pricewaterhousecoopers direct taxes code 2009 – uncoded august 2009 pwc

PricewaterhouseCoopersDirect Taxes Code 2009 – UncodedAugust 2009

PricewaterhouseCoopers

Aug, 2009

Backdrop

• Current law – Income-tax Act, 1961

• Almost five decades old

• Over 5000 amendments

• New Code in the making for four years


Aug, 2009

Stated objectives

• Simplicity

• Minimising litigation

• Widening the tax base

• Eliminating exemptions


Aug, 2009

Topics

• Corporate and Personal Tax

• Business Reorganisations

• International tax

• Transfer Pricing

• Introduction of GST


Aug, 2009

Topics not covered

• Detailed analysis of procedural provisions

• Tax recovery provisions

• Taxation of non-profit organisations


Aug, 2009

Commencement

• Applicability – Financial year 1st April 2010 - Confusing indications for later applicability

Corporate and personal taxation


Aug, 2009

Taxation of resident companies

Existing (%)* Proposed (%)*Corporate tax 30 25

Dividend Distribution Tax 15 15

MAT 15 2 / 0.25 on assets

Capital gains tax varying 25

* Surcharge and cess as per the relevant Finance Act


Aug, 2009

Business Income…

• Income from separate businesses to be computed separately• Income from businesses eligible for incentives to be computed

separately


Aug, 2009

…Business Income…

• Sweeping amendments to the scope of taxable profits - any amount receivable from or in connection with business

included• Taxable profits to now include:

- Relief in respect of any liability in the nature of loan, deposit, etc

- Amount receivable on cessation / termination of any business agreement

• Profit on sale of business capital assets or on slump sale - taxed as business income and not capital gains


Aug, 2009

…Business Income…

• Deductions allowable only under three classes:- Operating expenditure;- Permitted Finance Charges; and- Capital Allowances

• Losses incidental to business – selectively covered


Aug, 2009

Deferred revenue expenditure

• Specific Deferred Revenue Expenditure eligible for capital allowance

Block of Assets Depreciation Rate (%)

Non-compete fees 25Premium on obtaining assets on lease / rent 25VRS expenditure 25Business re-organisation expenditure 25Expenditure on prospecting mineral or development of mine / other natural deposit of any mineral

15


Aug, 2009

Capital Allowances

• Broadly similar to depreciation and similar allowances

• 150% weighted deduction for in-house scientific R&D expenditure; extended to all industries

• Loss upon sale of entire block of assets to be ignored

- Depreciation on block to continue

• Lessee eligible to claim capital allowance in case of finance lease


Aug, 2009

Minimum Alternative Tax (‘MAT’)

• Payable on ‘value of gross assets’ and not on ‘book profits’

• Tax Rate

- Banking companies – 0.25%

- Other companies – 2%

• No credit allowed in subsequent years

• Multiple level taxation – holding-subsidiary structures


Aug, 2009

Dividend Distribution Tax

• DDT extended to all “dividends”

• Dividend distributed to specified pass-through entities exempt from DDT

• DDT exemption for SEZ developers discontinued

• Dividends specifically excluded from DDT – whether exemption available in the hands of recipient


Aug, 2009

Capital Gains…

• Distinction between long-term and short-term gains removed

• Capital gains taxable at normal rates

• Gains on transfer of business capital assets taxable as business income

• Other capital assets referred to as ‘Investment Assets’

• Securities Transaction Tax proposed to be abolished


Aug, 2009

…Capital Gains

• Indexation available only for assets held for one full financial year

• Indexation benefit now available for bonds and debentures

• Indexation benefit now available to non-residents

- Adjustment for exchange fluctuation no longer available

• Substitution of cost by fair market value

- Base date shifted from 1.4.1981 to 1.4.2000

• Cost of acquisition of asset deemed to be “nil” if not determinable


Aug, 2009

Tax incentives…

• Profit-based tax incentives sought to be discontinued

• Expenditure / Investment-based incentive scheme introduced

• Infrastructure Projects including development of Special Economic Zones (“SEZ”) under new scheme

• Export-based Incentives such as for units in Software Technology Parks or SEZs to be discontinued

• Selective grandfathering


Aug, 2009

…Tax incentives

• Eligible businesses entitled to following additional deductions:

- Expenditure on purchase, lease or rental of land or land rights

- Capital expenditure on most assets

- Expenditure incurred before commencement of business

• Each eligible business to be treated as separate business


Aug, 2009

Grandfathering of existing incentives

• Following incentives continued under the Code:- Sec 80-IA – Profits from Infrastructure business- Sec 80-IAB – Profits earned by SEZ developer- Sec 80-IB – Profits from various businesses covered therein- Sec 80-IC – Profits from undertakings in the North-East- Sec 80-ID – Profits from business of hotels / convention centres in

specified areas- Sec 80-IE – Profits from undertakings in the North-East- Sec 80JJA – Profits from business of collecting and processing bio-

degradable waste• No specific provisions for grandfathering of SEZ units eligible

for tax holiday under section 10AA


Aug, 2009

Carry forward of losses

• No distinction between long term and short term capital losses

• Capital losses not to be set off against any other income

• Loss of a specified business / special source allowable only against subsequent years’ profits of the same business / source

• Losses allowed to be carried forward indefinitely

• Entire losses including previous years’ losses lapse if return not filed by due date


Aug, 2009

Set-off and carry forward of losses

Losses from a Special Source Income from the same Special Source

• Set-off in same or subsequent years

• Discussion paper talks of ring-fencing losses from speculative business - no corresponding provisions in Code

Capital Loss

Business loss, loss from house property or ‘residuary’ losses

Capital gains

Income from employment, house property, Business income,

residuary income, incl. capital gains


Aug, 2009

Losses of closely-held companies

• Losses of closely held companies to lapse on change in controlling interest, as now

• Widely-held companies to include all public companies – listed or unlisted

• No distinction between unabsorbed depreciation and loss

• Capital losses may be carried forward even after change in ownership

Taxation of LLPs


Aug, 2009

Taxation of LLPs

• LLPs, Partnership Firms and AoP / BoI treated as “unincorporated bodies” and taxed as separate entities

• Applicable tax rate 30% (no MAT, no tax on cash distributions)

• Partner’s share not taxed in his hands

• In case of change in constitution because of retirement, death etc., losses to the extent of the share of the retiring / deceased partner cannot be carried forward

• Salaries, bonuses, commissions to working partners and interest to all partners fully deductible

Personal Taxation


Aug, 2009

Tax rates for an individuals

Existing Income Slab (INR)

Tax Rate*

Proposed Income Slab (INR)

Tax Rate

Up to 1,60,000 Nil Up to 1,60,000 Nil

1,60,001 to 3,00,000 10% 1,60,001 to 10,00,000 10%

3,00,001 to 5,00,000 20% 10,00,001 to 25,00,000 20%

Above 5,00,000 30% Above 25,00,000 30%

*Currently education cess is levied at 3% of the tax amount.


Aug, 2009

Deductions for savings

• Restricted to maximum of Rs. 300,000 per year

• Amount deposited in accounts with permitted intermediaries

• Withdrawals not taxable if rolled over into another account

• Withdrawals from such accounts taxable


Aug, 2009

Taxation of savings

Taxability of Qualifying Investments at present

Taxability of Qualifying Investments as per Code

OnInvestment

OnInvestment

Accretion AccretionOn withdrawal On withdrawal

Exempt upto Rs. 100,000

Exempt Exempt Exempt upto Rs. 300,000

Exempt Taxable - may result in double taxation

EXISTING PROPOSED


Aug, 2009

Key exemptions removed

• House Rent Allowance

• Leave Travel Concession

• Medical reimbursement

• Free or concessional medical treatment

• Leave encashment

Income from House Property

• Taxable value based on higher of:- actual rent or - presumptive rent which is:

• 6% of rateable value fixed by local authority; OR• If no rateable value then 6% of cost of acquisition

• Standard deduction reduced from 30% to 20 % • Interest on housing loan for Self Occupied Property not

deductible• Repayment of housing loan does not qualify for any deduction


Aug, 2009

Roll-over provisions for capital gains…

• Roll-over available for re-investment of sale proceeds• Roll-over available only to individuals/HUFs• Investment to be made in new asset within

- one year before or - three years from the end of the financial year in which

transfer took place• If new asset not acquired before the end of the financial year

- Sale proceeds to be deposited in Capital Gains Deposit Scheme


Aug, 2009

…Roll-over provisions for capital gains

• Qualifying new assets- Agricultural land – in case of gain on transfer of agricultural

land- Residential house – in case of gain on transfer of any asset- Deposit in Capital Gains Saving Scheme (CGSS) – in case

of gain on transfer of any asset• Any withdrawal from CGSS is liable to tax under the head

income from residuary sources in the year of withdrawal


Aug, 2009

• TDS on payments for purchase of goods?

• No ability to seek lower rate of TDS?

• No time limit for completion of TDS assessment

- Time limits were recently introduced

• TDS on capital gains

- From payments to residents @ 10%

- From payments to non-residents, including FIIs @ 30%

Tax Deduction at Source


Aug, 2009

• Current safeguards against reopening of assessments done away with

• Scope of “rectification” significantly widened

• New Dispute Resolution procedure extended to residents in all cases involving a dispute above Rs. 25 lacs

Significant procedural changes

General Anti-Avoidance Rules (‘GAAR’)


Aug, 2009

General Anti-Avoidance Rules…

• Empowers the Commissioner of Income-tax (‘CIT’) to declare an arrangement impermissible

- if the arrangement has been entered with the objective of obtaining tax benefit and, inter alia, lacks commercial substance or misuses the provisions of the Code

• The CIT may amend, disregard or re-characterise the arrangement

• Onus on the tax payer to demonstrate that obtaining tax benefit was not the main purpose of the arrangement

• Applicable to residents as well as non-residents


Aug, 2009

…General Anti-Avoidance Rules

• GAAR provisions are highly subjective

• Sweeping powers to tax department

• Whether tax planning permissible

Wealth Tax


Aug, 2009

Wealth Tax

• Individuals, HUFs and Private Discretionary Trusts liable to wealth tax

• Wealth tax abolished for companies• Rate of wealth tax reduced from 1% to 0.25%• Exemption limit enhanced from Rs. 30 Lakhs to Rs. 50 Crores• One house or plot of land acquired or constructed before April

1, 2000 exempt

Business Re-organisations


Aug, 2009

Amalgamation…

• Restricted to mergers between residents only- Cross border mergers ?

• Carry forward of losses in the hands of all amalgamated companies / co-operative societies

- currently available only to companies having industrial undertakings, hotels, ships, etc

• Conditions for business continuity maintained- Pre-merger conditions removed- Violations to trigger reversal of predecessor’s loss set-off


Aug, 2009

…Amalgamation

• Now includes conversion of unincorporated bodies into companies

• Succession of AOP/BOI into company – covered

• Post conversion of firm / proprietary concern – maintaining of shareholding condition removed

- Reversal of loss set-off, if any


Aug, 2009

Demerger

• Scope of Demerger restricted between residents only• Resulting Company to issue only “Equity Shares” in

consideration• Set-off of losses

- All losses of the predecessor company allowed to be carried forward

• Anomaly in the provision – whether losses of only demerged undertaking to be carried forward

• Test of continuity of business to be complied with- Currently conditions are not applicable to Demerger- Violations to trigger reversal of loss set-off


Aug, 2009

Transfers between holding-subsidiary company

• Gain on transfers between holding and subsidiary to be taxed if:- The relationship ceases to continue at any time - in the year

of cessation of such relationship• Existing provisions provided for lock-in of only 8 years

- Asset is converted into or treated as stock in trade at any time – in the year in which such stock-in-trade is sold

• Transfer of business capital assets and slump sale – whether exempt


Aug, 2009

Business Reorganisation Expenditure

• Revenue expenditure – allowed as business expenditure

• Deferred Revenue Expenditure – allowed as depreciation @ 25% on WDV basis


Aug, 2009

Slump Sale

• No change in the definition- However, the gains arising would now be taxable as

business income and not capital gains• The cost of acquisition to be the ‘net worth’

- Mode of computation of net worth to be prescribed• Cost of acquisition in the hands of the acquirer – uncertain

(cost to previous owner or actual purchase price)• For shares – valuation ?• Purchase price – not defined


Aug, 2009

Itemised Sale

Business Capital Assets• Gains arising taxable as business income if consideration

exceeds block of assets• Otherwise depreciation allowed on adjusted WDV• Impact of stamp duty valuation ?

Investment Assets• Gains taxable as capital gains• Gains on transfer of land & building

- Higher of stamp duty valuation or valuation by valuation officer

International tax

Key changes in a nutshell

Positive Negative Circumstantial

Lower tax rates but, 2% MAT

Introduction of sweeping General Anti Avoidance Rules

Changes in capital gains legislation

Introduction of APA and safe harbour rules

Treaty override provisions

Indefinite carry forward of business and capital losses

Increase in withholding tax rates

Residence status of foreign companies

MAT

Similar issues for Indian subsidiaries of foreign companies

• For “determining the relationship between … a treaty and this code … the provision which is later in point of time shall prevail”

• Principle of beneficial interpretation between the domestic law and tax treaty no longer applicable?

• Furnishing of tax residency certificate mandatory for claiming benefits under the applicable tax treaty

• GAAR to override applicable tax treaties?

Treaty override

80 existing tax treaties overridden? – Long-standing principle of beneficial choice

overturned?

Slide 51

Overview of tax rates

Slide 52

Existing (%) Proposed (%)*

Corporate tax 40 25

Branch Profits Tax - 15

Capital gains tax Various 30

Royalty/Fees for Technical Services (“FTS”)

10.56 20

* Surcharge and cess as per the relevant Finance Act

• Branch profits tax (15%) introduced on branches of foreign companies

• Illustration -INR

Branch profits in India 100Less : Corporate tax at 25% 25Net profits after corporate tax 75Less : Branch profits tax at 15% 11.25Net profits after branch profit tax 63.75

Overview of branch profits tax

Slide 53

Effective tax rate – 36.25%

• Branch not defined - Applicability to Project Office- Permanent Establishment without ground presence

• Scope of tax base for branch profits tax unclear- Whether applies to Royalty / FTS / Capital Gains

• Not linked to repatriation

Branch profits tax - Key issues

Slide 54

Change in residency test for foreign companies

Slide 55

Provision Implication

Current Foreign companies resident in India only if controlled and managed wholly in India during the year

Non-India income not liable to tax in India

Proposed Threshold lowered to wholly or partly managed and controlled from India at any time during the year

Non-India income exposed to Indian tax

Intent to hit subsidiaries of Indian MNCs? Result: (unintended?) adverse consequences for certain

foreign companies

• Concept of “not ordinarily resident” eliminated- relevance – non-India income was shielded from Indian tax

• Residence triggers in Year 3 of coming to India- foreign income exposed to Indian tax after Year 2

Slide 56

Change in residency test for individuals - Implications to expatriates in India

• Income deemed to accrue in India includes income from direct as well as “indirect” transfer of capital assets situate in India

• “Royalty” definition expanded

- Use or right to use transmission by satellite, cable, optic fibre or similar technology

- Use of equipment specifically expanded to ships or aircrafts (bareboat charter/dry lease specifically hit)

- Consideration for “live feed” now included

• Fees for Technical Services (“FTS”) definition expanded to include development and transfer of a design, drawing, plan or software

• Withholding tax rate for royalties and FTS increased from current 10% to 20%

• Interest paid by one non-resident to another in respect of borrowing made to earn income from any source in India liable to tax in India

Other important provisions

Slide 57

Some practical scenarios

Project Office - a 24 month project in India

• Current interpretation: Project office covered by Branch Profits Tax (“BPT”)

• Tax rate (currently 42.23%) will be 25%

• However, BPT at 15% applicable on post tax base i.e. 15% on 75%

Effective tax rate reduced to 36.25%

Divesting a subsidiary in India (“ICO”) held though a holding company structure (“HoldCo”)

• Currently, divestment of ICO by HoldCo (in treaty protected jurisdiction such as Mauritius) is exempt from capital gains tax in India

• If HoldCo itself is divested; currently, hit by the Vodafone controversy

• DTC makes a reference to transfer “directly or indirectly” of an asset in India

Offshore sale with underlying asset in India further exposed to tax?

Fund investing in India through Mauritius

• Currently, capital gains on sale of shares exempt from Indian tax in India

• Impact at four levels- Treaty override: is the intent to neutralise the exemption?- If treaty override has no impact, GAAR necessitates

commercial substance- Long term (as also short term) gain now taxable at 30%- Computation of gain in rupee terms, not in foreign exchange

terms

Significant implications – active advocacy needed

Transfer Pricing


Aug, 2009

Transfer Pricing

• Transfer pricing framework

- broadly in line with the existing law

• Definition of Associated Enterprises widened

- Amongst others, shareholding relationship of 10% sufficient to create association amongst enterprises

• Provisions relating to Safe Harbour and Dispute Resolution Panel retained

- Dispute Resolution machinery available only where adjustment amount exceeds INR 25 lakh


Aug, 2009

Transfer Pricing

• Advance Pricing Arrangement (‘APA’) machinery introduced- For an APA, arm’s length price to be determined based on

Indian TP regulations- APA decision to be binding upon tax authority and tax payer - APA decision not binding in case of change in law / change

of facts on the

basis of which APA was entered into- Validity of APA decision – not exceeding 5 consecutive

years • Anti-avoidance provisions introduced – include provisions for

controlling “thin capitalisation”


Aug, 2009

Transfer Pricing

• Certain compliance related changes proposed- Accountants’ Report to be submitted to TPOs- Selection of cases by TPOs to be based on risk

management strategy- Accountants’ Report submission date brought forward to

August 31st - TP assessment to be completed within 42 months from

end of financial year• Transfer pricing penalties eased

- Documentation penalty to range between INR 50,000 to INR 200,000

Introduction to GST


Aug, 2009

• Basic Structure- identified taxes to be subsumed under dual GST- stamp duty, toll tax, passenger tax and road tax not subsumed under

dual GST- exports to be zero rated

• Rates- uniform rates for services- multiple rates for goods

• Input tax Credits (ITC)- full credits under the Central and the State GST that will operate in

parallel - Cross-utilisation of credits between Central GST and State GST not

permitted- refund of unutilised accumulated ITC

Significant features of proposed dual GST Model


Aug, 2009

• Inter-State transactions

- goods to be taxed in the destination/importing State

- services to be taxed in the State of consumption

- zero rating in the originating State

Significant features of proposed dual GST Model


Aug, 2009

• Impact analysis - ‘As is’ basis

• Exploring business restructuring avenues

• Transition from existing to GST

• Identification of relevant tax jurisdictions

• Contract and ‘change in law’ clauses

• Vendor / Customer negotiation

• Review of existing IT infrastructure

• Change in accounting system

• Invoicing system and GST

• Compilation of data and ‘transitional provision’

• Registration / Returns

Action Points

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pricewaterhousecoopers direct taxes code 2009 – uncoded august 2009 pwc

Documents

business incomeincome

business agreementprofit

capital gains taxable

capital gainsdistinction

sale of entire block

businesses eligible

value of gross assets

tax base