Kpmg Dtc 2010 Analysis

8/6/2019 Kpmg Dtc 2010 Analysis

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Direct Taxes Code 2010 - Analysis

KPMG IN INDIA

TAX


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2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

?Business Income

?Minimum Alternate Tax

?Dividend Distribution Tax

?Branch Profit Tax

?International Taxation

?Residence Rules

?Treaty Override

?Controlled Foreign Company

?General Anti-Avoidance Rules

?Tax Incentives & Special Economic Zones

?Capital Gains

?Transfer Pricing & Advanced Pricing Agreement

?Personal Taxation

?Venture Capital Funds, Mutual Funds & Insurance

Companies

?Wealth Tax

?Glossary

02

04

05

06

07

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29-31

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Table of Contents


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02

Under the Act

The income under the head Business and Profession is

computed as business profits with specified adjustments, which

can be described as Income expense model.

DTC 2009

Income from each business is to be computed separately and each

unit deemed to be distinct and separate from another unit, unless

there is interlacing, inter-dependence or unit embarrassing the two

business/units. The Income expense model proposed by DTC 2009

is as under:

?

provisions of computation of profits will apply separately to each

such unit

?The proposed section will cast a more burdensome duty on the

tax payer to comply with the extra documentation requirement

?Additional tax outgo for tax payers falling under the presumptive

tax regime

?In case the tax payer contends that the income is lower than the

prescribed rates, the same has to be substantiated by maintaining

the books of accounts for the operations.

Since each unit is deemed as a separate business, all the?Increase in rates of presumptive taxation for businesses relating

to oil exploration, shipping operation, air transport, etc. The actual

profits would be taxable if higher than presumptive profits

?Changes in depreciation rates

DTC 2010 OUR COMMENTS

Business Income

Gross earnings Xxxxxx

Less: Specified Business Expenditure

Operating Expenditure

Permitted Finance Charges

Capital Allowances

Xxxxx Xxxxx

Taxable Income from business Xxxxx

Computation of income


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Under the Act

Profits and gains from any business and profession combined with

some specified income is chargeable under the head 'Businessand profession'

DTC 2009

Proposed to introduce inclusive definition of the term 'gross

earnings' for the purpose of computing 'Income from business'.

Scope widened

?

receipt has been a subject matter of litigation. The amount would

now be taxable as business profits

?The scope of business income further widened to include non

moving creditors beyond a specified period

?There was no clarity under the Act regarding the taxability of

income from carbon credits and tax payers were contending it to

be capital receipt not liable to tax. The proposal would end

uncertainty over the issue and receipts would now be taxable as

business income. However, the issue as to whether the income

would be eligible for profit linked incentives is still open for debate

?An attempt is made to resolve the controversy with regard to

characterisation of income from letting out of property. There is no

specific reference in DTC 2010 for income from property used as

hospital, hotel, convention centre or cold storage and forming part

of the SEZ. However, the memorandum to the Bill provides that

the income from property used as hospital, hotel, convention

centre or cold storage and forming part of SEZ, would be taxable

as Business Income.

The issue as to whether the waiver of a loan is capital or revenueThe following is proposed to be included in the gross earnings:

?Remission, cessation of any liability by way of loan, deposit,

advance or credit

?Non moving creditors beyond three years are to be treated as

business income

?

Consideration accrued or received on the transfer of carboncredits

?Income from letting of house property to be included under the

head income from house property.


Under the Act

Business profits are computed in accordance with the provisions of

Section 30 to 43D.

DTC 2009

Only the specified deduction would be allowed to the tax payer

from his gross earnings. Gross earnings will ordinarily include all

income connected with business asset whether trading or

capital.

Expenditure allowed from gross earning

?

which has now been increased to 200 percent. Further the benefit

is extended to all industries

?The issue as to whether a lessee would be eligible to claim

depreciation on assets under finance lease has been a subject

matter of litigation. The lessee would now be eligible to claim

depreciation as the tax payer is deemed to be the owner of the

asset in the finance lease

?Under the provisions of the Act, the issue as to whether

expenditure incurred on non-compete fee or premium for

obtaining asset on lease or rent, is allowable as the revenue

expenditure has been a subject matter of Litigation. DTC 2010

provides that such expenditure would be allowable as Deferred

Revenue expenditure for 6 - 10 consecutive years.

Benefit of weighted deduction was 150 percent in DTC 2009?Weighted deduction at 200 percent for any expenditure (both

revenue and capital except land and building) incurred on in-house

scientific research and development

?Depreciation allowable to lessee in case of finance lease

?Deduction for a specified deferred revenue expenditure, viz non-

comptete fee, expenditure incurred for business reorganisation,

loss on account of forfeiture of any agreement, etc, to be allowed

on a straight-line basis over 6-10 years.


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Under the Act

A company is required to pay MAT @ 18 percent (excluding

education cess and surcharge) of book profits if the tax payable

under the provisions of the Act is lower than the MAT. MAT Credit

is allowed to be carried forward for 10 years for set off against

normal tax liability.

DTC 2009

It was proposed that a company shall pay tax on its gross assets @

2 percent (0.25 percent in case of banking companies) if the tax

liability under provisions of the DTC is less than the tax on gross

assets.

Minimum Alternate Tax

?

companies. In DTC 2010, book profit based MAT regime has been

reintroduced. MAT is applicable to both Indian as well as foreign

companies.

?This is a welcome relief for all capital intensive companies having

a significant asset base but incurring losses. However, the rate

has been increased from 18 to 20 percent

?Levy of a 20 percent MAT on SEZ units would significantly dilute

the tax holiday granted and hence could be a dampener for IT/ITeS

industry in particular and Indian exporters of goods/services in

general. Similarly, MAT on SEZ developers would dilute the tax

holiday granted to such developers and may have an adverse

impact on profitability of SEZ developers and future investment

outlook in SEZ development

?No specific provision for carry forward of accumulated MAT credit

under the Act to the DTC 2010.

DTC 2009 provided for levy of MAT based on Gross Assets of?MAT levied @ 20 percent of the adjusted book profits in the case

of those companies where income-tax payable on the taxable

income for a particular year according to the normal provisions of

the DTC is lower than 20 percent of book profits

?Computation of book profits is broadly similar to that under the

Act

?MAT credit is allowed to be carried forward for 15 years

?MAT is now applicable to SEZ developers and SEZ units.


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Under the Act

Every company (other than an SEZ developer) was required to pay

DDT @ 15 percent on the dividends distributed to its shareholders.

DTC 2009

DDT provisions were broadly similar to those under the Act.

Dividend Distribution Tax

?

?Second-tier holding companies now eligible for deduction of DDT

paid by subsidiaries

?15 percent additional tax burden on SEZ developer companies to

dilute tax holiday benefit.

The DDT regime under the Act remains largely unchanged?DDT for companies retained @ 15 percent

?Deduction for DDT paid by subsidiary available against DDT

liability of the holding company for an onward distribution of

dividend

?The clause under the Act providing for disallowance of the

aforesaid deduction in relation to an onward distribution of

dividend by holding companies which are subsidiaries of upstream

holding companies, has been removed

?SEZ developers are now subject to DDT



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Branch Profit Tax

Under the Act

A branch of a foreign company operating in India is not subject to

any further tax in addition to normal income-tax under the Act.

DTC 2009

In addition to the normal income-tax, it was proposed that branch

profits of a foreign company shall be taxable @ 15 percent of the

post tax profits. Neither the term branch nor the term branch

profits were defined.

?

liable to pay branch profit tax @ 15 percent (on post-tax income)

for income attributable directly or indirectly to permanent

establishments of such foreign companies in India

In addition to normal income-tax, every foreign company shall be ?

compared to the definition provided in various international tax

treaties entered into by India

?Branch profit tax is payable even in case of deemed PE (agency

PE, service PE, etc.) (i.e. without any fixed base or direct

presence in India). The USA imposes a branch profit tax on the

income of a foreign corporation which is effectively connected

with a US trade or business. The branch profit tax typically does

not apply, to the extent such as effectively connected income is

reinvested in the USA

?The tax treaty provides for credit from taxes in home country in

respect of taxes paid by such a company in a foreign country.

Typically, taxes for this purpose are defined to cover income tax.

Income tax in this regard may not cover branch profit tax and

hence it is unlikely that the foreign company would get credit for

branch profit tax in its home country under the tax treaty

?Where a foreign company is effectively managed in India, it

would be regarded as a resident in India. In such a situation,

since branch profit tax are only in relation to non resident, no

branch profit tax ought to be payable.

The definition of PE under DTC 2010 is wider in scope as


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Under the Act

A foreign company is taxable @ 40 percent plus applicable

surcharge and cess.

DTC 2009

Provided for a tax rate of 25 percent. Further, branch profit tax @

15 percent on the branch profits was also proposed resulting in an

effective tax rate of 36.35 percent on the profits of a foreign

company having a branch in India.

International Taxation

?

under the Act has been reduced to 30 percent under the DTC

which is a welcome move of the government

?In case where a foreign company is subject to branch profit tax,

the effective tax rate for such a foreign company would be 40.5

percent under the DTC as against 42.23 percent (including

surcharge and cess) under the Act

?An attempt has been made to bring the effective tax rate on the

profits of an Indian company and the foreign company almost at

par

?Eligibility of a foreign company to avail credit of branch profit tax in

their home jurisdiction would depend on local laws of the home

country.

Headline tax rate of 42.23 percent (including surcharge and cess)?Flat rate of 30 percent for all companies

?Additional branch profit tax @ 15 percent (on post tax income) on

income attributable directly or indirectly to the PE or immovable

property situated in India of a foreign company in India.


Rate of tax Foreign companies

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Under the Act

Income accruing or arising directly or indirectly through the

transfer of a capital asset situated in India is deemed to accrue orarise in India.

DTC 2009

Income shall be deemed to accrue in India, if it accrues, whether

directly or indirectly, through or from the transfer, directly orindirectly, of a capital asset situated in India.

Transfer of a capital asset situated in India

?

even from 'indirect' transfer of a capital asset situated in India

would be deemed to accrue in India

?In the DTC 2010, the subject provisions have been reproduced as

under the Act and do not expressly provide that the income

accruing from 'indirect' transfer of a capital asset situated in India

would be deemed to accrue in India

?Nonetheless, the DTC 2010 provides that the income arising from

the transfer outside India of share or interest in a foreign company

would not be taxable in India if such company's assets in India

constitute less than 50 percent of its total assets

?The provision could implicitly have potential tax implications in

India in relation to a company whose assets in India constitute

more than or equal to 50 percent of the total assets owned by it

globally. The implications inter alia, could be:

- Even a single share sold outside India, or transfer of partial

interest, in such company by any person could trigger

taxability in India

- Gains arising to the non-resident could be taxable in India in

the ratio of FMV of assets owned directly or indirectly in India

by the company to FMV of total assets owned by the

company

- Would entail undertaking valuation of global assets of the

foreign company

?Rules/procedures for determining FMV of an asset would be

prescribed in due course.

The DTC 2009 sought to expressly state that the income accruing?Income shall be deemed to accrue in India, if it accrues, whether

directly or indirectly, through or from the direct or indirect transfer,

of a capital asset situated in India

?Income arising from the transfer of shares or interest in a foreign

company by a non-resident outside India will not be deemed to

accrue in India if the FMV of the assets owned (directly or

indirectly) by the foreign company in India is less than 50 percentof the FMV of the total assets owned by that foreign company

?In case any income is deemed to accrue in India to a non-resident

by way of transfer of share or interest in a foreign company

outside India, the proportionate gains (i.e. capital gains * FMV of

assets in India/FMV of total assets owned by that foreign

company) would be the income accruing or arising in India from

such transfer.


Under the Act

PE is defined to include a fixed place of business through which

the business of the enterprise is carried on.

DTC 2009

PE was defined in a similar manner.

Permanent Establishment

?

business of an enterprise is carried on and includes, inter alia,

- Place of management, branch, office, factory, workshop, sales

outlet, warehouse, etc.

- Building or construction site

- Provision of services

PE is defined to mean a fixed place of business though which the ?

to the definition provided in tax treaties, in as much as, inter alia,:

- No threshold period provided inter alia, in the following cases,

whether or not the parties are associated enterprises

- Service PE- Installation PE

- Building or construction PE

- Substantial equipment PE

The definition of PE under the DTC is wider in scope as compared


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- Installation of equipment

- Dependent agents concluding contracts, maintaining stock, or

securing orders on or for the non-resident

- Presence of substantial equipment in India

?Business connection defined to include a PE of the non-resident

in India.

- Presence of substantial equipment in India could trigger

establishment of a PE

- Substantial equipment has not been defined or explained

?However, a person could have recourse to the beneficial

provisions of the tax treaty, wherever applicable. Non treaty

countries would be significantly impacted.


Under the Act

The definition of royalty does not include the rights in respect of

transmission and live coverage of any event.

DTC 2009

Ambit of royalty was widened to include consideration in respect

of use of transmission, ships and aircraft and live coverage of any

event.

Royalty

?

right to use of

- transmission by satellite, cable, optic fibre

- ship or aircraft

- live coverage of any event

?The above could have potential tax implications in India in relation

to inter alia, payments made for broadcast reproduction rights,

connectivity charges, bandwidth charges, etc.

Definition of royalty widened to cover payments for the use or?'Royalty' has been defined to inter alia, include consideration for

the use/right to use of transmission by satellite, cable, optic fibre,

ship or aircraft and live coverage of any event

?Royalties accruing to or received by the non-resident would be

treated as a special source of income, taxable at the increased

rate of 20 percent on gross basis as opposed to the existing rate

of 10 percent under the Act. However, royalties attributable to a

PE of the non-resident in India would be considered as an

ordinary source taxable on net basis subject to the fulfillment ofcertain conditions.


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Residency Rules Other than Individuals

Under the Act

A company is resident in India in any previous year, if the control

and management of its affairs is situated 'wholly' in India. Every

other person is said to be a resident in India in any year except

where during that year the control and management of its affairs is

situated wholly outside India.

DTC 2009

A company was proposed to be considered as a resident in India, if

the place of control and management, at any time during the

financial year, was situated 'wholly or partly' in India.

?

its 'place of effective management' at any time in the year is in

India.

?The place of effective management of the company means

- A place where the board of directors or its executive directors

make their decisions

- In case where the board of directors routinely approve the

commercial and strategic decisions made by the executive

directors or officers of the company, the place where such

executive directors or officers of the company perform their

functions.

A company incorporated outside India will be resident in India, if ?

management' in the DTC is an attempt to bring the Indian law on

corporate residence in line with the international tax practice

?Place of effective management in India of the foreign company

even for a part of the year could potentially trigger residence

based taxation in India on its global income

?Once a foreign company is deemed to be resident in India, it

would be subject to all other provisions of the DTC with respect

to its global income including MAT and DDT

?Residence test for other persons (other than individual and

company) continues on similar lines as under the Act.

The introduction of the concept of 'place of effective


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Treaty Override

Currently, Tax Treaties supersede domestic law to the extent they

are more beneficial to the tax payer.

DTC 2009

Provided that neither the tax treaty nor the Code will have a

preferential status and bring the two at par. In case of a conflict

between the two it was provided that the one later in time would

prevail.

?

law of giving preferential treatment to the tax treaty subject to the

following exceptions:

- Where GAAR is invoked or

- When CFC provisions are invoked or

- When Branch Profits Tax is levied

?DTC 2010 is in consonance with the revised discussion paper,

restoring the rule that provisions of domestic law or tax treaties

whichever are more beneficial shall apply, except in situations (a)

to (c) as stated above which are proposed to be in line with the

internationally accepted principles.

The revised discussion paper proposed to continue the existing ?

?The CBDT is to specify the conditions and the manner in which

GAAR provisions will apply

?These provisions would need careful examination for investments

using a favourable treaty jurisdiction

?It is expected that these limited treaty override provisions will not

be used indiscriminately to dilute tax treaty benefits otherwise

eligible.

Restoring the beneficial provisions of tax treaty is a welcome step


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The CFC provisions were not a part of DTC 2009. In the Revised

Discussion Paper of June 2010, the Finance Ministry indicated the

introduction of CFC provisions as an anti avoidance measure.

CFC provisions are now introduced in the Twentieth Schedule of the

DTC 2010. The CFC provisions seek to tax passive income earned

(and not distributed to the shareholder) by a foreign company,

controlled directly or indirectly by a resident tax payer in India.

?

approach' or the 'entity approach'. The Indian CFC legislation

appears to have followed an 'entity approach'. Once the foreign

company becomes a CFC, the entire income i.e. active as well as

passive income can be taxed in the hands of the resident tax

payer

?CFC provisions will impact many outbound investments made by

the Indian residents

?Active trade or business test excludes the sale of goods/supply of

services to interalia an associated enterprise. This could impact

intra group supply/service arrangements between the related

parties

?For measuring 'lower rate of taxation', the resident tax payer will

need to compute the tax on profits of each CFC based on the

provisions of the DTC. This could entail a cumbersome exercise

for the resident tax payer and may involve several complexities

?The CFC provisions are silent on the manner in which losses of

the CFCs inter-se are to be dealt with

?There is lack of clarity on the availability of credit/deduction in the

hands of the resident tax payer for foreign taxes paid by the CFC

?Possible double taxation can arise on account of the interplay

between transfer pricing and CFC provisions.

?The DTC 2010 does not provide a mechanism to exempt

subsequent gains realised by resident shareholders on the sale of

shares of the CFC, to the extent such CFC has undistributed

income that has been previously taxed under the CFC provisions.

Internationally, CFC legislations generally follow the 'transaction?The total income of a resident tax payer will include incomeattributable to a CFC.

CFC means a foreign company:

?that is a Resident of a Territory with lower rate of taxation

?whose shares are not traded on any stock exchange recognised

by such Territory

?over whom person(s) resident in India exercise control

?that is not engaged in active trade or business

?has specified income exceeding INR 2.5 million.

Where taxes paid in a Territory are less than 50 percent of taxes on

such profits as computed under the DTC 2010

To be determined based on the capital held, voting power, income,

assets, dominant influence, decisive influence, etc.

?It is engaged in commercial, industrial, financial undertakings

through employees/personnel

Meaning of CFC

Lower rate of taxation

Exercise control

Active trade or business


Controlled Foreign Company

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?Less than 50 percent of its income is of the nature of dividend,

interest, income from house property, capital gains, royalty, sale

of goods/supply of services to related parties, income from

management, holding or investment in securities/shareholdings,

any other income under the head income from residuary sources,etc.).

?Income attributable to CFC

- Income attributable to a CFC to be computed as per Specified

Formula

- Specified Formula reduces the interim dividends paid and

earlier year losses not taken into account

- Income so computed to be apportioned to the extent of a

resident's share in the profits

?Resident tax payer to furnish details of investments and interest

in entities outside India.

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Under the Act

There are some limited anti-abuse provisions.

DTC 2009

Proposed a GAAR, where revenue authorities have sweeping

powers to disregard, combine or re-characterise any part or whole

of a transaction or arrangement if the transaction/arrangement is

considered to be an 'impermissible avoidance arrangement'.

The revised discussion paper provided that every arrangement for

tax mitigation would not be covered within the purview of GAAR.

Further, the revised discussion paper also proposed the following

safeguards for invoking GAAR:

?The CBDT will issue guidelines to provide for the

circumstances under which GAAR may be invoked

?A threshold limit of the tax avoided would be provided for

invoking GAAR

?The forum of DRP would be available where GAAR provisions

are invoked.

General Anti-Avoidance Rules

?

?GAAR is applicable to domestic as well as international

arrangements

?GAAR provisions empower the CIT to declare any arrangement as

impermissible avoidance arrangement provided the same has

been entered into with the objective of obtaining tax benefit and

satisfies any one of the following conditions

- It is not at arm's length

- It represents misuse or abuse of the provisions of the DTC

- It lacks commercial substance

- It is carried out in a manner not normally employed for bona

fide business purposes

The DTC retains GAAR provisions as provided in DTC 2009 ?

were raised and representations were made to narrow down the

scope of GAAR. While the revised discussion paper on DTC

provided that it is not the intention to apply GAAR provisions in

case of every arrangement for tax mitigation, such intent does not

seem to have been expressly indicated in DTC 2010. On the

contrary, the meaning of 'tax benefit' for coverage of GAAR

provisions has been widened to cover reduction in the tax base

including increase in loss. Consequently, the guidelines (including

threshold limit) to be issued by the central government would

need careful examination to assess the scope and impact of

these provisions

After the introduction of GAAR under DTC 2009, several concerns


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Under the Act

Undertaking engaged in the business of developing or operating

and maintaining any infrastructure facility is considered as an

eligible business subject to fulfillment of conditions like owned by

an Indian company, agreement with the Central Government, etc.

Undertaking engaged in the business of laying and operating of a

cross country natural gas or crude or petroleum oil pipeline

network for distribution, not an eligible business.

Specified business

1?Investment linked tax incentive retained and extended to

specified hotel, hospital and a Slum rehabilitation scheme vis--vis

DTC 2009

?Undertaking engaged in developing or operating and maintaining

any infrastructure facility is not required to fulfill any such

conditions for availing the deduction

?Undertaking engaged in the business of laying and operating of a

cross country natural gas or crude or petroleum oil pipeline

network can avail the investment based incentive subject to the

fulfillment of certain conditions.

Grandfathering of profit-linked deduction to the existing specified

business for the unexpired period if the assessee is eligible for the

said deduction as on 1 April 2011.

?Under the Act, the deduction is available to the eligible business

like power and industrial park which commences the operations

before 31 March 2011. Whereas under the DTC 2010,

grandfathering is applicable to the specified business which is

eligible for deduction under the Act as on 1 April 2011. Therefore,

an amendment to this effect is expected in the coming Finance

Act else grandfathering for the undertaking which commences

the operations in the FY 2011-12 will not be allowed

?Since the condition of being an Indian company is not specified

under DTC 2010, the option of forming LLPs may be explored for

specified business.


Under the Act

Natural Gas not defined

Mineral oil and natural gas

?Definition of Natural Gas introduced

?DTC allows deduction for the payment made towards Site

Restoration Account maintained with the State Bank of India as

per the scheme framed by the Central Government.

?DTC 2010 provides for grandfathering of profit-linked deduction for

the unexpired period subject to the fulfillment of certain

conditions for mineral oil

?Inclusion of Natural gas definition under DTC is a welcome step.


Under the Act

?Indian Shipping Companies were provided with an option to

offer to tax its income from the qualifying ships on gross basis

i.e. following Tonnage Tax Scheme.

Tonnage income scheme

?DTC 2010 has now made available the option to a shipping

company to compute its profits by applying the Tonnage Income

Scheme as provided under the Act which was not provided in the

earlier draft.

?Giving discretion to the shipping companies to compute its

income by applying or not by applying the Tonnage Income

Scheme is a welcome step and will give a big relief to the

shipping companies.



1. Generation, transmission or distribution of power, developing or operating and maintaining any infrastructure facility, operating and maintaining a hospital in a specified area, processing, preservation and packaging of

fruits and vegetables, laying and operating of a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of the network, setting up and

operating a cold chain facility, setting up and operating warehousing facility for the storage of agricultural produce.

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Under the Act

Gain on transfer of any capital asset is chargeable to tax under the

head capital gains. Capital gain is computed as the difference

between full value of consideration and cost of

acquisition/improvement or indexed cost of

acquisition/improvement. Further, depending on the type of asset

and period of holding,. concessional rate of tax is provided. Further,

the gains arising on certain types of transfer are exempt from tax.

DTC 2009

Eliminated the distinction between short-term capital gains and

long-term capital gains, especially with respect to the rates at

which such gains would be taxed. In case of non-residents, capital

gains was considered as special source income and taxed at therate of 30 percent. In respect of residents, capital gains were

subjected to tax at applicable slabs.

The DTC 2009 made a distinction between investment assets

and business assets. It provided that gains arising from the

transfer of investment assets were taxable under the head

capital gains.

?

source income in so far as capital gains in the hands of non-

resident is done away with

?Concessional tax rate of 20 percent for the long-term capital

gains available under the Act are done away with

?Income from the sale of securities in the hands of FIIs would be

treated as 'capital gains' thereby avoiding litigation to determine

characterisation of income

?Indexation benefit is available for assets held for a period of 12

months or more.

The distinction between an ordinary source and special?Under DTC 2010, income is chargeable to tax as income from

either ordinary sources or special Sources. Capital gains on

transfer of investment assets to be treated as income fromordinary sources for all tax payers and taxed at applicable

slabs

?No distinction between short-term capital gains and long-term

capital gains

?Investment Asset has been defined to include any securities

held by the FIIs and any undertaking or division of a business

?Taxation of gains arising from transfer by way of slump sale of

an undertaking/division now reverts to the head capital gains.

DTC 2009 sought to tax the same as business income.

Chargeability Our Comments

Taxation of Capital Gains

18

Some of the key provisions of DTC 2010 are discussed hereinafter.


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?

exemption from the long term capital gains on the sale of listed

securities. DTC 2010, proposes to bring the capital gains tax

regime on sale of listed securities along the lines with the existing

regime

?If the cost of acquisition cannot be determined then the same

shall be taken at nil to arrive at the capital gains. The amendment

is attempted to plug the loophole where the cost cannot be

determine resulting in the failure of computation mechanism.

Several representations were made for restoring the current?In addition to deductions for the actual cost of

acquisition/improvement available in computing gains on the

transfer of equity shares or equity oriented mutual funds, the

following deductions are allowed:

- On equity shares or equity-oriented mutual funds which havebeen held for more than one year and where STT has been

paid on the transfer, a deduction equal to 100 percent of the

capital gains

- On equity shares or equity-oriented mutual funds which have

been held for one year or less and where STT has been paid

on the transfer, a deduction equal to 50 percent of the capital

gains

?Indexation benefit is available on the transfer of any other

investment asset after one year from the end of the financial year

in which such asset was acquired

?Fair market value substitution date and the indexation base date is

proposed to be 1 April 2000

?If the cost of acquisition/cost of improvement of an asset is not

determinable by the tax payer, then such cost shall be taken as nil

and the capital gains are to be computed and charged to tax

?The cost of acquisition with respect to various modes of

acquisition of shares have been provided in 17schedule similar

to the existing provisions.

Computation Our Comments

Exempt Transfers Our Comments

?

company to a WOS and vice versa to be exempt from tax,

provided the transferee is an Indian company and treats the asset

as an investment asset. If the aforementioned conditions are

breached or the Parent WOS relationship ceases to exist before

the expiry of eight years from transfer, the gains are to be taxable

in the year of breach

?Business reorganisations cover amalgamation, merger of banking

companies brought into force by the central government under

the Banking Regulation Act, 1949 and the demerger between one

or more residents

?Transfer of investment assets in the hands of transferor entities

and their shareholders/partners in a business reorganisation is

exempt

?

In case of amalgamation or demerger amongst foreigncompanies, the condition of 75 percent shareholders continuing in

the amalgamated/resulting company has been introduced for

availing exemption from the gains arising on the transfer of

underlying shares of the Indian company

?Conversion of a company into LLP is exempt from tax, subject to

the fulfillment of certain conditions

?Certain exemptions such as transfer on a gift, partition of HUF,

will, liquidation, reverse mortgage, security lending scheme,

conversion of bonds, debentures, depository receipts, transfer of

securities by depository, transfer of work of art, archaeological

collection, etc. have been retained

?The transfer of land under Sick Industrial Companies (Special

Provisions) Act, 1985 where a company is managed by its worker

co-operative, is exempt

Gains arising on the transfer of investment assets by a holding ?

period under DTC 2009

?Exemption in case of cross border merger available in the hands

of a transferor entity if it is a resident. Tax exemption would be

available in the hands of shareholders of the transferor entity

irrespective of their residential status

?Amalgamation includes a merger between one or more

companies, between co-operative societies and succession of

unincorporated body/ proprietary concern by a company

?Only equity shares can be issued on demerger to avail tax

exemption

?Explicit exemption has not been provided for the transfer of

business capital assets in the course of business reorganisation

?Voluntary mergers of banking companies under the RBI Act may

not be covered.

The lock in period of eight years reintroduced as against infinite

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?Failure to use the funds withdrawn from the Capital Gains Deposit

Scheme or non utilisation of the amount deposited within a

specified time would result in taxation on the amount

withdrawn/not utilised and not pro rata to the capital gains

exemption availed. The capital gains would be chargeable to tax in

the year of withdrawal/year of completion of specified time.

?Capital gains rollover provision are applicable only in case of

Individuals and HUFs in respect of capital gains other than on

slump sale and equity shares or unit of equity oriented funds on

transfer of which securities transaction tax has been paid

?

Rollovers are provided in the proportion of amount invested in theacquisition of agricultural land/acquisition or construction of

residential house depending on the nature of investment asset

transferred

Rollover Our Comments

Losses Our Comments

?

capital loss can be carried forward for an indefinite period

Capital loss to be set off only against capital gains. Unabsorbed ?

forward capital losses can be set off only against capital gains.

No distinction between capital losses. Current year and brought

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Under the Act

Two persons are deemed to be AE if they fulfill any of the 13

specified criteria. The said criteria includes participation in

shareholding with 26 percent voting power, loan amounting to 51

percent of book value of assets, appointment of one-half of the

directors, purchase of 90 percent of raw materials, dependence on

know-how, etc.

DTC 2009

Had proposed to substantially widen the scope of AE by reducing

the aforesaid limits, whereby more entities were covered within

the ambit of transfer pricing regulations. For example, share

holding with 10 percent voting power, loan amounting 26 percent

of total assets, nomination of one-third directors, purchase of two-

third raw material and consumables, would have resulted in an AE

relationship.

Associated enterprise

?

contained in the Act is a welcome step. The same will help ensure

that only in a case where an enterprise is in a position to exercise

control through participation in the management, capital or control

of the other enterprise, the two shall be deemed to be AEs

?However, due to one of the newly introduced criterion,

transactions with independent entities would also get covered

under the ambit of transfer pricing provisions, merely on the basisof such other entity being located in a specified location outside

India.

The restoration of the criterion for treating two entities as AEs as?The scope of the term associated enterprise has now been

brought in line with the scope as existing under the Act with

certain additional criterions

Following an additional criterion have been included within the

definition of the term associated enterprise:

- The provision of services to another enterprise or person

specified by it if the amount payable and other terms relating

thereto are influenced by such other enterprise

- Any one of the enterprises to the transaction is situated in any

specific territory or distinct location, which may be prescribed.


Transfer Pricing Provisions

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Under the Act,

There was no provision for APA mechanism under the Act.

DTC 2009

Had introduced the APA mechanism. The CBDT was entitled to

enter into an APA with a prior approval of the central governmentfor specifying in advance the manner of determination of the arm's

length price of an international transaction. The validity of the APA

was a maximum period of five years except in the case of a

change in the law on the basis of which the APA was entered into.

The APA was proposed to be binding on the tax payer, the

commissioner and income tax authorities below him. The APA

would remain binding unless there is any change in the law or it

was obtained through fraud or misrepresentation of facts.

Advance pricing agreement

?

to the prescribed method for the determination of the arms

length price of an international transaction. The same would

provide flexibility in arriving at the manner of arms length price

determination

?Earlier there may have been some scope for either party to try

and withdraw from the APA by contesting change in law (eg.

based on a subsequent Supreme Court ruling). However, this

option seems to be no longer available with the replacement of

the words change in law' with the words amendment to DTC

2010

?Further, the APA mechanism is silent on the consequences in

case there is a change in the facts and circumstances of the caseof the tax payer on the basis of which the APA was entered into.

For APA, the provisions permit the use of any method in addition?The APA provisions as contained in the DTC 2009 have been

retained with minor modifications

?The manner of determination of the arms length price of an

international transaction may be any method including one of the

prescribed methods

?The APA will be binding, unless there is any change in the DTC

2010 having bearing on the transaction covered under the APA.

(The condition of change in law in DTC 2009 has been replaced

with amendment to DTC 2010).


Under the Act

The tax payer is required to file an Accountants Report with the

AO. The TPO conducts a transfer pricing scrutiny based on the

reference received from the AO. Thereafter, the AO is required to

compute the total income of the tax payer in conformity with the

arms length price so determined by the TPO. The time limit for thecompletion of the transfer pricing assessment is 43 months from

the end of the financial year in which the international transaction

was entered into.

DTC 2009

Had proposed for the filing of the accountants report directly with

the TPO. The case was required to be selected for scrutiny by the

TPO, based on a risk management strategy and the TPO was

required to communicate the same to the AO. The AO was required

to incorporate the TPOs order in the final assessment order. Thetime limit prescribed for completion of the transfer pricing

assessment was 42 months from the end of the financial year in

which the international transaction was entered into.

Accountants report and assessment

?

TPO. However, the TPO can make a detailed scrutiny only on

receiving a reference from the AO. Accordingly, it remains to be

seen as to how the AO would make an objective evaluation for

the purpose of reference to the TPO in the absence of the

accountants report being available with him

The tax payer is required to file the Accountants Report with the?The tax payer is required to file the Accountants Report with the

TPO

?However, the case for transfer pricing scrutiny will be selected by

the AO and a reference will be made to the TPO for conducting

the scrutiny


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Under the Act

Stringent penalties were prescribed under the Act for

contravention of the transfer pricing provisions and no tax holiday

was available in respect of addition to income as a result transfer

pricing adjustment

DTC 2009

Under the DTC 2009, penalties for contravention of transfer

pricing provisions were rationalised and relaxed substantially.

Penalty and other matters

?Thereafter, the TPO will determine the arms length price of an

international transaction, which shall be incorporated by the AO in

the final assessment order

?Though the TPO is required to give the tax payer an opportunity of

being heard, there is no provision for issuance of a show causenotice by the TPO before proposing variation in the arms length

price determined by the tax payer

?In the absence of the show cause notice, the tax payer may not

have an opportunity to provide replies/arguments against the

proposed adjustment by the TPO, which may have satisfied the

TPO and avoided litigation

?Non co-operation has not been defined and hence could be

subject to varied interpretations. Accordingly, there is a concern

that the TPO may attempt to use this power to burden the tax

payer with substantial/unreasonable information requests.

?The determination of the arms length price by the TPO shall not

be subject to the specific four conditions as is presently contained

in the Act

?The time limit for completion of the transfer pricing assessment is

42 months from the end of the financial year in which theinternational transaction was entered into

?In case of non co-operation by the tax payer, the TPO may

complete the assessment based on the best judgment.


?

?The language of the DTC 2010 seems to suggest that the transfer

pricing adjustment ought not to adversely impact the tax

incentives for certain businesses (including SEZ Units) covered

under other sub-chapter.

The relaxation of stringent penalties is a welcome step?For contravention of transfer pricing provisions the penalties are in

line with the DTC 2009. The same are as under:

?No deduction (with regard to tax incentives) under Sub-chapter IV

of Chapter III of the DTC 2010 will be available in respect of any

upward transfer pricing adjustment.


Reason Penalty

Adjustment to tax payer's

income

100 -200 percent of tax on

adjustments

Failure to maintain

documentationINR 50,000 - 200,000

Failure to furnish the Report of

International Transactions INR 50,000 - 200,000

Failure to furnish

documentation-

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Personal Taxation

Residency and scope of income

Under the Act

?

Residents and Non Residents. A Resident individual could

further be classified as a Not Ordinarily Resident. Non

Residents and Not Ordinary Residents are taxable only on India

sourced income while Residents are taxed on worldwide

income.

?An individual is said to be Resident if he is:

- Present in India in the financial year for 182 days or more or

- Present in India for 60 days or more in the financial year

and 365 days or more during the preceding 4 FYs. The 60

days are substituted for 182 days for a citizen of India/

person of Indian origin on visits to India; citizen of India

who leaves India for employment abroad or as member of

a crew of an Indian ship

?A Resident individual is regarded as Not Ordinarily Resident if:

- He was Non Resident in India in 9 out of 10 preceding

financial years or

- He was present in India for less than 730 days during the 7

preceding financial years.

As per the existing residency rules, individuals are classified as

DTC 2009

?The category of Not Ordinary Resident was abolished. An

individual could be either Resident or Non Resident

?No amendments proposed to residency rules given under the

Act

?Non Residents were proposed to be taxed only on India

sourced income while Residents were proposed to be taxedon worldwide income. In the case of Residents, exemption

was proposed for the initial two years, if the individual qualified

as Non Resident for the immediately preceding nine years. The

additional second condition of 730 days is done away with.

?

taxability of overseas income

?An individual could either be Resident or Non Resident

?A citizen of India or a Person of Indian Origin, living outside India

and visiting India will trigger residency by staying in India for morethan 59 days vis--vis more than 181 days.

The additional condition of 730 days retained only to ascertain ?

for the purpose of taxing overseas income, the withdrawal of

concessional limit of 182 days for Indian citizen or Person of

Indian Origin who is residing overseas and visiting India (for

business/ personal purpose) is likely to be detrimental for such

individuals.

While the restoration of the limit of 730 days is a welcome step


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Under the Act

?Under the Act, the long-term savings schemes like the GPF,

RPF, PPF, Life Insurance, etc. are covered under the EEEmethod, wherein the contributions, accumulations/accretions

thereto and the withdrawals are exempt from tax.

DTC 2009

?The DTC proposed to introduce EET method of taxation on all

such schemes, wherein the contributions and accretions wereexempt from tax, while the withdrawals were proposed to be

taxable. It was, however, proposed that only the withdrawals

of accumulated balances on 31 March 2011 in specified

Provident Funds and accretions thereon would not be subject

to tax

?The long-term retiral savings schemes viz., GPF, RPF, PPF,

including life insurance policies were proposed to be moved to

the EET regime. Both the employer and employee

contributions to any account maintained with permitted

savings intermediaries were proposed to be deductible up to

INR 300,000. Permitted savings intermediaries were to include

approved Provident Fund and Superannuation Fund, life insurer

and New Pension System Trust. Accretion of income on thefunds till withdrawal was proposed to be exempt. Withdrawals

were proposed to be taxed unless deposited in another saving

intermediary

?The Revised Discussion Paper proposed that EEE method of

taxation to continue for specified Provident Funds and for the

Pension scheme administered by the Pension Fund Regulatory

and Development Authority.

?Further, approved pure life insurance products and annuity

schemes will also be covered under the EEE method.

?Investments made before the commencement of the DTC in

instruments which enjoy EEE method under the existing Act,

would continue to enjoy EEE method for the full duration ofthe financial instruments.


Exempt-Exempt-Exempt Regime for savings scheme

?

continuation of EEE regime is a welcome step as it will provide a

tax free lumpsum amount to individuals to meet their post-

retirement financial requirements.

In the absence of a universal social security system in India, the?Most long-term retiral savings schemes (for e.g. Approved

Provident Fund, Superannuation Fund, Gartutity Fund, Pension

Fund) are moved to EEE regime as against EET proposed earlier

?Deduction in respect of employee contributions to approved funds

such as Provident Fund, Superannuation Fund or Pension fund

reduced to INR 100,000. Further, accruals to the approved funds

(including interest) and any withdrawal from there will continue to

be exempt (subject to conditions) which exemption was earlier

proposed to be restricted only to accumulated balance as on 31

March 2011

?Receipts under a life insurance policy on death exempt from tax

?Receipt on maturity, of surrender value from life insurance policy

and distributions from the equity linked insurance policies exempt

are subject to the prescribed conditions.


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?

insurance premium, health insurance premium and tuition fees for

two children

?Deduction to a person with disability and for medical treatment

and maintenance of a dependent person with disability stipulated

subject to prescribed conditions

?Deductions in respect of contributions or donations to certain

funds or non-profit organisations proposed

?An individual not receiving house rent allowance alloweddeduction towards the payment of rent upto a maximum limit of

INR 2,000 per month, subject to prescribed conditions

?The deduction for interest paid on loan for higher education for a

period of eight years to be restored.

An aggregate deduction stipulated of INR 50,000 towards life ?

contributions into approved funds such as Provident Fund,

Superannuation Fund or Pension fund has been retained at the

existing limit under Section 80C of INR 100,000, an additional

deduction of INR 50,000 proposed in respect of life/health

insurance premium and tuition fees should benefit individuals who

have employee Provident Fund contributions in excess of INR

100,000 and also paid life insurance premium/tuition fees

?Repayment of the principal on housing loan is no longer eligible

for deduction. Hence, certain individuals relying on principalpayments to avail of this deduction may need to invest in other

prescribed funds to avail of deduction under the overall cap of INR

100,000

?Increase in maximum available deduction for certain prescribed

contribution/donation to 175 percent from 100 percent of money

paid is a welcome move.

While the overall deduction limit in respect of employee


Under the Act

?

- Aggregate deduction of INR 100,000 for

investments/payments towards life insurance premium,

public provident fund, tuition fees, repayment of housing

loan, purchase of ULIPs, NSC, contribution to the

recognised provident fund, annuity, mutual funds, etc.

- Additional deduction of INR 20,000 towards the purchase of

notified infrastructure bonds

- Deduction up to INR 40,000 towards health insurance

premium paid

- Expenditure on medical treatment/maintenance of

dependants with disability

- Medical treatment of specified disease or ailment forself/dependent person

- Interest on loan taken for higher education for self/relative

- Donation to specified funds/charitable

institute/scientific research, political party, etc. and

- Persons with disability/severe disability

subject to the limits and conditions prescribed under the Act

?Individuals not receiving HRA are allowed deduction towards

payment of rent upto a maximum limit of INR 2,000 per

month, subject to prescribed conditions.

In case of an Individual, following deductions allowed:

DTC 2009

?Aggregate deduction for a prescribed long term eligible savings

along with tuition fees paid proposed to be increased to INR300,000 from INR 100,000

?No further investments are eligible.


Other deductions

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?

?Retention of exemptions viz., house rent allowance and leave

encashment is a welcome move

?

Increasing the exemption limit in respect of medicalreimbursement is a positive step

?The removal of the overall cap of INR 300,000 in respect of

contributions to intermediaries/approved funds, removing the

current INR 100,000 limit of non-taxable employer contributions to

the approved Superannuation Fund and doing away with the

requirement of investment in permitted savings intermediary

should encourage savings in retiral schemes

?The propositions in respect of contributions to approved funds viz.

Provident Fund and Superannuation Fund beneficial to employees.

DTC 2010 is broadly neutral for employees?Employment income proposed to be computed as the gross

salary due, paid or allowed less the aggregate of the specified

deductions

?Exemptions such as house rent allowance, leave encashment and

medical reimbursements have been retained. The exemption for

medical reimbursements increased to INR 50,000 per annum

Exemption on leave travel concession and tax on non monetary

perquisite borne by the employer have been done away with

?Receipts under the Voluntary Retirement Scheme, Gratuity and

Commuted Pension are not included in the employment income

subject to prescribed limits (without the condition to make any

prescribed investments)

?The employer contributions to the approved Provident Fund,

approved Superannuation Fund or any other approved fund to be

deductible to the extent of prescribed limits as against the overall

cap of INR 300,000 proposed earlier

?Exemption towards reimbursement by the employer for the

premium paid by the employee to keep in effect health insurance

policy for his family members has been deleted

?Exemption for the reimbursement of overseas medical treatment

(including expenditure on travel and stay abroad) not available

where income from employment exceeds INR 500,000.



Income from employment

?Under the Act

?Gross salary income comprises of any amount due, paid or

allowed to an employee

?House rent allowance, leave travel concession, leave

encashment, tax on non monetary perquisite borne by

employer, specified allowances to meet personal expenses

exempt, subject to prescribed conditions

?Medical reimbursement upto INR 15, 000 per annuum exempt

?House rent allowance received by an employee exempt,

subject to prescribed conditions

?Contribution to approved Provident Fund by:

- Employer upto 12 percent of basic salary exempt

- Employee contribution deductible upto aggregate of INR

100,000

?Contribution by employer to approved Superannuation Fund in

excess of INR 100,000 taxable as perquisite.

DTC 2009

?Employment income proposed to be computed as the gross

salary less the aggregate of specified deductions

?Exemptions such as house rent allowance, leave travel

concession, leave encashment, tax on non monetary

perquisite to be borne by the employer, medical

reimbursements, etc. proposed to be deleted

?Payment (employer/employee contributions) in relation to

Voluntary Retirement Scheme, Gratuity, Commuted Pension

deductible from employment income if invested with permitted

savings intermediary, subject to overall cap of INR 300,000.

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Under the Act

?House property is classified either as self occupied, let out or

deemed to be let out

?The annual value of a house property deemed to be let out is

determined with reference to the 'fair rent' of the property

?In case of properties let out/deemed to be let out, a deduction

of 30 percent of the annual value for repairs and maintenance

is allowed. Additionally, the entire interest paid on the housing

loan is allowed as a deduction

?In case of one self occupied property, the annual value is Nil

and an interest deduction up to INR 150,000 is allowed

?Any income from the property occupied for business is not to

be taxed as income from house property

?

In case of co-owners, if shares of owners are definite andascertainable, such persons shall not be assessed as an

association of persons in respect of such property and shall be

assessed individually with respect to their shares

?No specific provision is laid for taxability of advance rent

received.

DTC 2009

?The gross rent from house property was proposed to be

determined at a higher of contractual rent or presumptive rent.The presumptive rent was to be determined at the rate of 6

percent of the value fixed by the local authority or the cost of

construction/acquisition of house property, where no such

value was fixed by the local authority.

?However, in the Revised Discussion Paper, the concept of

presumptive rent was proposed to be eliminated. Further, the

value of house property not let out for any part of the year was

proposed to be considered as Nil with no deduction for taxes

or interest to be allowed for such house property

?Deduction for repairs and maintenance was restricted to 20

percent of the gross rent of the property

?

No deduction was provided for the interest on loan for a self-occupied house property

?However, in the Revised Discussion Paper, it was proposed

that deduction of INR 150,000 in respect of the loan taken for

acquisition/construction of self occupied house property would

be retained

?Any income from property occupied for business is not to be

taxed as income from house property

?Advance rent proposed to be taxed only in the financial year to

which it relates.

?Gross rent to be calculated on the basis of actual rent received or

receivable and not on presumptive basis (higher of contractual

rent or presumptive rate of 6 percent of rateable

value/construction/acquisition cost as proposed earlier)

?Interest on housing loan on self occupied property upto INR

150,000 retained as a deduction from gross total income. Further,

interest relating to the period prior to financial year in which the

property has been acquired or constructed deductible in five equal

installments

?Deduction for repairs and maintenance to be 20 percent of the

gross rent

?If the shares of owners of property are not definite and

ascertainable, such persons are to be assessed as an Association

of Persons in respect of such property

?The property used as hospital, hotel, convention centre or cold

storage and forming a part of Special Economic Zone, the income

from which is computed under the head 'income from business'

is not to be included under the income from house property.

Income from letting all other types of property occupied for

business to be taxed as income from house property and not

income from business

?The arrears of rent to be taxable in the year of receipt irrespective

of ownership of property at that time with deduction for repairsand maintenance at 20 percent of such arrears

?Advance rent to be taxed only in the financial year to which it

relates.

?

removal of proposed taxation based on presumptive rent is in line

with the international practice of taxing real/actual income instead

of notional income

?Continuation of deduction of INR 150,000 interest for self-

occupied property is a welcome step

?Reduction in the rate for repairs and maintenance from 30 - 20

percent is likely to have a higher tax impact for property owners

?The deduction for service tax on payment basis proposed in DTC

2009 has now been withdrawn in DTC 2010.

The removal of the concept of deemed to be let-out property and



Income from house property

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Under the Act

Income of VCC and VCF from investment in unlisted VCU engaged1

in certain specified businesses is exempt from tax but taxable for

investors as if investments in VCU were made directly.

DTC 2009

The above scheme was to apply irrespective of the sector in which

such VCU is engaged. However DTC 2010 proposes provisions

similar to the Act.

?

exemption available for income from VCU which is listed

subsequently, investment in preferential allotments of listed

company, interest from deposits, applicability of MAT to VCC, no

exemption from withholding taxes on interest paid to VCF/VCC,

etc.

?Restricting the exemption for VCC/VCF to income from

investment in VCU engaged in specified businesses is not

encouraging for the industry and the benefit should have been

broader based

?Simplification of trust taxation provisions comes as a huge relief

for VCF with respect to its investment in VCU not engaged in

specific business.

No attempt made to address certain current issues e.g. no?Income of VCC/VCF from the investment in unlisted VCU engaged

in specified businesses exempt from tax

?Income received by investor from VCC/VCF taxable as if the

investor had made investments directly in the VCU

?Income of VCF/VCC from investment in companies not engaged in

specified businesses to be governed by normal trust taxation

provisions and normal corporate tax provisions respectively.


Venture Capital Funds/Venture Capital Companies

1. (a) nano-technology; (b) information technology relating to hardware and software development; (c)

seed research and development; (d) bio-technology; (e) research and development of new chemical

entities in the pharmaceutical sector; (f) production of bio-fuels; (g) dairy and poultry; (h) building and

operating composite hotel cum convention centre with seating capacity of more than three thousand;

(i) development of infrastructural facility; or (j) any other business as may be prescribed.

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Under the Act

Equity-oriented mutual funds enjoyed exemptions/concessions at

the mutual fund as well as the investor level. Even a non-equity

oriented mutual funds enjoyed concessional distribution tax rates

and concessional capital gains tax rates.

The DTC proposes to dilute the above concessional regime.

?

impact the performance and the returns to investors

?Proposed provisions dilute the current tax arbitrage that is

available on investing in non equity oriented mutual funds vis--vis

fixed income instruments directly

?The definition of equity oriented mutual fund continues as current

and would have helped the industry if it widened to include Fund

of funds which invest in equity oriented mutual funds or

investment in equity derivatives, etc.

The 5 percent distribution tax on equity oriented mutual funds will?Income received by mutual funds is exempt from tax

?Equity oriented mutual fund, liable to pay 5 percent tax on amount

distributed or paid to the unit holders. Income received by unit

holders from equity oriented mutual fund is exempt

?In case of non-equity oriented mutual funds, tax is required to be

withheld at specified rates beyond the threshold prescribed.

Income received by unit holders from non equity-oriented mutual

fund is taxable at applicable rates

?Capital gains on the transfer of units of equity oriented mutual

fund taxable at normal rate. In case such units are held for more

than one year and STT is paid, deduction of 100 percent is allowed

else deduction of 50 percent is eligible

?Capital gains on transfer of units of non equity oriented mutual

fund are taxable at normal rates. However, indexation benefit is

eligible if the units are transferred after a period of one year from

the end of the financial year in which such units were acquired.


Mutual Funds

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Under the Act, profits of the l ife Insurance business was subject to

tax at concessional rate of 12.5 percent (excluding surcharge and

education cess)

Under the Act, profits received by the policyholder' is exempt from

tax except in certain cases including where the premiums paid

during the term of the policy exceeds 20 percent of the actual

capital sum assured

Under DTC 2010 it is proposed that such exemption/deduction

from taxation shall be provided only in certain cases. Further,

withholding tax obligation and distribution tax on approved equity1

oriented life insurance scheme has been introduced.

?

welcome move. However, removal of the concessional tax rate

could hamper the life insurance business

?Taxability of sums received (excluding premium paid) in cases

other than that exempted/allowed deduction such as withdrawals,

unapproved equity oriented life insurance scheme, etc. is not

good news for the life insurance industry

?Also there is no grandfathering provision for the policies issued

under the Income-tax Act. Hence, if these policies were to mature

under the DTC regime, returns on the same could be taxable

?Introduction of withholding tax would be extremely tedious for life

insurance companies and will increase the compliance work

substantially. Also, it could have cash flow implications for

policyholders especially those whose income is below the taxable

limit

?The objective of this amendment appears to bring tax equalisation

between mutual funds and ULIP products which are primarily

equity based

?There was no such explicit provision under the Act. Hence under

the DTC regime, insurance arrangements (including re-insurance)

could be subject to tax in India especially if the foreign insurer/re-

insurer is not a resident of a country with which India has a tax

treaty or is not eligible for tax treaty benefits.

Non-taxability of profits in the policyholder's account is a?Under DTC, only profit in the Shareholders account (Non-technical

Account) is proposed to be subject to tax in the hands of the life

insurance company subject to certain adjustments at corporate

tax of 30 percent

Under DTC, only payments received from life insurance products

which satisfy the below conditions are proposed to be eligible for

exemption/deduction from tax:

- Where sum is received on completion of the original period of

contract of insurance and premium paid or payable for any of

the years does not exceed 5 percent of the capital sum

assured

- Where sum is received under an approved equity oriented life

insurance scheme and distribution tax is paid by the life

insurer and

- Where sum is received on death of the insured person

?Withholding tax provisions have been proposed to be introduced

for life insurance products whereby in certain cases, life insurance

companies will be required to withhold taxes on payments made

to resident policyholders

?Distribution tax @ 5 percent has been introduced on approved

equity oriented life insurance scheme

?Insurance premium (including re-insurance premium) accrued

from or payable by any resident or non-resident is proposed to be

deemed to accrue in India if in respect of insurance covering any

risk in India. Further, the payer is obligated to withhold tax on the

payment of such premium.


Insurance Company

1. Approved equity oriented scheme means a life insurance scheme where more than 65 percent of the

premium received under such scheme are invested by way of equity shares in domestic companies

and such scheme is approved by the Board

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Under the Act

The Wealth tax Act, 1957 provides for Wealth tax at the rate of 1

percent on specified assets exceeding INR 3 million. Wealth tax is

levied on Individuals, Hindu Undivided Family (HUF) and Company.

DTC 2009

Proposed to levy of Wealth tax on Individual, HUF and Private

Discretionary Trust at the rate of 0.25 percent on the net wealth

exceeding INR 500 million. All assets including financial assets

(with certain exceptions) were proposed to be included within the

definition of net wealth.

The Revised Discussion Paper of June 2010 indicated that Wealth

tax will be levied broadly on the same lines as the existing Wealth

tax Act and will be payable by all tax payers except NPOs.

?

step

?Valuation guidelines for computing value of assets are yet to be

notified. One would need to evaluate the manner in which the

interest in a foreign trust and shares held in a CFC are valued

?Multiple layers of CFCs could result in Wealth-tax being levied

multiple times on the resident assessee on the same value,

unless valuation guidelines (to be prescribed) take care of thisanomaly

?Under the Wealth-tax Act, the term 'assets' excluded certain type

of 'urban land' i.e. interalia unused land held for industrial

purposes for a period of two years/land held as stock in trade for a

period of 10 years from the date of acquisition. This exclusion

does not appear in DTC 2010

?Wealth-tax exemption available for a period of seven years for

assets brought into India by a person of Indian origin returning to

India has been withdrawn.

Levy of tax only on specified 'unproductive assets' is a welcome?In line with the proposals laid down in the Revised Discussion

Paper, under the DTC 2010, Wealth-tax will be made applicable to

all tax payers except NPOs

?Wealth-tax will be levied at the rate of 1 percent on net wealth

exceeding INR 10 million (as against the existing threshold limit of

INR 3 million under the Wealth-tax Act, 1957/INR 500 million

proposed under the DTC 2009)

The specified assets for computing 'net wealth' are broadly in linewith the existing taxable assets with new additions i.e.:

- Archaeological collections, drawings, paintings, sculptures or

any other work of art

- Watch with a value in excess of INR 50,000

- Bank deposits outside India, in case of individuals and HUFs,

and in the case of other persons, any such deposit not

recorded in the books of account

- Any interest in a foreign trust or any other body located

outside India (whether incorporated or not) other than a

foreign company

- Any equity or preference shares held by a resident in a CFC

Cash in hand in excess of INR 200,000 in the case of an

individual and HUF.


Wealth Tax

32


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?AE

?AO

?APA

?CBDT

?CFC

?CIT

?DDT

?DRP

?DTC 2009

?DTC 2010

?EEE

?EET

?FTS

?FII

?FMV

?FTC

?GAAR

?GPF

?HRA

?MAT?NPO

?PE

?PPF

?RPF

?SEZ

?STT

?The Act

?TPO

?VCU

?VCF

?VCC

?VCU

?WOS

Associated Enterprise

Assessing Officer

Advanced Pricing Agreement

Central Board of Direct Taxes

Controlled Foreign Company

Commissioner of Income tax

Dividend Distribution tax

Dispute Resolution Panel

Direct Taxes Code 2009

Direct Taxes Code 2010

Exempt-Exempt-Exempt

Exempt-Exempt-Taxable

Fees for Technical Services

Foreign Institutional Investors

Fair Market Value

Foreign Tax Credit

General Anti Avoidance Rules

Government Provident Fund

House Rent Allowance

Minimum Alternate TaxNon Profit Organisation

Permanent Establishment

Public Provident Fund

Recognised Provident Fund

Special Economic Zone

Securities Transaction Tax

The Income-tax Act, 1961

Transfer Pricing Officer

Venture Capital Undertaking

Venture Capital Fund

Venture Capital Company

Venture Capital Undertaking

Wholly Owned Subsidiary

Glossary

33


35/35

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that

such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one

should act on such information without appropriate professional advice after a thorough examination of the particular

situation.

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firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative

(KPMG International), a Swiss entity. All rights

reserved.

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Documents

Kpmg Dtc 2010 Analysis