Navigating India’s new Direct Tax Code

Saturday, July 16, 2011 | Posted by: Grant Thornton
Categories: India, India Watch Issue 13 | Tags: India, India Watch, UK, South Asia Group, Grant Thornton India, South Asia, legislation, wealth, companies, Direct Tax Code, Wealth Tax Act 1957, ITA, DTC, Tax Act 1961, individual, laws

It is regarded by some commentators as one of the most substantial changes to India’s tax system and will have significant implications for companies operating in and out of India on a cross-border basis. The newly proposed Direct Tax Code (DTC) is to replace the existing Income Tax Act, 1961 (ITA) with effect from April 1, 2012. The DTC is being introduced to integrate all direct tax laws (ITA and Wealth Tax Act, 1957) under a single legislation, to simplify the language, to reduce the scope of litigation and to provide stability in direct tax rates. Below we highlight some of the proposed changes.

Impact on individual tax payers

The DTC proposes to widen the income tax slab rates applicable to individual tax payers. Further it is also proposed to abolish Education and Secondary & Higher Education Cess on income tax. This would result in lower tax for the individual tax payer.

Slab rates under the ITA (applicable for tax year 2011-12)

Slab rates under DTC

For example, an individual (who is not yet 65 years old) having a total income of INR 1,000,000 shall be liable to pay income tax amounting to INR 130,000 under the DTC as against a total tax liability of INR 156,560 (INR 152,000 + INR 4,560 education cess) under the Act. Thus, a saving of maximum up to INR 26,560 under the DTC.

Impact on corporate tax payers

DTC proposes major changes in the way the corporate tax payers are subject to tax in India. The provisions relating to determination of residential status of a company in India are proposed to be changed to include a company, whose ‘place of effective management’ is in India, as resident in India for DTC purposes.

Further, DTC proposes to incorporate provisions whereby income from transfer (outside India) of any share or interest in a foreign company shall be subject to tax in India, if the Fair Market Value (FMV) of assets in India represents 50% of FMV of total assets owned by such foreign company. This has been introduced to remove any ambiguity on the legislative powers to tax the transactions such as Vodafone – Hutch.

Corporate income tax is proposed at the rate of 30% (surcharge, education cess and secondary & higher education cess is proposed to be abolished).

For example, a company incorporated in India having a total income of INR 20,000,000 shall be liable to pay income tax amounting to INR 6,000,000 under the DTC as against a total tax liability of INR 6,489,000 (INR 6,000,000 + INR 300,000 surcharge + INR 189,000 education cess) under the ITA. Thus, a saving of INR 489,000 under the DTC.

However, in addition to the corporate income tax rate, every foreign company, having presence in India, shall be liable to pay branch profit tax at the rate of 15% on profits attributable to activities carried out in India.

DTC proposes to substitute profit-linked incentives with investment-based incentives wherein capital expenditure incurred for specified businesses will be allowed as a deductible expenditure. However, certain profit linked tax incentives under the ITA are grandfathered in the DTC. This means certain profit-linked deductions available under the ITA will be protected for unexpired period under the DTC.

In line with the tax provisions prevailing in the several other jurisdictions, DTC proposes to introduce the concept of Controlled Foreign Companies (CFC) in India, whereby, subject to certain conditions, the income of a foreign corporation controlled by Indian residents shall be subject to tax in India (irrespective of whether distributed or not).

DTC proposes to grant immense powers to tax authorities under General Anti Avoidance Rules (GAAR) provisions whereby they can disregard any transaction meant for tax avoidance to determine the exact purpose of the transaction.

DTC provides that the provisions of Double Taxation Avoidance Agreement shall not apply in the following cases:

Deepak Joshi
Partner
Tax and Regulatory Services
Grant Thornton India
T +91 11 4278 7021
M +91 98 9911 9115
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Amit Arora
Associate Director
Tax and Regulatory Services
Grant Thornton India
T +91 11 4278 7076
M +91 98 1057 9183
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Other articles in this issue of India Watch include:

Grant Thornton India Watch Index outperforms all major London indices for the first half of 2011

Sustained momentum in India M&A deal activity

India’s United Progressive Alliance must act decisively for effective change

Indian listings in London: AIMing for the long term