KPMG Direct Tax Code 2009

KPMG IN INDIA Direct Taxes Code Bill, 2009 Key provisions impacting foreign businesses 26 AUGUST 2009

Tax framework in India The existing tax framework is decades old (Current Income tax legislation was passed in the year 1961) Frequent amendments have made the current tax legislation complex and ambiguous Government committed to ushering a new era in tax compliance and administration, primarily by way of: New Direct Tax legislation Shift to the Goods and Service Tax regime (GST)* Government introduced the new Direct Taxes Code Bill, 2009 (‘DTC’) for public discussion on 12 August 2009 *Timeline of Year 2010 reaffirmed in the Union Budget 2009 © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 2

Direct Taxes in India © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 3

Increased focus on Direct taxes Tax to GDP ratio Increasing contribution of direct taxes 14 Direct Taxes Indirect Taxes 12 (in percent) (in percent) 10 6 5.9 2004-05 2008-09 2004-05 2008-09 5.8 Rate 8 5.4 5.6 4.2 6.9 5.4 6.0 6 4.3 4 4.1 3.5 2.8 2.6 2 2.2 2.6 Direct tax collections@- USD 64.5 Bn 1.6 1.8 1.8 0 2004-05 2005-06 2006-07 2007-08 2008-09 * Indirect tax collections@- USD 50.7 Bn Years Personal Income Tax Corporate Tax Indirect Tax Shift of focus towards direct taxes and ensuring enhanced compliance Source: Economic Survey 2008-09; KPMG Analysis * Budgeted Estimate @ For FY 2008-09 (as per news reports) © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 4

Corporate tax rates in BRIC countries – A Comparison 35 30 34 34 25 25 25 20 Percent 15 20 China has also reduced its 10 rate from 33% in 2008 5 0 Russia China Brazil India Present Proposed Source: KPMG Corporate Tax Rate Survey, 2008; information in public domain © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 5

New Direct Taxes Code Bill: The Rationale © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 6

Rationale for the new code Direct Taxes Code Bill, Income Tax Act, 1961 2009 Numerous amendments - perplexing Simple and easy to comprehend for the tax payers Increased cost of compliance and Reduction in corporate tax rates – in administration line with global trends Interpretation issues leading to Proposals to increase the tax base litigation and controversies Attempt to minimize litigation / tax Ambiguities causing conflicting controversies judgments on same issues by courts © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 7

Some Significant Amendments - An Overview © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 8

Tax Rates and new taxes Reduction in Corporate tax rates Current Proposed rate Move in line with effective rate 34% 25 % International trend Additional Branch profit tax on Foreign Companies @ 15 % Domestic company Foreign Company Particulars Current Proposed Current Proposed Effective Corporate tax 34 25 42.23 25 rate Effective Dividend 9.60 9.80 Nil 11.25@ distribution tax TOTAL TAX 43.60 34.80 42.23 36.25 Transfer to reserve rules have been ignored @ 15%*(100-25)= 11.25 Branch not defined © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 9

Tax residence of a foreign company Residence of a company determines its tax obligation in India Non resident Partial Control and Current Status Tax on India sourced Management of a income only foreign company in India at any time Resident during the year Proposed Status Tax on worldwide income Partial control and management not defined © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 10

Expansion of source rule Source Rule – Taxability where income is earned / Asset is situated Current position: Ambiguity in taxation of overseas transfers having underlying interest in India Will Impact Cross border M&A Proposed: Gains arising on indirect transfer of transactions capital assets in India to be taxed Current position: Services utilized in India but rendered outside argued as not taxable Place of rendition of services not Proposed: All services utilized in India sought to be relevant anymore taxed © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 11

Treaty override and implications India has entered into tax treaties with 75 countries Current position: Tax treaties supersede domestic law to the extent more beneficial to the tax payer Proposed: - Treaty and Domestic tax provisions brought at par - Provisions later in point of time to prevail in case of conflict - Tax residency certificate required to claim treaty benefits © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 12

Royalty / Fees for Technical Services (FTS)… Scope of definitions widened Royalty to include consideration for use / right to use of: FTS to include: - Transmission by satellite, cable, optic - Development and fiber or similar transfer of design, technology drawing, plan, - Ship or aircraft software or similar - Live coverage of any services event Withholding tax rate (on gross basis) increased from 10% to 20% © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 13

…Impact analysis- An Illustration Specific exclusions from the definition of royalty in tax treaty between India - the Netherlands / Belgium − Right to use of any industrial, commercial or scientific equipment − Films or tapes for radio or television broadcasting Wider definition in DTC coupled with treaty override provisions may render these beneficial provisions redundant © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 14

General Anti-Avoidance Rule - Setting the context Historical perspective - Tax havens such as Mauritius extensively used for tax planning – Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI - Various developed countries (including the Netherlands and Belgium) have anti abuse provisions giving power to disregard transactions entered solely for obtaining tax benefit - The DTC has introduced anti-avoidance provisions in line with international standards *as per information in the Press © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 15

General Anti-Avoidance Rule - Purpose and implications Conditions to be fulfilled for invoking provisions Entering into any of the following arrangements with the main purpose of deriving a tax benefit: - Without a bona fide business purpose - Not at arm’s length - Misusing or abusing any tax provision - Lacking commercial substance Objective sought to be achieved - Deter tax avoidance - Preventing misuse of any provision © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 16

Tax Incentives - Key Changes Current regime Tax incentives linked to profits Proposed regime - Expenditure linked: Capital investment also eligible for tax breaks - No tax holiday for units in: SEZs, STPI, EOUs - Certain existing tax incentives grandfathered © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 17

Transfer Pricing Introduction of Advance Pricing Agreements Upfront determination of an arm’s length price Valid for a period upto 5 years Binding on the taxpayer and tax authorities Safe Harbor provisions retained Definition of Associated Enterprises widened Criteria Current Proposed Share holding with 26% 10% voting power Nomination of Directors one-half one-third © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 18

Miscellaneous Provisions Positives Negatives − Unlimited carry forward of − Minimum Alternate Tax now business loses calculated as a % of ‘Value of Gross Assets’ (as against ‘Book Profits’) − Depreciation benefit extended to amortized expenditure − All capital Gains taxed at normal rates (lower regime of − Provisions relating to foreign capital gains done away with) tax credit introduced © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 19

Concluding Thoughts - The DTC proposes significant changes to the current tax system - Stringent anti-avoidance measures could impact bona fide business structures - Businesses should consider the following actions: Impact assessment of proposals on their current structures and business models Active dialogue with the Government for presenting their views Government to consider public comments before tabling legislation in Parliament © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 20

Contact details Richard Rekhy Chief Operating Officer KPMG India Tel (Direct): +91 (124) 307 4303 Cell: +91 9845170801 e-mail: rrekhy@kpmg.com Naveen Aggarwal Executive Director KPMG India Tel (Direct): +91 124 307 4416 Cell: +91 98112 03453 e-mail: naveenaggarwal@kpmg.com © 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 21

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KPMG Direct Tax Code 2009

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