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The DTC’s Revised Discussion Paper

H JayeshFreddy Daruwala

Indian lawmakers appear to have become very PR savvy with the release of the Revised Discussion Paper (RDP), when compared to the earlier draft of the Direct Taxes Code.

They have sought to highlight the more glamorous aspects, while glossing over the unchanged unpalatable provisions.

This is equally true as regards cross-border tax issues generally. These primarily are Double Tax Avoidance Agreements (DTAA) override, General Anti-Avoidance Rule (GAAR), capital gains tax, taxation of foreign institutional investors (FIIs), residence criterion for body corporates, controlled foreign corporation regulations and minimum alternative tax (Mat).

A DTAA will not necessarily prevail over the DTC but a taxpayer may choose to have the more beneficial provision between the two, applicable to his case. DTAAs override provisions when the GAAR /CFC rules are invoked and when the manner of taxing (Indian) branch profits has been glossed over.

GAAR provisions were attracted under the DTC, where the impugned transaction is different in form than normal, is not at arms length, lacks commercial substance or leads to misuse or abuse of the DTC.

The Central Board of Direct Taxes (CBDT) will frame GAAR rules, set threshold limits on its invocation, and provide for recourse to the Dispute Resolution Panel (DRP) for GAAR aggrieved taxpayers. CFC regulations – a feature of very advanced or developed economies – are to be introduced. These confer the right to tax the undistributed income of an overseas corporate body, controlled from India, if its controlling shareholders are Indian tax residents.

For listed securities, the RDP proposes specified percentage rebates on long-term capital gains before addition to regular income.

All surpluses from securities trading for FIIs will be chargeable only as capital gains without effecting Withholding Taxes (WHT). Currently some FIIs offer such income as business income, and in the absence of a permanent establishment in India, are not liable to pay any tax.

MAT is proposed to be levied on the so-called book profits of a company (as is the current practice) instead of a levy on gross assets as proposed in the DTC earlier. This is indeed a positive for asset intensive businesses including banking. The rate of MAT is however not revealed.

The RDP steers clear of the other major areas of controversy in the earlier DTC draft. These were in the areas of withholdings, capital gains taxation on indirect transfer of a capital asset situated in India, interest source rule, transfer pricing, pass through structure for financial intermediaries, and penalty/prosecution provisions.

The DTC even as amended by the RDP, still continues to be a skeletal structure at best. Delegated legislation like rules, regulations and notifications, which are not subject to parliamentary approval will be used to provide flesh and sinew to it.

H Jayesh and Freddy Daruwala

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