direct tax code india _ jena
TRANSCRIPT
DIRECT TAX CODE
BACKGROUND 2
Income Tax Act 1961 has undergone several intractable amendments
Dividend Distribution Tax inserted in 1997
Fringe Benefit Tax inserted in 2006
Wealth Tax administered by Wealth Tax Act, 1957
Intractable conflicting rulings by different courts
Incomprehensible to the average tax payers
Complex tax law increases the cost of compliance of marginal tax payers and administration as well
BACKGROUND 3
Marginal tax rates lowered, range of exemptions
broadened
Tax base increased, further push required for
horizontal equity
STRATEGY 4
Efficient, Equitable and Effective
Avoidance by competents- subsidizing rich– inequitable
Minimize exemptions
Remove ambiguity in law to minimize tax avoidance
Keep pace with aggressive tax planning & court ruling on interpretation of ambiguous provisions
Technology & process reengineering to reduce cost
Tax policy to encourage self assessment and penalize evasion
Hence new DTC is aligned with above strategies
SALIENT FEATUREs 5
All direct taxes under one code
Language simple in active voice and short
Provisio and explanations removed, while essence
nested
Extensive use of formulae and tables
Executive is delegated to end protracted litigations
Essential principles kept in statute, matters requiring
frequent changes kept in rules/ schedules- will
reduce frequent amendments
Law is logically reproduced in FORMs
SALIENT FEATUREs 6
Consolidation and reorganization of different
provisions/ sections such as incentives, tax rates etc
Elimination of regulatory functions
Rate of Tax in Schedule, no more an annual
legislation through Finance Bill
BASE for TAXATION 7
Income= Consumption + Change in net worth
Exemption up to a limit under income tax towards indirect tax imposed on consumption
Balance covered under income tax
Income should ideally include
Gifts
Earnings from labour, investment and business
Net accrued capital gains
Value of services & non-business assets net of expenses & depreciation
Imputed value of services by family
Windfall gains
Casual receipts- lottery
EQUITY in TAXATION 8
Income tax on individual income leads to corporatization and avoidance of distribution of profits to shareholders- to take profit out in course of capital gains
To prevent this corporate tax on profit of corporation is required. However, this leads to double taxation, when dividends are taxed again under income tax
This creates bias for debt financing
Owner occupied house left out of taxation
Exemptions on positive externalities like cost of administration, human development, equity
Deferrals to allow liquidity
Agricultural Income comes under State List of Constitution.
RESIDENCE or SOURCE BASED TAX 9
Natural Persons, who establish their residence,
domicile in India irrespective of the source of the
income globally
In case of non natural persons/ corporations, place
of incorporation/ control & management is treated
as residence
Global income of all residents to achieve tax
neutrality in investment decisions (efficiency) &
horizontal & vertical equity
Sourced based tax for non-residents
RESIDENCE or SOURCE BASED TAX 10
Loss for underdeveloped nations on residence criteria
Investors in developed nations
Investment flow through tax havens
Political and economic error in not taxing foreigners earning inside the nation
Issues in pure source based tax
Investors play nations against others to race tax rate to bottom
Determining source in aggressive transfer pricing
RESIDENCE or SOURCE BASED TAX 11
R & OR R but NOR NR
Indian Income:
► Accrued / sourced in India Taxable Taxable Taxable
► Received in India Taxable Taxable Taxable
Foreign Income :
► Accrued outside India but deemed to accrue
in India by virtue of Section 9
Taxable Taxable Taxable
► Accrued outside India - First receipt in India Taxable Taxable Taxable
► Any other income accruing outside India
and received outside India
Taxable Not taxable Not
taxable
Assessee & Residence 12
Precise definition of residency
Financial Year instead of Assessment Year
Precise definition of assessee and persons to include not liable people eligible to refund etc
Accruals/ Receipts
Ordinary Sources
Employment, house property, business
Capital gains
Residuary sources
Special Sources
Lottery, Horse Racing, Sports person, Sports association
COMPUTATION of TOTAL INCOME 13
Ring fencing each head wise total income with carry forward loss of respective head from preceding year
Expenditure not admissible in case of non-resident
Royalty
Fees for technical services
Income (special rates of tax of part II of 1st schedule)
Deduction of special prescribed expenditures incurred in performance of duties
Deduction of retirement benefits
Deduction of insurance & education for kids up to Rs 50K
Deduction of medical reimbursements up to Rs 50K
INCOME from BUSINESS 14
Business profit model-does not provide receipts and deductions
Income-expenses model-adopted in India, USA, Australia, Canada and many Asian nations
Asset classified as business asset or investment asset. Business asset is classified into business capital asset and business trading asset.
Profits on sale of capital assets or undertaking as income from business- not capital gains
Interest from capital of business other than those of financial institutions
Expenditure
Operating
Permitted financial charges
Capital allowances
Presumptive profit of certain business to continue
Separate income determination regime for certain business
CAPITAL GAINs 15
Income from Investment assets
Capital gain not on accrual- strain the finances
Can’t be taxed at par with income tax, as wealth appreciated on several years, while one time receipt will push the assessee to higher tax bracket
All capital gains aggregated with unabsorbed loss
No distinction betn short term & long term investment
Securities Transaction Tax abolished- to be taxed as capital gain
Transfer of capital assets as “gift or will” shall be taxed
Cost of acquisition/improvement indeterminable- treated nil, gain to be taxed fully
CAPITAL GAINs 16
Rollover
Agriculture land
Residence, if only one residence
Deposited in capital gain savings scheme
Agricultural land & personal effects beyond urban
limit exempt
Reduce by inflationary index
TAX INCENTIVE 17
Tax avoidance and rent seeking behavior
Source specific incentive Sec 9 + 6th Schedule
Entity specific incentive Sec 10 + 7th Schedule
Non Profit organizations concessional treatment
Business Tax Incentives
Tax holiday for certain business
Profit linked incentive modified to recover all capital and revenue expenditure- existing schemes grandfathered
Area based exemptions abolished- existing areas grandfathered
Royalty, patent and cooperatives
Social Tax Incentives
EET instead of previous EEE approved by PFRDA
Health insurance, disable dependant, handicapped, education loan, rent
125%, 100% or 50% of donation
Taxation of Companies 18
Taxing profit of Companies-withholding tax that
would be income of shareholders in future
Dividend distribution tax of resident company=15%
MAT-to overcome tax incentives and evasion
Taxpayers’ net wealth
Gross receipts of the enterprise
Visible wealth accrual
Book Profit- Old
Value of the assets used in business- New
.25% for banking companies, 2% for others
No carry forward credit
Taxation of Companies 19
Tax on Corporation
25% both domestic and foreign
15% on branch profit (income- corporate tax)
Unincorporated Bodies 20
Partnership firms, association of persons
Carry forward loss
Deduction as per corporations
Financial intermediary-passthru companies
Not liable to pay tax for liability of investors
Non Profit Organs and Trusts 21
Charitable replaced by permitted welfare activities
Organizations to be registered under the income
tax commissionerate
Surplus generated from PWA & capital gains-15%
On transfer to other constitutions- 30% on net worth
Income of approved religious bodies exempt-
donors not eligible for deduction
Tax on Net Wealth 22
Net Wealth Tax & Transfer Tax
Ability to pay higher tax
Progressive income tax without increasing marginal rate
Capture partly IT evasion in case of black economy
Wealth carries social power & privilege- annuity tax
Valuation at cost/ market price which ever is less
@ .25% on > 50 Cr of individual wealth or combined wealth of private discretion trust
Exempted Assets
Stock in trade
One house or land/ palace as residence
Jewellery of nation in possession of former rulers
Coparcenaries' property
Trust Property in charge of individual
Tax Administration 23
Stability in tax laws, moderate tax rates, fair and non-discreminatory application of law and quality of services in receipt, acknowledgement of return, assessment, refund, petitions and appeal
Strategy
Effective and efficient handling of non-compliance
Quality taxpayers service
Tax literacy and sensitizing taxpayers
Grievance handling
CBDT Chairman
6 members
Tax Administration 24
Income Tax Authorities
Director General/ Chief Commissioner
Commissioner, Addl Commissioner/ Joint Commissioner
Asst Commissioner, Income Tax Officer, Inspector
Transfer Pricing Officer
Tax Recovery Officer
Taxpayer Information System Information in organized and non-intrusive manner
Search, seizure or summon in case of need
Based on PAN
Hierarchy of users allowed access on need to know basis
Confidentiality of taxpayers data-RTI to be amended
Information sharing with other regulatory and enforcement agencies to the extent required for public interest
Procedural Laws & Enforcement Strategy
25
Procedural law applies to all taxes/ tax bases
Return Filing
30th Jun non-business, non-corporate
31st August for rest
Revised return within 21months
Enforcement for Non-Compliance
Late filers, non filers, stop filers
Notice after 21 months
Return scrutiny on parameters given by CBDT through CASS
AO shall have discretion to select few cases on parameters
Return Processing
Within one year notice for any discrepancy
Cannot demand after one year
Scrutiny assessment- 21 months from FY in which return is filed
Best Judgment, order special audit / refer to valuation officer
Valuation officer’s recommendation binding
Procedural Laws & Enforcement Strategy
26
Escaped Assessment
Reasons of reassessment recorded
AG findings
With prior approval of Commissioner
Re-assessment shall not be made, if the assessment is made prejudicial to the assessee based on order of higher court or assessment is made on the specific order of CBDT/ supervising officer
Within seven years- no time limit for reassessment based on appeal / revision orders
Notice explaining reasons
30 days time for filing return in response to notice
Search & Seizure
Mandatory reopening seven preceding years
Background on Transfer Pricing 27
Transfer pricing norms for computation of income in international transactions & SDTs wrt arms length principle-2001
Sec 92 to 92F of IT Act and Rule 10 to 10T of IT Rule – TP regulations
Finance Act 2012
92 BA inserted to include SDT
92CC & CD, 44 GA advance pricing agreement
Documentation
Burden of arms length comparison rests on tax payer
Rule 10D - 13 mandatory documents
Accountant’s report
SPECIFIED DOMESTIC TRANSACTION (SDT)
28
section 40A, Chapter VI-A, section 10AA, & > Rs 5
crore in aggregate during a FY
section 92BA
Payment to a related person referred in Section
40A(2)(b) of the Act, including payment to a director
or any person (ownership of shares carrying =20% of
voting power)
Transactions between the tax-incentivised business and
another business of one taxpayer close connection -
Section 80 IA(8) (10)
Transfer Pricing
29
Audit by Indian Revenue Authorities- aggregate
income adjustments to the tune of Rs 44,000 crore
last year>audits of previous 4 years
Companies are opting for the mutual agreement
procedure (MAP)- characterization of income,
permanent establishment profit attribution and
transfer pricing issues- actions by either of the tax
authorities are contrary to the treaty provisions
MAP: Rules 44G and 44H Income tax Rules, 1962
MoU with US and UK to follow certain procedures
Audit of Transfer Pricing 30
Institution of TPO - Specialist
Specified transactions to be reported to TPO by return date
Selection by TPO on risk parameters set by Board within 2 months of end of FY in which assessee reported
Communication to assessee & AO simultaneously
Report of TPO to assessee & AO within 42 months of FY of transaction
AO to issue assessment order within 3 months
Assessee may agitate the computation before AO & TPO and dept or appeal
Double Taxation Avoidance Agreement(DTAA)
31
Comprehensive DTAAs
Limited DTAAs for shipping and air transport
Conflict of DTC and DTAA- latest document shall prevail
Residence and Source Based taxation four models
Full or part tax in country of residence and country of source waiving tax to that extent
Full right to tax by one country based on source or residence and the other country exempt fully
Full right to tax by both countries, but tax rate of source country is limited, and country of residence gives credit
Full right to tax by both, residence country gives credit
Advance Pricing Agreement 32
Bilateral and Multilateral APA
Anonymous pre-filing consultation- confidentiality of transaction/ party not revealed
Inclusion of experts from industry, economics and statistics in APA team
Site visit to taxpayer’s premises
Withdrawal of application - no refund of fee
TPO carry out compliance audit every year
APA not binding if critical assumptions alter
Retrospective Law for Indirect Transfer 33
Retrospective application-technical defects vitiating substantive law used for aggressive tax planning
Share/interest in a company/ entity-ownership, capital, control, management
Substantially from the assets in India≥50% of value- Para 5 of Art 13 of UN Model
Indirectly-look through-intermediary entities be ignored
Transfer- 100% indirectly
Minority shareholders- ≥26% share transfer
Foreign Company listed abroad, frequently traded
Tax neutrality in business reorganization abroad-75% ownership in amalgamation/ demerger,100% others
FII-underlying assets of non-resident investors not be taxed
Private Equity Investors-waived if no control/ Mgmt, ≤ 26% ownership, or ≤50% assets in India, listed and traded abroad, reconstitution within group
No penalty on retro-effect
Attributable profit- proportionate only if ≥50% of value of assets
Dividend paid by foreign companies- not taxable
Double Taxation-applicable to non-treaty countries and non- double taxation
Non deduction of tax- retrospective cases, liability shall not be on non-deducting assessee
