On 15.06.2010, CBDT released Revised Discussion Paper on DTC. It covers 11 points on which comments were received after the release of Draft DTC provisions in August 2009.
Through this article, I just try to explain the points covered by the Revised Discussion Paper in the manner in which it is easy to read and understandable with an eye catching tabular format for comments and responses.
In the first paragraph, the relevant provision of the topic provided in the Draft DTC is mentioned. The following table representing the comments raised and the relevant response by the ministry. I hope, it will explain the paper at a glance and will provide an easy way to understand the changes proposed.
I) MAT– Chapter XIII of Discussion paper on DTC
DTC Provisions
- MAT calculated with reference to the "value of gross assets".
- Value of Gross assets will be Gross Fixed assets, Capital work in progress, book value of all assets reduced by accumulated depreciation on gross block of fixed assets and debit balance of P&L (if included in book value of other assets)
- MAT Rate – Banking Companies – 0.25% and Other Companies – 2%.
- MAT not allowed to carried forward for claiming tax credit in subsequent years.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Hardship on Loss making companies or operating in a cyclical downturn. |
Some issues raised can be addressed by making appropriate changes in the proposed scheme of the asset based MAT. However, there are practical difficulties and unintended consequences, particularly in loss making companies and companies having a long gestation period.
Therefore, it is proposed to compute MAT with reference to Book Profit. |
|
Not suitable for newly set up or having long gestation period since there is no exemption for gestation period.
Cost in the new business will be higher when compared to old business which have depreciated assets base. |
|
|
Companies’ undergoing major expansion, the MAT is much higher than the income Tax liability. |
|
|
For Corporate under liquidation, levy of presumptive tax till the time company is dissolved is not reasonable. |
|
|
Assuming same net income as % of gross assets is not practical as they vary depending upon industry, product or service. |
|
|
CWIP not used in business and does not contribute in revenue generation, distorts asset based tax. |
|
|
Not cover situations where multiple tiers of subsidiaries for handling separate businesses or investments exist. |
|
|
No carry forward of losses means paying more overall tax in a low profit year. |
II) Tax Treatment of Savings (EET v/s EEE) – Chapter XII of Discussion paper on DTC
DTC Provisions
- DTC proposed the Exempt-Exempt-Taxation (EET) method of taxation for savings. Under this method, the contributions towards certain savings are EXEMPT, the accumulation/accretions are EXEMPT till they remain invested and all withdrawals at any time are TAXABLE.
- Deductions for Contributions to saving are exempt up to Rs 3,00,000 (both by employer and employee).
- EET is applicable for investment accounts with Permitted saving intermediaries (approved by PFRDA) viz. Approved Provident Fund, approved superannuation fund, life insurer & new Pension System Trust.
- Withdrawal will be taxable under “Investment from residuary sources” in the year of withdrawal.
- Taxation on EET basis is prospective i.e only contributions and accretions on or after DTC applicability will be subject to EET.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Countries having EET system also have social security system. Without this, it will be harsh. |
Universal social security benefits for tax payers may not be feasible in the near future.
|
|
There should be flexibility in making withdrawals in lump sum without subject to tax i.e EEE must exist for that.
Alternatively, EET should not apply to existing saving instruments. |
Switching to complete EET method of taxation entail many administrative, logistical and technological changes. It requires, network of intermediaries, central record keeping authority, central agency to service accounts and tax withdrawals.
Therefore, EEE is proposed for GPF, PPF, RPF and pension scheme administered by PFRDA, LIP and annuity schemes.
Investments enjoying EEE before DTC will continue the same.
|
III) Taxation of Income from Employment – Retirement Benefits and Perquisites – Chapter VII of Discussion paper on DTC
DTC Provisions
- DTC Retirement Benefit Scheme (RBS) provides deduction for VRS, Gratuity received on retirement or death, pension only if the employee maintains a retirement benefit account (RBA) with any permitted saving Intermediary. Retirement benefits will be exempt only if deposited in RBA and will be subject to tax on withdrawal of such A/c.
- Employer’s contribution to an approved provident fund, superannuation fund and life insurer and New Pension Scheme within the limits is considered as salary.
- Under DTC, salary will include >
i) Value of Rent Free Accommodation (RFA), provided by employer (Government or any other person)
ii) Value of LTC
iii) Encashment of Unavailed Earned Leave on retirement.
iv) Medical Reimbursement
v) Free or concessional medical treatment paid for or provided by employer.
DTC proposes, that Value of RFA will be determined (for government employees also) in the same manner as is presently determined in case of employees in private sector.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
In the absence of social security benefits, taxation of withdrawals from a Retirement Benefit Account would be Harsh. |
- Maintaining RBA requires a centralized nationwide authority to regulate and manage accounts, which entails complexities of creation of a separate institutional mechanism, complex logistics and substantial costs also discussed in EET method of taxation. So it is proposed that this scheme will not be introduced. - Employer’s contribution to an approved provident fund, superannuation fund and New Pension Scheme within the limits prescribed shall not be considered as salary in the hands of the employee. Also, retirement benefits received by an employee will be exempt subject to specified monetary limits.
|
|
Value of accommodation, in case of Govt. Employee will be taken at market rent, it would create higher tax burden. |
DTC does not propose to compute perquisite value of rent-free accommodation based on market value.
|
|
Concerns for Non-availability of exemption for perquisites in the nature of medical benefits. |
The method of valuation of perquisites will be appropriately provided in the rules. It is proposed that perquisites in relation to medical facilities / reimbursement provided by an employer to its employees shall be valued as per the existing law with appropriate enhancement of monetary limits.
|
IV) Taxation of Income from House property – Chapter VIII of Discussion paper on DTC
DTC Provisions
DTC provides a new scheme for computation of IFHP. Some features are >
- IFHP will be Gross rent less deduction.
Gross rent is higher of (i) Contractual Rent for the FY; and (ii) the presumptive rent calculated at 6% p.a of the rateable value fixed by the local authority. If rateable value fixed by the local authority is not available, then 6% of cost of construction or acquisition will be taken. If property acquired during the FY, then rent will be calculated on proportionate basis.
Deductions are i) Taxes levied by local authority and tax on services on payment basis, ii) 20% of gross rent for repairs and maintenance and iii) Interest payable on capital borrowed.
- Advance Tax will be taxed only in the FY to which it relates.
- For self occupied property, gross rent is nil and no deductions for taxes and interest will be available.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Notional rent on presumptive basis (at the rate of 6%) with reference to the cost of construction/ acquisition is inequitable as it discriminates against recent owners as such cost is a function of inflation.
|
- Gross Rent will NOT be computed on presumptive rate of 6%.
- For Let-out Property, gross rent is rent received or receivable in FY.
- For Self Occupied property, Gross rent will be Nil and no deduction of taxes or interest is allowed.
|
|
To incentivize investment in housing, the deduction for interest on capital borrowed for acquisition or construction of a self occupied house property, up to a ceiling of Rs. 1.5 lakhs, should be retained |
- For one self occupied property, an individual or HUF will get deduction on account of interest on capital borrowed for acquisition or construction of such house property (subject to a ceiling of Rs.1.5 lakh) from the gross total income |
V) Taxation of Capital Gains – Chapter X of Discussion paper on DTC
DTC Provisions
- No Distinction between STCG or LTCG
- Abolition of Securities Transaction Tax (STT)
- Base date for Cost of acquisition will be shifted from 1.4.1981 to 1.4.2000.
- New Capital Gain Saving Scheme will be framed. Capital Gains deposited under this scheme will be exempt until the withdrawal.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Currently, on Listed Equity securities and Equity Oriented Units, STCG is 15% and LTCG is NIL. Withdrawal of this will raise tax liability and may cause fluctuation inn Capital Market.
Currently, CG on listed equity shares held for more than 1 year in exempt in hands of Non Residents. The proposed rate of 30% is very high. |
- Listed Equity shares or Units of Equity Oriented Funds, held for more than one year > Capital gain shall be computed after giving deduction at a specified % of Capital Gains. The paper gives examples after taking specified percentage as 50% or 60% or 70% for different marginal tax brackets. Since, there is shift from Nil tax rate on listed Equity shares and EOU, an appropriate transition regime will be provided. - CG on transfer of assets held for more than 1 year > The base date has been shifted from 1.4.1981 to 1.4.2000. So unrealized capital gains on such assets will not be liable to tax. - No Capital Gains saving scheme will be introduced for the same reasons as held in EET for maintaining permitted saving accounts. - CG on transfer of assets held for less than 1 year > Computed without giving any specified deduction or indexation.
|
|
FIIs play an important role in Capital markets. No benefits granted to them. |
- Income arising on purchase and sale of securities by an FII shall be deemed to be income chargeable under the Head “Capital Gains”.
|
|
FIIs not be subjected to TDS. Current provisions of payment the liability as advance tax should be continued. |
- FIIs shall not be subject to TDS and existing practice of advance tax will prevail. |
VI) Taxation of Non-Profit Organizations (NPO) – Chapter XV of Discussion paper on DTC
DTC Provisions
DTC proposes a new tax regime for all trust and institution carrying on charitable activities. The main features are:
A) The organization shall be treated as NPO if
- Established for the benefit of the general public
- Established for carrying on permitted welfare activities
- NOT established for the benefit of any particular caste
- NOT established for the benefit of any of its members
- Carries on the permitted welfare activities during the financial year and the beneficiaries of the activities are the general public
- Not intend to apply its surplus or other income or use its assets or incur expenditure, for the benefit of any interested person
- Any expenditure does not enure for the benefit of any interested person
- Funds or assets are not used or applied for the benefit of any interested person
- Surplus, if any, accruing from its permitted activities does not enure, for the benefit of any interested person
- Funds or the assets of the NPO are not invested or held in any associate concern or in any prescribed form or mode
- Maintains such books of account and in such manner, as may be prescribed
- Obtains a report of audit in the prescribed form from an accountant before the due date of filing of the return in respect of the accounts of the business, if any, carried on by it; and the accounts relating to the permitted welfare activities and
- Registered with the Income-tax Department under the DTC.
B) Tax Liability of NPO is 15% of Surplus plus Capital Gain on transfer of an investment asset being financial asset.
Surplus = Gross receipts minus Outgoings
Gross Receipts Include |
Outgoings Include |
|
- Voluntary Contributions received during the FY.
- Rent received from property being building or land appurtenant thereto
- Income derived from incidental business
- Consideration received for transfer of investment asset not being financial asset.
- Consideration received for transfer of business capital asset.
- Income derived from investment of fund or asset
- Other incomings, realizations, proceeds, donations or subscription from any source. |
- Voluntary contributions with a specific direction
- Expenditure, excluding capital expenditure, for earning or obtaining gross receipts.
- Expenditure, excluding capital expenditure, on permitted welfare activities.
- Capital Expenditure for any incidental business for acquiring business capital asset or investment asset not being financial asset.
- Amount paid to other NPO doing similar activity.
- Amount applied outside India for an activity that promotes international welfare in which India is interested and Central Govt has notified that NPO.
|
C) Surplus will be determined on Cash System of Accounting.
D) Capital gain on transfer of investment asset, being a financial asset, will be computed in accordance with provisions of Capital Gains.
E) NPO is prohibited from investing funds or holding assets in any concern in prescribed form or mode.
F) It is mandatory for every NPO to register with Income Tax department.
G) Donation to NPO is eligible for deduction to the donor at appropriate rates.
H) Income of any trust or institution registered under religious endowment Acts of CG or SG, shall be fully exempt. However, donor will not get any deduction for such donations.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Fresh registration of NPOs lead to increase in compliance cost of NPOs and workload for IT Department. |
NPOs already registered and are valid as on the effective date of DTC, are not required to register again but must provide additional information to comply with new provisions.
|
|
Status of Public Religious Institutions is not clear since DTC exempts income of only such religious trust that are registered. There are many states where such legislation does not exist or does not cover all religious institutions. |
Income of Public Religious Institutions will be exempt subject to fulfil ALL the following conditions>
- Registered under DTC
- Whole Income applied for public religious purpose
- Registered under state law, if any
- Established for the benefit of General Public
- File tax return before due date
- Maintain books of account and get audited, in case gross receipts exceed prescribed limits.
- Funds or assets must be invested or held in specified permitted forms or modes.
- Funds or assets not to be used or applied directly or indirectly for benefit of interested person.
Donors are not eligible for deductions for donations made to such institutions.
|
|
Status of partly religious and partly charitable institutions is not clear |
Treated as NPOs, if registered under DTC.
Income from Public Religious activity will be exempt if >
- Trust deed/memorandum of institution provides for predetermined ratio of application of gross receipts between charitable and religious activities.
- Maintain separate books of account and separate financial statements
- Fulfil all conditions of Public Religious Institutions
Income from charitable activities will be liable to tax as per NPOs if conditions prescribed in DTC are fulfilled.
Donors are not eligible for deductions for donations made to such institutions.
|
|
There is no provision for carry forward of surplus for expenditure in subsequent years in respect of Grants received by NPOs at the year-end. Taxation of surplus of income over expenditure will be harsh. |
Proposed that up to 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years from the end of the relevant financial year.
|
|
Phrase “Charitable Purpose” should be used instead of “Permitted Welfare Activities” to maintain continuity and minimize litigation. |
To maintain continuity and minimize litigation, the phrase “Charitable purpose” will be retained in place of “permitted welfare activity”.
|
|
Option to choose cash system or mercantile system of accounting should be allowed. |
Proposed to retain the cash system of accounting because of simplicity easiness to administer.
|
|
Other Concerns |
Other Proposals >
- Donations by an NPO out of its accumulated surplus to another NPO will not be considered as application for the charitable purpose
- Basic exemption limit will be provided and the surplus in excess of such limit will be taxed.
- Central Government shall be empowered to notify any non-profit organization of public importance as an exempt entity.
|
VII) Special Economic Zones – Chapter XII of Discussion paper on DTC
DTC Provisions
- The profit-linked tax incentives and other tax incentives not covered in the DTC are to be grandfathered.
- DTC substitutes profit linked incentives with a new scheme wherein any capital expenditure incurred for specified business will be allowed as a deductible expenditure and the loss shall be allowed to be claimed forward till it is absorbed completely.
- DTC does not allow area based exemptions.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
No mentioning of Grandfathering of Profit-Linked Deductions in case of units operating in SEZs. |
- Specific provisions for protecting profit linked deduction for the unexpired period in the case of SEZ developers is already provided
- Units already operating in SEZs will be incorporated |
VIII) Concept of Residence in case of a Company Incorporated Outside India – Chapter IV of Discussion paper on DTC
DTC Provisions
- DTC provides that the company incorporated in India will always be treated as resident in India.
- A foreign company will be treated as resident in India if, at any time in the financial year, the control and management of its affairs is situated “wholly or partly” in India.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Modification of the phrase “wholly or partly” has been suggested since it leads to make
- MNC having any single transaction in India as resident
- -A Foreign Co. held by Indian residents (Control In India) as resident. It leads to uncertainty in taxation and impact FDI in India.
|
The foreign company or company incorporated outside India would be treated as resident in India if its place of effective management is situated in India.
“Place of effective management is defined” as
- Place where the BOD or ED make their decision or
- Place where ED and officers performs their functions, where the BOD routinely approve the commercial or strategic decisions.
|
|
Additional Provisions for Controlled Foreign Corporation |
Undistributed Passive income of a foreign company controlled, directly or indirectly, by a resident in India shall be deemed to have been distributed and would be taxable in India in the hands of resident shareholders as dividend received from the foreign company.
|
IX) Relief from Double Taxation – Chapter XXIII of Discussion paper on DTC
DTC Provisions
- DTAA provides for how, when will income be taxed & by which authority.
- Neither the DTAA nor DTC will have preferential status of applicability or levy.
- In case of conflict, the one later in point of time will prevail.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
It leads to DTC override existing DTAAs |
Between DTC & DTAA, it is proposed to provide the preference to the one which is more beneficial to the tax payer. Exceptions to this are >
- When GAAR is invoked
- When Controlled Foreign Corporation are invoked
- When Branch Profits Tax is levied.
|
|
Not possible to restore the preferential status of DTAAs as they are bilateral agreements, which can’t be re-notified unilaterally. |
Anti-avoidance rules are part of the domestic legislation and they are not addressed in tax treaties, such limited treaty override will not be in conflict with the DTAAs. This will not deprive any taxpayer of any intended tax benefit available under the DTAAs. |
X) Wealth Tax – Chapter XVII of Discussion paper on DTC
DTC Provisions
- Payable by an Individual, HUF and private Discretionary trusts.
- Levied on the valuation date i.e. last day of the financial year
- Net wealth is equal to assets chargeable minus the debts owed on these assets
- Assets include all assets, included financial assets and deemed assets and excluding exempted assets.
- Exempted assets include stock in trade, a single residential house or a plot of land.
- Net wealth in excess of Rs.50 Crores chargeable at 0.25%. This is not applicable to private discretionary trust.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
Productive assets should be exempted |
- Wealth Tax will be levied broadly on the same lines as provided in the Wealth Tax Act, 1957.
- Specified “unproductive assets” will be subject to the wealth tax
|
|
Limit of Rupees 50 crores is too high |
Payable by all taxpayers except non-profit organizations
|
|
Tax on financial assets will be harsh as they are currently exempt. |
Threshold limit and rate of tax will be suitably calibrated in the context of overall tax rates.
|
XI) General Anti-Avoidance Rule (GAAR) – Chapter XXIV of Discussion paper on DTC
DTC Provisions
- The GAAR provision apply where a taxpayer has entered into an arrangement, the main purpose of which is to obtain a tax benefit and such arrangement is entered or carried on in a manner not normally employed for bona-fide business purposes or is not at arm‟s length or abuses the provisions of the DTC or lacks economic substance.
- Power to invoke GAAR is with CIT (Commissioner of Income Tax) and AO(Assessing Officer) in direction from CIT will determine the tax consequence.
- CIT has to follow principle of natural justice, can call for any information and direct AO for making appropriate adjustments. These directions are binding on AO.
Revised DTC Comments and responses
|
Comments /Proposals |
Response to Comments |
|
GAAR may be invoked by Assessing officer in routine manner. |
GAAR will be invoked in case of arrangements where one of the four conditions exist >
- Not at arms length
- Represent misuse or abuse of the provisions of DTC
- Lacks commercial substance
- Entered not for Bona-fide business purpose.
|
|
Further legislative and administrative safeguards should be provided to avoid arbitrary applications |
- Countries not having GAAR provide information and disclosure requirements, which can be investigated, and accordingly, abusive arrangements can be declared impermissible.
- CBDT will issue guidelines for circumstances under which GAAR will be invoked.
- Forum of Dispute Resolution Panel (DRP) would be available where GAAR provisions are invoked.
|
|
Define thresholds limits for Invoking GAAR |
GAAR will be invoked in respect of arrangement where tax avoidance is beyond a specified threshold limit.
|
Prepared by CA Rahul Gupta & CA Deepika Goel
CAclubindia
