Monday, November 29, 1999

Collaborative approach is a welcome sign

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The revised discussion paper on the Direct Taxes Code (DTC) was finally released by the CBDT on Tuesday. Unlike the initial euphoria, the release does not contain the revised provisions of the DTC, but only a discussion on certain areas wherein the approach has been revised. The paper covers only 11 important areas and also introduces the concept of Controlled Foreign Company (CFC). The paper also clarifies that other areas, on which representations were made, would be considered while finalising the Bill before being introduced in the Parliament.CFC provisions are generally introduced in the law to address the tendency of the companies to park profits in overseas subsidiaries to avoid domestic taxation. It is proposed that the passive income earned by a foreign company, controlled directly or indirectly by a resident in India, would be deemed to have been distributed and subject to tax in India as dividend when such income is not distributed to the Indian shareholders resulting deferral of taxes.Lately, there have been a lot of instances of overseas acquisitions by Indian companies. Since, these homegrown companies need flexibility in terms of their operations to manage their growing global presence, the right time for introduction of the CFC provisions in the Indian tax laws can be a matter of debate.Interestingly, the revised discussion paper provides significant relief to non-residents. The major area of concern for the non-residents was the treaty override provisions. It has been clarified that there would be no general treaty override. The provisions of the domestic law would override the provisions of the tax treaties only in three cases — when GAAR provisions are invoked, CFC provisions are invoked or when branch profits tax is levied.Another major area of concern for foreign companies was the test of residency. It is proposed that the foreign company can be treated as a resident of India only if its place of effective management is in India.According to the paper, provisions for GAAR have also been relaxed to some extent. It has been provided that GAAR provisions would be invoked only for transactions exceeding certain specific thresholds and DRP forum will be available when GAAR provisions are invoked.Further, CBDT would issue guidelines to specify the circumstances under which GAAR provisions can be invoked.Certain other major areas of concern for the industry are addressed in this revised discussion paper. The proposal of 2% MAT on gross assets has been withdrawn. It is now proposed that MAT would be computed with reference to book profits. Although the discussion paper does not specifically indicate that the current regime of calculating book profits based MAT will be continued, the same may continue.The paper also clarifies that the units situated in the SEZs will continue to enjoy the tax exemption for the unexpired period. It has also been recognised that, unlike other countries, it is not possible to have universal social security benefits in India. Accordingly, the EEE regime is proposed to be continued, subject to certain exceptions.The income under the head "capital gains" will be treated as income from ordinary source and will be subject tax on the basis of the rates applicable to the investor. The current regime of total exemption for long-term capital gains for certain securities will not be continued. Instead a new regime is proposed for capital gains wherein only a specified percentage of capital gains on listed securities and units of equity oriented schemes will be subjected to tax.For Foreign Institutional Investors (FIIs), it is proposed that the income earned by them from sale of securities would be deemed to be characterised as "capital gains". Treating the income on sale of securities by FIIs as "capital gains" may result in discrimination against such FIIs. This is because it would be possible for the Indian residents to characterize such income as "business income".Further, unlike the initial proposal of complete withdrawal of STT provisions, STT will be levied based on revised taxation system.The revised discussion paper is certainly a positive development as some of the major areas of concern have been addressed. One would need to wait and see the rates in order to assess the overall picture of the new Direct Taxes Code. Whatever may be the final outcome, it is indeed a very encouraging and healthy development to see the Government following a collaborative approach by involving key stakeholders in evolving its fiscal policy.The writer is executive director, tax and regulatory services, PricewaterhouseCoopers

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