Direct Taxes Code, 2010

The Direct Taxes Code,2010 (‘the Bill’), has been laid before the Parliament for discussion. The Bill would now need to be approved by both the Houses of the Parliament of India and the President of India before it becomes law. Some of the salient features of the Bill have been discussed below.
The DTC aims to replace the Act and the Wealth-tax Act, 1957. Several proposals of the DTC are path-breaking and aim to bring changes to the ways we have traditionally understood tax issues in India.

General provisions

  • The DTC 2010 would come into force on 1 April 2012, if enacted.
  • The concept of previous year has been replaced with a new concept of financial year which inter alia means a period of 12 months commencing from the 1st day of April.
  • Income has been proposed to be classified into two broad groups:
    • Income from Ordinary Sources refers to:
    – Income from employment
    – Income from house property
    – Income from business
    – Capital Gains
    – Income from Residuary Sources
    • Income from Special Sources to include specified income of nonresidents, winning from lotteries, horse races, etc. However, if such income is attributable to the PE of the non-resident it would not be considered as Special Source income. Accordingly, such income would be liable to tax on net income basis

Tax rates for domestic companies

Category Existing rate* As per draft DTC**
Income-tax 30 percent 30 percent
MAT Levied at 18 percent of
the adjusted book
profits in case of
companies where
income-tax payable on
taxable income
according to the normal
provisions of the Act is
lower than the tax @
18 percent on
book profits
Levied at 20 percent of
the adjusted book
profits in case of
companies where
income tax payable on
taxable income
according to normal
provisions of the DTC is
lower than the tax @
20 percent on book
DDT 15 percent 15 percent
Income distributed by
mutual fund to unit
holders of equityoriented
Not applicable 5 percent of income
Income distributed by
life insurance
companies to
policy holders of equityoriented
life insurance
Not applicable 5 percent of income

* Exclusive of surcharge and education cess
** There is no surcharge and education cess under DTC

  • MAT credit is allowed to be carried forward for 15 years
  • In the case of a Company, its liability to pay income-tax is to be the higher of thetwo:
    – The amount of income-tax liability computed at normal rates of tax on its Total Income.
    – The amount of income-tax liability calculated at the specified rates on ‘Book profits’.

Provision pertaining to non-residents

Category Existing rate As per DTC
Foreign company 40 percent • 30 percent
• Additional branch profits tax of 15 percent (on post tax income)
  • A foreign company is considered to be a resident in India if its ‘place of effective management’ is situated in India.
    Place of effective management of the company means –
    – the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or
    – In a 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.

Any other person is considered to be a resident in India if its place of control and management at any time in the year is situated wholly or partly in India 1 April 2000.
The provisions of the DTC or the relevant tax treaty, whichever are more beneficial shall apply except where provisions relating to (a) General Anti-Avoidance Rules (GAAR), (b) levy of Branch Profits Tax, or (c) Controlled Foreign Companies (CFC) shall apply in preference to the beneficial provisions of the relevant tax treaty.

  • Income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from the transfer, of a capital asset situated in India.
  • Income from transfer of share or interest in a foreign company by a non resident outside India will not be deemed to accrue in India if the fair market value of the assets in India owned (directly or indirectly) by that company is greater than or equal to 50 percent of the fair market value of the total assets owned by that company.

Further, it is provided that proportionate gains would be taxable in India where any income is deemed to accrue to a non-resident by way of transfer of share or interest in a foreign company

  • PE defined in the same way as in treaties and includes the concept of one day Service PE, (substantial) equipment PE and insurance agent PE
  • In relation to availability of Foreign Tax Credit, it has been clarified that:
    – Foreign Tax Credit to be available to a person resident in India; and
    – Foreign Tax Credit to be restricted to the amount of Indian income tax payable on (a) income taxed outside India and (b) total income of the assessee.

The Central Government may prescribe methods for computing the foreign tax credit, the manner of claiming credit and such other particulars as are necessary for providing the relief or avoidance of double taxation.

  • Income of FIIs from transfer of any security will be taxable as capital gains.
  • For non-residents, head office expenditure shall be restricted to one-half percent of the total sales, turnover or gross receipts.

Controlled foreign companies

  • The total income of a Resident taxpayer to include income attributable to a CFC which means a foreign company:
    – that is a resident of a territory with lower rate of taxation (i.e. where taxes paid are less than 50 percent of taxes payable on such profits as computed under the DTC)
    – whose shares are not listed on any stock exchange recognised by such Territory
    – individually or collectively controlled by persons resident in India (through capital, voting power, income, assets, dominant influence, decisive influence, etc.)
    – that is not engaged in active trade or business (i.e. it is not engaged in commercial, industrial, financial undertakings through employees/personnel or less than 50 percent or more of its income is of the nature of dividend, interest, income from house property, capital gains, royalty, sale of goods/services to related parties, income from management, holding or investment in securities/shareholdings, any other income under the head income from residuary sources, etc.)
    – has specified income exceeding INR 2.5 million.
  • The income attributable will be computed based on the net profit as per the profit and loss account of CFC for the accounting period.
  • The accounting period will be the period ending on 31 March or the period it regularly follows for complying with the tax laws of the Territory for reporting to its shareholders.
  • The resident taxpayer will have to furnish details of investments and interest in entities outside India in the prescribed form and manner.
  • The amount received from a CFC as dividend in a subsequent year will be reduced from the total income to the extent it has been taxed as CFC income in any preceding previous year.
  • CFC provisions applicable to taxpayers notwithstanding the provisions of the DTAA that may be more beneficial.

General anti-avoidance rules

  • The DTC contains GAAR provisions which provide sweeping powers to the tax authorities. The same are 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
  • An arrangement would be presumed to be for obtaining tax benefit unless the tax payer demonstrates that obtaining tax benefit was not the main objective of the arrangement.
  • IT to determine the tax consequences on invoking GAAR by reallocating the income etc or is regarding/recharacterising the whole or part of the arrangement.
  • GAAR provisions to be applicable as per the guidelines to be framed by the Central Government.
  • GAAR to override Tax Treaty provisions.

Capital gains

  • Definition of capital assets have been modified and replaced with the term investment asset. Investment asset does not include business assets like self generated assets, right to manufacture and other capital asset connected with the business. Further, Investment Asset is defined to include any securities held by FII and any undertaking or division of a business.

Personal taxation

  • New beneficial tax slabs are proposed to be introduced which will reduce the tax burden for individuals. Peak rate of 30 percent applicable on income exceeding INR 1 million.
  • The category of ‘Not Ordinarily Resident’ abolished and only two categories of taxpayers proposed viz. residents and nonresidents.
  • The additional condition of stay in India of 729 days during the 7 preceding financial years is retained only to ascertain taxability of overseas income earned during a financial year.
  • A citizen of India or person of Indian origin living outside India and visiting India will trigger residency by staying in India for more than 59 days in a financial year proposed earlier.

Wealth tax

  • Every person, other than a NPO, would be liable to pay wealthtax at the rate of 1 percent on net wealth exceeding INR 10 million.
  • The specified assets for computing ‘net wealth’ have been retained in line with existing taxable assets, with additional items as under:
    – Archaeological collections, drawings, paintings, sculptures or any other work of art
    – Watches 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.
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