The document provides background on India's direct tax code. It notes the existing income tax act has undergone many amendments and other taxes like wealth tax are administered separately by different laws. This leads to conflicting court rulings and complexity for taxpayers. The new direct tax code aims to simplify laws, avoid exemptions, minimize tax avoidance, keep pace with court rulings, and encourage self-assessment and compliance through technology. It will consolidate all direct taxes under one code with simple language. Key features include eliminating regulatory functions, setting tax rates in schedules instead of annual finance bills, and delegating powers to reduce litigation.

1. DIRECT TAX CODE

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. BACKGROUND
3
 Marginal tax rates lowered, range of exemptions
broadened
 Tax base increased, further push required for
horizontal equity

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. 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. 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. 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. 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. 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. 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. 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. Assessee & Residence
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 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. 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. 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. 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. 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. 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. 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. Taxation of Companies
19
 Tax on Corporation
 25% both domestic and foreign
 15% on branch profit (income- corporate tax)

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena