approach
• Broader and commercial mindset –A Collegium of Revenue & Industry
representatives to review?

• Prospective application
• Advance Ruling mechanism
• LOB clause applicability (in case of specific treaties)
Slide 18
 Capital gains taxation
Resident Non Resident
Particulars Remarks
Act DTC Act DTC
• If held for less than one year from the end of
Short Term 15% 25%* 15% 25%*
financial year in which the asset is acquired
• Listed shares / Equity MF
- Flat Reduction in Gains – 50% to 70%
Long Term Exempt 25%* Exempt 25%* - No indexation
• Other assets
- Indexation available

STT to be calibrated

Carry forward of losses

• No distinction between long term and short term capital losses
• Capital losses not to be set off against any other income
• Losses allowed to be carried forward indefinitely

* May be increased Slide 19

 WHT provisions

• Rate of tax on residuary income 10 %

• List of income proposed to be covered under residuary clause to be

specified to mitigate litigation

• Scope for obtaining Tax WHT order restricted to Nil withholding only

− Obtaining Lower Tax WHT orders – not provided for

All payments to residents subject to WHT – Likely

to be revisited in the revised draft

Slide 20
Key takeaways
 Key takeaways

• Tax Rate could be higher than 25%; need to be moderate

• MAT based on profits – huge respite

• Incentive regime – need to catalyse investments in CORE Sectors

• Adequately grandfather ALL current projects

• WHT cannot be a burden on the Corporate & the Economy

• CFC regime – needs a robust tax administration mechanism

• GAAR – should be progressive

Slide 22
Thank You