Since the previous DTC had become outdated over the years, the tax officials of India decided to make changes in the Direct Tax Code to address the economic needs of the country while keeping in line with the global best practices.
What is Direct Tax Code?
Direct Tax Code was intended to revise the Income Tax Act of 1961. DTC aims to consolidate the direct tax legislations into one manuscript and enable voluntary tax compliance on part of taxpayers.
The first DTC bill was introduced in the parliament in 2010, the present finance minister, Arun Jaitley presented a revision to the bill, DTC 2013 in his post-election Budget in 2014.
The provisions of the Bill are:
General Anti Avoidance Rule:
GAAR aims to prevent foreign companies from escaping taxation in India. Companies make use of creative accounting manoeuvres to avoid taxation. Most often they transfer wealth and profits earned in India to the low tax regime countries which cost the government. GAAR allows the tax authorities to question suspect overseas fund transfers and if needed they can amend the company’s taxable income accordingly.
Minimum Alternate Tax:
For gains made by foreign investors by investing in India is to be taxed at a minimum rate of 18.5%.
This provision of tax provides for incremental taxation of super-rich individuals, HUFs and corporations to bring in circulation excess wealth that has been lying unused by them. DTC 2013 altered the provisions by increasing the threshold to Rs.50 crore from Rs.30 crore and decreasing the tax rate to 0.25% from 1%. It has also widened the base of assets for the wealth tax to be charged.
Identifying Tax Residence:
A new approach to assessing ‘residence’ of India for purpose of taxation of foreign operations. Place of Effective Management has been introduced to prevent exploitation. If the Company’s effective management and control was situated in India at any time during the year instead of throughout the year then its global income will be eligible for taxation in India.
Changes made in Direct Tax Proposals of Union Budget 2015-16
The following changes have been implemented in the Direct Tax code for the year 2015-16:
- There will be no change in the basic exemption limit and tax rates of individuals.
- Starting from the next financial year, the corporate tax rate is proposed to be reduced to 25%.
- Royalty and fees for technical services in case of non-residents to be reduced to 10%.
- 2% additional surcharge to be levied on income exceeding Rs.1 crore. This surcharge will be replacing the wealth tax. The wealth tax is to be abolished.
Deductions from the gross total income:
- EEE or Exempt-Exempt-Exempt tax benefit is proposed for assessee having a girl child and for investing in Sukanya Samriddhi Account Scheme. The investment made will be eligible for deduction under Section 80C of the IT Act. The interest earned and the withdrawals made will be exempt from tax in accordance to the rued of the scheme.
- Section 80D is proposed to raise the limit of deduction to Rs.25,000 keeping in mind the rise in cost of medical expenses. Senior citizens will get deduction up to Rs.30,000.
- For the amount paid towards medical treatment of very senior citizen, the deduction available is increased to Rs.80,000 under Section 80DDB.
- The limit to increase to Rs.75,000 for Section 80DD and the limit for Section 80U to increase to Rs.1.25 lakh.
- To promote social security, the deduction for Section 80CCC(1) to increase to Rs.1.5 lakh within the overall limit provided in 80CCE. The section provides deduction to amount paid for the annuity plan of LIC or any other insurer for receiving pension.
- Amendment for Section 80G to provide 100% deduction for donations made to National Fund for Control of Drug Abuse.
- Section 80G is proposed to be amended to provide 100% deduction for the donations made to Swachh Bharat Kosh and to Clean Ganga Fund. This is to encourage the people’s participation to improve sanitation facility and rejuvenation of the river Ganga.
Black money curbing measures:
- Section 269SS is proposed to be amended to provide that no person will accept any loan or any type of advance from any person about the transfer of immovable property. This is being done to curb the generation of black money and to curb the dealing in cash in immovable property transactions. The transaction has to be done through issuing cheques, bank draft, or by electronic clearing system if the amount of loan is Rs.20,000 or more.
- Section 269T is being amended to provide that no person is to repay any loan in cash, it has to be done through cheque, bank drafts or by electronic clearing system if the repayment amount is Rs.20,000 or more.
General Anti Avoidance Rule:
- The GAAR is proposed to be deferred by two years and it will be applicable for the financial year 2017-18.
Investment allowance and provisions in respect of additional depreciation:
- Section 32AD will be inserted to provide additional investment allowance of an amount equal to 15% of the cost of the new asset.
- A higher additional depreciation at the rate of 35% to be allowed for the State of Andhra Pradesh and State of Telangana in respect of the actual cost of the new machinery acquired and installed by a manufacturing enterprise set up in the backward areas on or before 1st April, 2015.
- Additional depreciation under Section 32(1)(iia) on plant and machinery used for less than 180 days and for that used for 180 days or more, it is proposed to provide that the balance i.e. 50% of the additional depreciation on the new plant acquired and used for less than 180 days will be allowed in the immediate succeeding years.
Charitable purpose definition:
- Activity if Yoga is a special category of activity that is proposed as charitable purpose on lines of education under Section 2(15).
- The advancement will not be considered charitable purpose, if it involves carrying out activity that is in the nature of trade, commerce or business or any activity that render service to trade, commerce or business. The advancement must be for activity that is actually carrying out activity of genera public utility. The aggregate receipt must not exceed 20% of the total receipts of the trust undertaking such activity.
- Section 49 is being proposed to be amended to provide the acquisition cost of an asset shall be the cost for which the demerged company acquired the asset as increased by the cost of the improvement incurred by the demerged company.
Direct Taxes Code:
- Since a large number of the provisions of the proposed DTC is included in the IT Act, 1961 and the rest are proposed to be included through the Finance Bill, 2015, the government will not be going ahead with the DTC.
Direct Tax Amendments – International Taxation Provisions
The International Taxation Provisions are as follows:
Place of Effective Management of Foreign Companies in India:
Amendment has been made to Section 6(3) of the word. The words ‘wholly’ has been replaced in the Act. A company will be treated as an Indian Company for Income Tax purposes if its worldwide income is liable to be taxed in India and if it is incorporated in India or if it has a place of effective management in India.
Place of effective management is a place where the key management and commercial decisions necessary for the conduct of the business of an entity as a whole are, in substance made.
The word ‘wholly’ has been diluted and now the company will be liable for taxation in India if the key decisions are taken from India. This makes the foreign companies cautious before taking any decision to avoid double taxation in India and in the country that is situated in.
Term ‘Substantially’ has been defined in Section 9:
The key aspect of the definition of the term ‘substantially’ in the Section 9 for treating shares or interest in a foreign company situated in India are as follows:
- The share value must not exceed Rs.100 million and the assets must represent at least 50% of the value of all assets or the fair market value of such assets owned by foreign company.
- The fair market value of the Indian and global assets will be prescribed by the rule.
- The entire gain will not be taxed in India. The taxes will be to the extent of the Indian assets that contribute to the value of the shares.
- De minimis exemption to be given to small shareholders who do not have control or management of the foreign company and if their voting power does not exceed 5% of the total voting power.
- The deduction is the same in the case of indirect holding of asset in India.
- Indirect transfer provisions will not apply in case of group reorganisations such as amalgamation or demerger among foreign companies.
- 2% value of transaction or Rs.5 lakh will be imposed as penalty if the Indian company through which foreign shares and interest derive their value has a change in shareholding pattern.
- These changes will come into effect for the financial year 2015-16.
Reduced WHT for Royalty and FTS:
To encourage transfer of technology from foreign companies, the government has reduced WHT rate of royalty and FTS on payments to non-residents to a 10%. This will bring back free flow of transfer of technology.
PEs are liable to WHT and consequent deductions for interest payments made to Head office:
PEs are treated as extension of foreign entities. Indian PEs of Foreign banks will be treated as separate entities and payments made to the head office or to other PEs of the group will be liable to WHT. The PEs are liable to tax on their income in India as per DTAA and the Act albeit giving interest payment deductions.
Offshore funds’ fund managers investing in India will not be considered as business connection:
The fund managers of the offshore funds will not be considered as business connection, neither will the offshore fund be treated as an Indian Fund. Section 9A has been introduced in the Act to state that the fund managers will not be treated as business connection and the income earned by them will not be liable for tax in India. The OSF reporting requirement is within 90 days from the end of the financial year, every year. Failure to do so will attract a Rs.5 lakh penalty.
The OSF has to fulfil the following conditions:
- The OSF is not an Indian Resident and is located in a jurisdiction that has comprehensive or limited DTAA with India.
- Not more than 5% of the Indian Residents are participating in the OSF.
- It must have at least 25 unrelated members.
- The member along with other members must not have controlling interest exceeding 10%.
- Participation interest must not be more than 50% upon 10 or less members of the fund.
- Fund is not to invest more than 20% of its corpus in an entity.
- The fund must have a monthly average of Rs.10 million at its time of creation.
- The fund is not to carry any business in India.
- The fund must not have a business connection other than the fund manager acting on its behalf.
- The fund manager’s remuneration should be at arm’s length.
The fund manager has to fulfil the following requirements:
- The fund manager must not be an employee of the fund.
- The fund manager must be registered with concerned regulators or must be a registered investment advisor.
- He must not be entitled to more than 20% of the profits of the offshore funds as remuneration along with his connected persons.
Changes in relation to investment by venture capital funds:
Venture capital funds investment could be made not only into venture capital undertaking but also trusts, LLPs, etc.
- Alternative Investment Funds beneficial tax treatment is being offered.
- REITs sponsors will also get beneficial tax treatment.
- FIIs to get relief from minimum alternate tax on exempt capital gains.
- Foreign tax credit rule to be introduced.
- Lower WHT in interest income to FIIs and QFIs.
- GAAR is being deferred by 2 years.
Amendments on corporate taxation and mergers and acquisitions:
The changes are as follows:
- The base corporate income tax is reduced to 25%
- 100% depreciation for assets that has been put to use for less than 180 days for the manufacturing and power sectors.
- Domestic transfer pricing has been increased to Rs.200 million
- Companies that are the members of association of persons will be exempt from MAT.
- Investors in States of AP and Telangana will get special corporate tax deduction.
- Tax neutrality on the merger if Mutual Fund schemes.
Amendments on personal Income Taxation:
The changes are as follows:
- No change in the basic exemption limit for individuals.
- Wealth tax to be abolished.