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Direct Taxes Code 2010 - Analysis
KPMG IN INDIA
TAX
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?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
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11
12
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24
29-31
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33
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.
DTC 2010 OUR COMMENTS
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.
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
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.
DTC 2010 OUR COMMENTS
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
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
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.
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
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.
DTC 2010 OUR COMMENTS
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.
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
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).
DTC 2010 OUR COMMENTS
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
DTC 2010 OUR COMMENTS
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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.
DTC 2010 OUR COMMENTS
?
?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.
DTC 2010 OUR COMMENTS
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
DTC 2010 OUR COMMENTS
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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.
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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.
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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.
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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.
DTC 2010 OUR COMMENTS
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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
DTC 2010 OUR COMMENTS
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Income from house property
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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.
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.
DTC 2010 OUR COMMENTS
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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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.
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.
DTC 2010 OUR COMMENTS
Mutual Funds
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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.
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.
DTC 2010 OUR COMMENTS
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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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.
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.
DTC 2010 OUR COMMENTS
Wealth 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.
?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
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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.
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.
KPMG in India KPMG Contacts
KolkataInfinity Benchmark, Plot No. G-1
10th Floor, Block EP & GP, Sector V
Salt Lake City, Kolkata 700 091
Tel: +91 33 44034000
Fax: +91 33 44034199
Mumbai
Lodha Excelus, Apollo Mills
N. M. Joshi Marg
Mahalaxmi, Mumbai 400 011
Tel: +91 22 3989 6000
Fax: +91 22 3983 6000
Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 3058 5764/65
Fax: +91 20 3058 5775
BangaloreMaruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala, Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999
Chandigarh
SCO 22-23 (Ist Floor)
Sector 8C, Madhya Mar