Friday, September 24, 2010

Law Street - Economic Times (Sept 2010) -DTC - Change for the better

Dear Readers,

The cup can be half full or half empty, depending on how one sees it. As a lot had been written and published about the "harsh" provisions in the DTC and moreso, since "Zenobia Aunty" was in a good mood she decided to see the DTC in a good light. As always, you can read it online on The Economic Times' website. It is also cut and pasted below.
Have a nice weekend.
Best regards,

Change for the better
• Cascading impact of DDT is resolved for domestic multi-tiered groups
• Dispute resolution expanded to cover GAAR cases
• Advance pricing mechanisms introduced for international transactions

Zenobia Aunty recently read an amazing book, “Leaving Microsoft to change the world”. Written by John Wood, founder of the global NGO, “Room To Read” which facilitates education for girls in developing countries including India, it shows that change for the better is always possible, if one is committed to the cause.

Our new tax law was supposed to be a change for the better – in essence it sought to achieve stability, simplicity, minimize litigation and also prevent abuse of tax laws. Thus, at first glance, Zenobia Aunty was taken aback to see that the Direct Tax Code, 2010 (DTC) ran into something like 400 pages.

Some of her friends have outright pooh-poohed the DTC mainly because the radical low rates of tax spoken about in the 2009 draft could not be introduced. However, basking in the aftermath of having contributed her mite towards girl’s education and being in a very generous mood, Zenobia Aunty decided to concentrate on what was good in the DTC.

For long, India Inc has been complaining about the double whammy when it comes to dividend distribution tax (DDT). The Finance Act, 2008, alleviated this grievance partly by providing that the domestic holding company will not have to pay DDT on dividends paid to its shareholders to the extent it received dividends from its subsidiary company on which DDT has been paid by such subsidiary. However, this reduction benefit was available only up to one level. Once the DTC comes into force, this restrictive provision will be abolished enabling multi-tiered domestic companies to get the reduction benefit up to the last level of the corporate chain.

It is true that the wide provisions of the General Anti-Avoidance Rules (GAAR) continue to exist, the CBDT has been empowered to lay down the conditions for application of GAAR and Zenobia Aunty hopes powers will be judiciously exercised. That said the DTC provides that taxpayers in whose case GAAR is invoked can approach the Dispute Resolution Panel (DRP).

An assessing officer, who has received a direction from the tax commissioner for applying GAAR in relation to a particular case, is required to prepare a draft assessment order and serve it on this tax payer. The tax payer can then directly approach the Dispute Resolution Panel (DRP) against this order for resolution of the matter. Zenobia Aunty points out: “Currently, DRP is a mechanism used in the arena of transfer pricing, hopefully the mechanism when extended to GAAR cases will be equally effective and mitigate long winded protracted litigation.”

The mechanism of advance pricing agreements has at last been introduced. The arm’s length price for international transactions can be decided upfront for a maximum of up to five years and this will go a long way in mitigating transfer pricing litigation. Even as SEZ developers and units will now fall under MAT levy, the profit linked exemptions have been suitably grandfathered. R&D expenditure (other than land and building) will carry a weighted deduction of 200% against the existing 150% and more so will be expanded to the non-manufacturing sector also. The practical realities facing the Not for Profit (NPO) segment have also been factored in. Further, donors will continue to get a tax benefit for their deduction to approved and registered NPOs

True there are certain uncalled for changes. Instead of the wide sweeping GAAR provisions, the government could have introduced specific anti avoidance provisions. The government has sought to bring into the tax ambit cross border acquisitions, if: the target foreign company holds directly/indirectly assets in India that are valued at more than 50 per cent of the fair market value of all assets held by such company, at any time, within the twelve months prior to such transfer. Perhaps an extra territorial move? Controlled foreign corporation rules have been defined and exemptions carved out, but sadly underlying tax credit norms are not introduced. While profit linked incentives for SEZs are grandfathered, they find themselves in the MAT net.

Coming to individuals, there has been some minor tinkering in tax slabs, but not much. The silver linings are many. The existing EEE mechanism continues and various perquisites such as HRA continue to enjoy tax benefits.

Zenobia Aunty has always lamented about two things, both of which have been favourably resolved. Medical reimbursement is now exempt up to Rs. 50,000 in a year (as compared to the measly Rs. 15,000 under current tax provisions). Further, the DTC provides that there will be no provision for presumptive rent where properties have not been let out during the financial year. Currently presumptive rent provisions apply and tax is payable on notional income.

Zenobia Aunty signs off on the note that: The FM cannot please everyone, but some of the changes are for the better. Hopefully, the jarring changes will also be streamlined.

Photograph: This photograph was taken at the Lalbaugh Flower Show in Bangalore, India.

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