Nihar Jambusaria 13TH November,2010

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DTC AN OVERVIEW

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KEY HIGHLIGHTS OF DTC

Common threshold limit of ` 2 lakhs for men and women and ` 2.5 lakhs for senior citizens

Amount received by employee from NPS trust if tax free Only actual rent from house property to be taxed and not on annual value Limit for tax audit for professionals increased from ` 15 lakhs to ` 25 lakhs.

Limit for tax audit for business increased from ` 60 lakhs to ` 1 crore. Remission or cessation of liability by way of loan/ deposit/ advance/ credit to

be taxed as business income Income from sale of carbon credits to be taxed as business income Short-term capital gain (where equity shares/ units are held for 1 year or

less) – deduction of 50% to be allowed and balance 50% taxed. Short- term capital loss to be scaled down by 50%

Exemption for Long Term Capital Gain from equity shares/units of equity oriented mutual funds retained. STT to be retained.

TDS of 10% on payments in respect of life policies which are not exempt from tax from code

Wealth tax threshold limit increased to ` 1 crore

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KEY HIGHLIGHTS OF DTC – TAX RATES

Category Tax Rates

Indian Company 30%

Minimum Alternate Tax 20% of adjusted book profits

Dividend Distribution Tax (DDT) 15%

DDT on income distributed by mutual fund/ life insurance to unit holder/ policy holder

5%

Wealth Tax 1% on Net Wealth exceeding ` 1 crore

Foreign Company 30%

Branch Profit Tax 15%

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MINIMUM ALTERNATE TAX

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MINIMUM ALTERNATE TAX – GROSS ASSETS VIS-À-VIS BOOK PROFITS

Company liable to pay 20% tax on book profits if such tax is higher than the normal income tax payable

MAT applicable to units in Special Economic Zone (SEZ) and SEZ developers MAT not applicable to the companies engaged in core shipping activities of a

qualifying shipping company as defined MAT credit can be carried forward upto 15 years Incase of a conversion of a company into LLP, MAT credit would not be

available to LLP

Restoration of MAT provision on “Book Profit” (rather than on Gross Assets as proposed under first draft) is a welcome change. However, applicability of MAT to SEZ developers is a dampener

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Net profit as per P/L A/C prepared in accordance with Parts II and III of Schedule VI to the Cos. Act

XXX

Add: Tax paid or payable under the code including any interest, tax on distributed profits/income, branch profit tax and wealth tax

XXX

Amount carried to any reserves XXX

Provisions for unascertained liability XXX

Provision for losses of Subsidiary companies XXX

Dividends paid or proposed XXX

Depreciation XXX

COMPUTATION OF BOOK PROFITS

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Deferred tax and provision for def. tax XXX

Provision for diminution in value of assets XXX

Expenditure in relation to income exempt under the sixth schedule

XXX XXX

XXX

Less: Depreciation debited to PIL excluding depreciation on revaluation of assets

XXX

Amount withdrawn from revaluation reserve to the extent of depreciation on revaluation of assets

XXX

Amount withdrawn from any reserve/provision credited to P/L A/C, if earlier considered for computing book profit

XXX

Profits of a sick industrial co. during the period its net worth is negative

XXX

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Income exempt U/S 10 read with the Sixth Schedule XXX

Deferred tax credited to P/L A/C XXX

B/f loss excluding depreciation or unabsorbed depreciation whichever is less

XXX XXX

BOOK PROFITXXX

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DEPRECIATION

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Asset

Business Asset (Cl.314(38))

Investment Asset(Cl.314(141))

Business Capital Asset (Cl.314(39))

Business Trading (Cl.314(42))

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CLAUSE 314 (42) Business trading asset means stock in trade, consumable store or raw materials held for the purposes of business.

CLAUSE 314 (39) Business capital asset means (a)Any capital asset self generated in the course of business

(b)Any intangible capital asset in the nature of (i) Goodwill of a business(ii) A trade mark or brand name associated with the business(iii) A right to manufacture or produce any article or thing(iv) Right to carry on any business(v) Tenancy right in respect of premises occupied by the assessee

and used by him for the purposes of his business or(vi) License, right or permit (by whatever name called) acquired in

connection with or in the course of, any business

(c)Any tangible capital asset in the nature of a building, machinery, plant or furniture or(d)Any other capital asset not being land connected with or used for the purposes of any business of the assessee.

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CLAUSE 314 (141) Investment asset means

(a) Any capital asset which is not a business capital asset

(b) Any security held by a FII

(c) Any undertaking or division of a business.

Deprecation allowable on adjusted value of the block of assets( Ss 38, 44, 45)

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W.D.V of the block at the beginning of F.Y XXX

Add: Actual cost of any asset falling within the block, acquired during the F.Y.

XXX(A)XXX

Less: Money receivable in respect of any asset falling within the block, which is sold, discarded, destroyed or destructed during the F.Y.

XXX

Scrap value, if any XXX

Deemed W.D.V of assets transferred by way of gift, etc XXX (B)XXX

Adjusted Value A-B=( C) XXX

Less: Deprecation @ the rate prescribed for the block in Fifteenth schedule W.D.V at the end of the F.Y.

D XXX

W.D.V at the end of the F.Y. C-D=( E ) XXX

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Depreciation shall be allowed, even if, all the assets in the block are transferred, demolished, destroyed or discarded, if the adjusted value of the block of assets is greater than zero [ Clause 38 (2) ].

Depreciation on asset acquired during the F.Y, and used for the purposes of the business for less than 180 days, shall be allowed @ fifty percent of the normal rate prescribed in the fifteenth schedule [Clause 38 (3)]

No depreciation allowable, if the asset does not form part of any block of assets specified in the Fifteenth Schedule or the expenditure on the asset has been allowed as deduction under any other provision of the code [Clause 38(4)].

CLAUSE 42(1) Where in the above table© is negative, that is, if there is surplus, the same shall be taxable as business income.

CLAUSE 42(3) Where the amount receivable in respect of business capital asset which is transferred, discarded, destroyed or destructed is more than its cost, the surplus is taxable as business income.

In both the above situations, under the I.T. Act 1961, the surplus is taxable as capital gain

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CLAUSE 43 In case of business reorganisation, depreciation is allowed to

the predecessor and the successor in the ratio of no. of days upto the date

of succession and the no. of days in the F.Y. after the date of succession.

Depreciation is computed in the manner as if no reorganisation has taken

place.

CLAUSE 44 Actual cost is determined as under

The actual cost of a business capital asset to the person shall be computed

in accordance with the formula-

A-[B+(C*A/D)]

A = cost of business capital asset to the person including the interest

paid on the capital borrowed for acquiring the asset if such interest is

relatable to the period before the asset is put to use;

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B = the amount of additional duty leviable U/S 3 of the Customs Tariff Act,

1975 or the amount of duty of excise, in respect of which a claim of credit

has been made and allowed under the Central Excise Rule, 1944;

C = the amount of subsidy, grant or reimbursement(by whatever name called)

received by the assessee, directly or indirectly, from the Central Gov., a

State Gov., any authority established under any law for the time being in

force or by any person in respect of, or with reference to, any assets

including the relevant asset;

D = cost of all assets in respect of or with reference to which the amount ‘C’ is

so received.

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Anti avoidance provisions are proposed to be introduced in Clause 44 on lines similar to the explanations to S.43(1) in the I.T. Act 1961 to restrict depreciation in case assets are transferred at higher value to enable the transferee to claim depreciation on higher value and in cases of sale and lease back.

Actual cost of the business assets acquired by way of gift, inheritance, etc shall be the W.D.V. in the hands of the previous owner.

Where deduction is allowed in the form of investment based incentives under the Eleventh, Twelfth or Thirteenth Schedules actual cost of such assets shall be taken at ‘NIL’ for the purposes of depreciation.

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Initial Depreciation allowable, if the following Conditions are fulfilled:

(a) The person is engaged in the business of manufacture or production of any article or thing

(b) The asset is new plant & machinery not used in India or outside by any person.

(c ) The asset is not installed in any office premises or residential accommodation or guest house and the asset is not an office appliance.

(d) The whole of the cost of the asset is not allowed as deduction.

Initial depreciation is allowable @ 20% of the actual cost of the asset in the F.Y. in which it is used for the first time for the business.

The deduction shall be restricted to 50% , if the asset is used for less than 180 days for the purposes of the business.

INITIAL DEPRECIATION

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Terminal allowance in respect of a block of assets is allowable, if the block of assets has ceased to exist on being transferred, demolished. Discarded or destroyed and the rate of depreciation specified in the Fifteenth Schedule is zero.

A+B-CWhere

A = the written down value of the book of asset at the beginning of the

financial year.

B = the actual cost of any asset falling within that block, acquired during

the financial year; and

C = the amount accrued or received in respect of the assets which are

demolished, destroyed, discarded or transferred during the financial year

together with the value of the carcass or the scrap, if any.

TERMINAL ALLOWANCE

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REIMBURSEMENTS OF EXPENSES

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As per Clause (xxi) of subsection (2) of Section 32, any amount received as reimbursement of expenditure to be treated as Gross Earnings while calculating Income from Business

Reimbursement of expenses to be considered while calculating the gross earnings for applicability of tax audit as per clause 88

Tax to be deducted at source on the payment towards reimbursement of expenses

The onus to prove that the expenditure has been incurred falls on the assessee

REIMBURSEMENT OF EXPENSES

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EEE

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All long term retiral savings schemes moved to EEE regime as against Exempt-Exempt-Tax proposed earlier.

The “EEE” method of taxation to be followed for Government Public Fund (GPF), Public Provident Fund (PPF), Recognized Provident Fund (RPF), Pension scheme administered by Pension Fund Regulatory and Development Authority, Approved pure life insurance products, Annuity Schemes

Investments made before commencements of DTC in investments currently enjoying the EEE method of taxation would continue to be so eligible for the full duration of the instrument

Receipt under a life insurance policy on death/ maturity exempt from tax

Receipt of surrender value from life insurance policy and distributions from equity linked insurance policies exempt subject to prescribed conditions

EXEMPT EXEMPT EXEMPT REGIME

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Deduction in respect of investment in approved funds such as provident funds, superannuation fund or Pension fund reduced to ` 1 lakh from ` 3 lakhs

Any withdrawal there from now not taxable which exemption was earlier confined only to accumulated balance as on 31st March, 2011.

An aggregate deduction stipulated to ` 50,000 towards life insurance, 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 profits organizations proposed

An individual not receiving house rent allowance allowed deduction towards payment of rent up to maximum of ` 2,000 per month, subject to prescribed conditions

The deduction for interest paid on loans for higher education for a period of eight years to be restored

DEDUCTIONS

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CONTROLLED FOREIGN COMPANY(CFC)

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A CFC regime is an anti-avoidance measure aimed to provide for taxation of passive income earned by a foreign company that is directly or indirectly controlled by a resident in India

This income is not distributed to its shareholders resulting in deferral of taxes. Under proposal of CFC regime, this income is deemed to have been distributed and therefore, taxed in the hands of the resident shareholders as dividend received from foreign company

CFC is a foreign company- Which is resident of a country/ territory where the tax payable on profits

is less than half of the corresponding Indian tax.- Which is individually or collectively controlled by persons resident

outside India- Which is not engaged in active trade/ business

A foreign company is not CFC if- It is listed on a recognized stock exchange of the foreign jurisdiction- Its specified income exceeds ` 2.5 lakhs

CFC PROVISIONS

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CFC regime applies to a resident that fulfills individually or collectively any of the following criteria in a direct or indirect manner:

- Any specific or distinct location of either of the enterprises as may be prescribed

- Holds at least 50% of the voting power or capital of CFC- Has the power to secure application of 50% of income or assets of the

CFC for its benefits- Has the ability to exercise dominant influence on the CFC due to a

special contractual relationship- Exerts decisive influence on the shareholder meeting

CFC PROVISIONS

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GENERAL ANTI AVOIDANCE RULES(GAAR)

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The DTC contains GAAR provisions which provides sweeping powers to the tax authorities. The same are 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 DTC• It lacks commercial substance• It is carried out in a manner not normally employed for bonafide

business purposes

Definition of tax benefit includes reduction in tax bases including increase in revenue loss to government. This coupled with exhaustive source rules strengthens GAAR.

GAAR

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GAAR to override tax treaty provisions

Redressal in the form of DRP available to the tax payer where GAAR provisions are invoked

GAAR

Insertion of these provisions is in line with international trade. However, disregarding the provisions of a tax treaty together with the overriding effect to the code may adversely impact international trade and bona fide tax planning if safeguards (that are yet to be prescribed) prove inadequate to curtail arbitrary invocation of GAAR.

Permissible limits of bonafide tax planning will be tested as burden of proving the genuineness of the arrangement rests with the assessee.

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