The DTC dilemma
Member firm of Ernst & Young Global
The third version of the Direct Taxes Code (DTC) to replace the five-decade-old Income-tax (I-T) Act, 1961, was placed for public debate recently as part of the government’s tax reform for revision, consolidation and simplification of the direct tax structure into a single legislation. The initial euphoria surrounding the introduction of the DTC appears to have dwindled considering the lack of political willingness to endorse it and the fact that the Lok Sabha has already been adjourned. The intent in making the DTC draft available for public comments at this stage appears to send out a message that the present government has completed the necessary work on DTC 2010.
The DTC is currently a draft version that can be implemented only after it is presented before Parliament. Some of the roadblocks envisaged in the enactment of the DTC in the near-term are the uncertain political scenario in India due to the ongoing general elections, willingness on part of the new government to take immediate measures for introducing the new code and so on.
The economic scenario prevalent at the time of conceptualising the original DTC in 2009 has undergone a rapid change. The original code was proposed during the period when the economy was healthier and direct tax collections were growing. However, in the last two years, the economy has witnessed a downturn, growth rates have declined and, thus, the government may not be willing to provide certain reliefs. For instance, recommendation of the standing committee to revise the tax slabs for personal income-tax and removal of cess were discarded citing huge revenue loss to the government.
Many of the proposals that were planned to be enacted through the DTC have already been introduced in the existing tax law; for instance, introduction of GAAR, taxation of indirect transfer of assets, widening the source rule for taxation of royalty and fees for technical services, etc. One doesn’t foresee any reason why other novel provisions proposed by the DTC cannot be incorporated under the existing Act.
Some of the provisions of the DTC seem to be misaligned with the economic developments and policy changes in the country. The proposal resulting in levy of Branch Profit Tax at 15% to foreign companies (over normal reduced tax rate of 30%) would make the effective tax rate 40.5%, which is almost at par with the existing rate under the I-T Act. This levy is not linked to the repatriation of profits by such foreign companies, making such companies indifferent towards ploughing back the profits into the country vis-à-vis repatriating the same to their home country. This is an unwelcome move hampering FDI into the country. Further, in the note released by the CBDT along with the draft of the DTC, it has been stated that CSR expenditure cannot be considered as an admissible expense as it is an application of income and allowing CSR as a deduction “would imply that the government would be contributing one-third of this expenditure as revenue foregone”. So, while mandating the incurrence of the said expenditure under the New Companies Act, it is proposed to disallow the same in tax. Moreover, the proposed levy of additional tax at the rate of 10% on dividends, where the aggregate dividend received exceeds R1 crore, despite of dividends having already suffered Dividend Distribution Tax at the rate of 15% is likely to result in cascading effect of taxation in multi-tier companies and in effect re-introduction of double taxation of dividend income. The provisions of taxability of income of controlled foreign companies are likely to impact foreign companies in a large manner, although the provisions have been diluted in DTC 2013 vis-à-vis the provisions of DTC 2010. Further, the Place of Effective Management (PoEM) rules are proposed to bring into the ambit of taxation of global income as also dividend distribution of foreign companies alleged to have PoEM in India. Moreover, taxing long-term capital gains at the rate of 30%, lapsing of losses and depreciation allowance in case of late filing of return of income and so on are not welcome measures.
The government should give serious thought as to whether a new DTC is required at all. It should consider allowing deduction for CSR spend to give a boost to the corporate sector. Exempting small shareholders holding less than 5% shares from indirect transfer is a welcome move; however, there is a need for exempting transfers arising in case of overseas restructuring transactions.
Views are personal.