Direct Tax Code India _ Jena


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Direct Tax Code India _ Jena

  2. 2. BACKGROUND 2  Income Tax Act 1961 has undergone several intractable amendments  Dividend Distribution Tax inserted in 1997  Fringe Benefit Tax inserted in 2006  Wealth Tax administered by Wealth Tax Act, 1957  Intractable conflicting rulings by different courts  Incomprehensible to the average tax payers  Complex tax law increases the cost of compliance of marginal tax payers and administration as well
  3. 3. BACKGROUND 3  Marginal tax rates lowered, range of exemptions broadened  Tax base increased, further push required for horizontal equity
  4. 4. STRATEGY 4  Efficient, Equitable and Effective  Avoidance by competents- subsidizing rich– inequitable  Minimize exemptions  Remove ambiguity in law to minimize tax avoidance  Keep pace with aggressive tax planning & court ruling on interpretation of ambiguous provisions  Technology & process reengineering to reduce cost  Tax policy to encourage self assessment and penalize evasion  Hence new DTC is aligned with above strategies
  5. 5. SALIENT FEATUREs 5  All direct taxes under one code  Language simple in active voice and short  Provisio and explanations removed, while essence nested  Extensive use of formulae and tables  Executive is delegated to end protracted litigations  Essential principles kept in statute, matters requiring frequent changes kept in rules/ schedules- will reduce frequent amendments  Law is logically reproduced in FORMs
  6. 6. SALIENT FEATUREs 6  Consolidation and reorganization of different provisions/ sections such as incentives, tax rates etc  Elimination of regulatory functions  Rate of Tax in Schedule, no more an annual legislation through Finance Bill
  7. 7. BASE for TAXATION 7  Income= Consumption + Change in net worth  Exemption up to a limit under income tax towards indirect tax imposed on consumption  Balance covered under income tax  Income should ideally include  Gifts  Earnings from labour, investment and business  Net accrued capital gains  Value of services & non-business assets net of expenses & depreciation  Imputed value of services by family  Windfall gains  Casual receipts- lottery
  8. 8. EQUITY in TAXATION 8  Income tax on individual income leads to corporatization and avoidance of distribution of profits to shareholders- to take profit out in course of capital gains  To prevent this corporate tax on profit of corporation is required. However, this leads to double taxation, when dividends are taxed again under income tax  This creates bias for debt financing  Owner occupied house left out of taxation  Exemptions on positive externalities like cost of administration, human development, equity  Deferrals to allow liquidity  Agricultural Income comes under State List of Constitution.
  9. 9. RESIDENCE or SOURCE BASED TAX 9  Natural Persons, who establish their residence, domicile in India irrespective of the source of the income globally  In case of non natural persons/ corporations, place of incorporation/ control & management is treated as residence  Global income of all residents to achieve tax neutrality in investment decisions (efficiency) & horizontal & vertical equity  Sourced based tax for non-residents
  10. 10. RESIDENCE or SOURCE BASED TAX 10  Loss for underdeveloped nations on residence criteria  Investors in developed nations  Investment flow through tax havens  Political and economic error in not taxing foreigners earning inside the nation  Issues in pure source based tax  Investors play nations against others to race tax rate to bottom  Determining source in aggressive transfer pricing
  11. 11. RESIDENCE or SOURCE BASED TAX 11 R & OR R but NOR NR Indian Income: ► Accrued / sourced in India Taxable Taxable Taxable ► Received in India Taxable Taxable Taxable Foreign Income : ► Accrued outside India but deemed to accrue in India by virtue of Section 9 Taxable Taxable Taxable ► Accrued outside India - First receipt in India Taxable Taxable Taxable ► Any other income accruing outside India and received outside India Taxable Not taxable Not taxable
  12. 12. Assessee & Residence 12  Precise definition of residency  Financial Year instead of Assessment Year  Precise definition of assessee and persons to include not liable people eligible to refund etc  Accruals/ Receipts  Ordinary Sources  Employment, house property, business  Capital gains  Residuary sources  Special Sources  Lottery, Horse Racing, Sports person, Sports association
  13. 13. COMPUTATION of TOTAL INCOME 13  Ring fencing each head wise total income with carry forward loss of respective head from preceding year  Expenditure not admissible in case of non-resident  Royalty  Fees for technical services  Income (special rates of tax of part II of 1st schedule)  Deduction of special prescribed expenditures incurred in performance of duties  Deduction of retirement benefits  Deduction of insurance & education for kids up to Rs 50K  Deduction of medical reimbursements up to Rs 50K
  14. 14. INCOME from BUSINESS 14  Business profit model-does not provide receipts and deductions  Income-expenses model-adopted in India, USA, Australia, Canada and many Asian nations  Asset classified as business asset or investment asset. Business asset is classified into business capital asset and business trading asset.  Profits on sale of capital assets or undertaking as income from business- not capital gains  Interest from capital of business other than those of financial institutions  Expenditure  Operating  Permitted financial charges  Capital allowances  Presumptive profit of certain business to continue  Separate income determination regime for certain business
  15. 15. CAPITAL GAINs 15  Income from Investment assets  Capital gain not on accrual- strain the finances  Can’t be taxed at par with income tax, as wealth appreciated on several years, while one time receipt will push the assessee to higher tax bracket  All capital gains aggregated with unabsorbed loss  No distinction betn short term & long term investment  Securities Transaction Tax abolished- to be taxed as capital gain  Transfer of capital assets as “gift or will” shall be taxed  Cost of acquisition/improvement indeterminable- treated nil, gain to be taxed fully
  16. 16. CAPITAL GAINs 16  Rollover  Agriculture land  Residence, if only one residence  Deposited in capital gain savings scheme  Agricultural land & personal effects beyond urban limit exempt  Reduce by inflationary index
  17. 17. TAX INCENTIVE 17  Tax avoidance and rent seeking behavior  Source specific incentive Sec 9 + 6th Schedule  Entity specific incentive Sec 10 + 7th Schedule  Non Profit organizations concessional treatment  Business Tax Incentives  Tax holiday for certain business  Profit linked incentive modified to recover all capital and revenue expenditure- existing schemes grandfathered  Area based exemptions abolished- existing areas grandfathered  Royalty, patent and cooperatives  Social Tax Incentives  EET instead of previous EEE approved by PFRDA  Health insurance, disable dependant, handicapped, education loan, rent  125%, 100% or 50% of donation
  18. 18. Taxation of Companies 18  Taxing profit of Companies-withholding tax that would be income of shareholders in future  Dividend distribution tax of resident company=15%  MAT-to overcome tax incentives and evasion  Taxpayers’ net wealth  Gross receipts of the enterprise  Visible wealth accrual  Book Profit- Old  Value of the assets used in business- New  .25% for banking companies, 2% for others  No carry forward credit
  19. 19. Taxation of Companies 19  Tax on Corporation  25% both domestic and foreign  15% on branch profit (income- corporate tax)
  20. 20. Unincorporated Bodies 20  Partnership firms, association of persons  Carry forward loss  Deduction as per corporations  Financial intermediary-passthru companies  Not liable to pay tax for liability of investors
  21. 21. Non Profit Organs and Trusts 21  Charitable replaced by permitted welfare activities  Organizations to be registered under the income tax commissionerate  Surplus generated from PWA & capital gains-15%  On transfer to other constitutions- 30% on net worth  Income of approved religious bodies exempt- donors not eligible for deduction
  22. 22. Tax on Net Wealth 22  Net Wealth Tax & Transfer Tax  Ability to pay higher tax  Progressive income tax without increasing marginal rate  Capture partly IT evasion in case of black economy  Wealth carries social power & privilege- annuity tax  Valuation at cost/ market price which ever is less  @ .25% on > 50 Cr of individual wealth or combined wealth of private discretion trust  Exempted Assets  Stock in trade  One house or land/ palace as residence  Jewellery of nation in possession of former rulers  Coparcenaries' property  Trust Property in charge of individual
  23. 23. Tax Administration 23  Stability in tax laws, moderate tax rates, fair and non- discreminatory application of law and quality of services in receipt, acknowledgement of return, assessment, refund, petitions and appeal  Strategy  Effective and efficient handling of non-compliance  Quality taxpayers service  Tax literacy and sensitizing taxpayers  Grievance handling  CBDT  Chairman  6 members
  24. 24. Tax Administration 24  Income Tax Authorities  Director General/ Chief Commissioner  Commissioner, Addl Commissioner/ Joint Commissioner  Asst Commissioner, Income Tax Officer, Inspector  Transfer Pricing Officer  Tax Recovery Officer  Taxpayer Information System  Information in organized and non-intrusive manner  Search, seizure or summon in case of need  Based on PAN  Hierarchy of users allowed access on need to know basis  Confidentiality of taxpayers data-RTI to be amended  Information sharing with other regulatory and enforcement agencies to the extent required for public interest
  25. 25. Procedural Laws & Enforcement Strategy 25  Procedural law applies to all taxes/ tax bases  Return Filing  30th Jun non-business, non-corporate  31st August for rest  Revised return within 21months  Enforcement for Non-Compliance  Late filers, non filers, stop filers  Notice after 21 months  Return scrutiny on parameters given by CBDT through CASS  AO shall have discretion to select few cases on parameters  Return Processing  Within one year notice for any discrepancy  Cannot demand after one year  Scrutiny assessment- 21 months from FY in which return is filed  Best Judgment, order special audit / refer to valuation officer  Valuation officer’s recommendation binding
  26. 26. Procedural Laws & Enforcement Strategy 26  Escaped Assessment  Reasons of reassessment recorded  AG findings  With prior approval of Commissioner  Re-assessment shall not be made, if the assessment is made prejudicial to the assessee based on order of higher court or assessment is made on the specific order of CBDT/ supervising officer  Within seven years- no time limit for reassessment based on appeal / revision orders  Notice explaining reasons  30 days time for filing return in response to notice  Search & Seizure  Mandatory reopening seven preceding years
  27. 27. Background on Transfer Pricing 27  Transfer pricing norms for computation of income in international transactions & SDTs wrt arms length principle-2001  Sec 92 to 92F of IT Act and Rule 10 to 10T of IT Rule – TP regulations  Finance Act 2012  92 BA inserted to include SDT  92CC & CD, 44 GA advance pricing agreement  Documentation  Burden of arms length comparison rests on tax payer  Rule 10D - 13 mandatory documents  Accountant’s report
  28. 28. SPECIFIED DOMESTIC TRANSACTION (SDT) 28  section 40A, Chapter VI-A, section 10AA, & > Rs 5 crore in aggregate during a FY  section 92BA  Payment to a related person referred in Section 40A(2)(b) of the Act, including payment to a director or any person (ownership of shares carrying =20% of voting power)  Transactions between the tax-incentivised business and another business of one taxpayer close connection - Section 80 IA(8) (10)
  29. 29. Transfer Pricing 29  Audit by Indian Revenue Authorities- aggregate income adjustments to the tune of Rs 44,000 crore last year>audits of previous 4 years  Companies are opting for the mutual agreement procedure (MAP)- characterization of income, permanent establishment profit attribution and transfer pricing issues- actions by either of the tax authorities are contrary to the treaty provisions  MAP: Rules 44G and 44H Income tax Rules, 1962  MoU with US and UK to follow certain procedures
  30. 30. Audit of Transfer Pricing 30  Institution of TPO - Specialist  Specified transactions to be reported to TPO by return date  Selection by TPO on risk parameters set by Board within 2 months of end of FY in which assessee reported  Communication to assessee & AO simultaneously  Report of TPO to assessee & AO within 42 months of FY of transaction  AO to issue assessment order within 3 months  Assessee may agitate the computation before AO & TPO and dept or appeal
  31. 31. Double Taxation Avoidance Agreement(DTAA) 31  Comprehensive DTAAs  Limited DTAAs for shipping and air transport  Conflict of DTC and DTAA- latest document shall prevail  Residence and Source Based taxation four models  Full or part tax in country of residence and country of source waiving tax to that extent  Full right to tax by one country based on source or residence and the other country exempt fully  Full right to tax by both countries, but tax rate of source country is limited, and country of residence gives credit  Full right to tax by both, residence country gives credit
  32. 32. Advance Pricing Agreement 32  Bilateral and Multilateral APA  Anonymous pre-filing consultation- confidentiality of transaction/ party not revealed  Inclusion of experts from industry, economics and statistics in APA team  Site visit to taxpayer’s premises  Withdrawal of application - no refund of fee  TPO carry out compliance audit every year  APA not binding if critical assumptions alter
  33. 33. Retrospective Law for Indirect Transfer 33  Retrospective application-technical defects vitiating substantive law used for aggressive tax planning  Share/interest in a company/ entity-ownership, capital, control, management  Substantially from the assets in India≥50% of value- Para 5 of Art 13 of UN Model  Indirectly-look through-intermediary entities be ignored  Transfer- 100% indirectly  Minority shareholders- ≥26% share transfer  Foreign Company listed abroad, frequently traded  Tax neutrality in business reorganization abroad-75% ownership in amalgamation/ demerger,100% others  FII-underlying assets of non-resident investors not be taxed  Private Equity Investors-waived if no control/ Mgmt, ≤ 26% ownership, or ≤50% assets in India, listed and traded abroad, reconstitution within group  No penalty on retro-effect  Attributable profit- proportionate only if ≥50% of value of assets  Dividend paid by foreign companies- not taxable  Double Taxation-applicable to non-treaty countries and non- double taxation  Non deduction of tax- retrospective cases, liability shall not be on non-deducting assessee
  34. 34. Chidananda Jena Email: Skype/ YM: chidanandajena