The Direct Taxes Code (DTC), once touted as an important tax reform, seems to be missing from pre-Budget discussions. Some finance ministry officials and tax experts believe DTC, in its current form, does not serve any purpose, as most of the things it had proposed initially have already been brought under the Income-Tax Act.
According to officials, not much debate has happened on DTC in pre-Budget interactions and whatever little suggestions have come are regarding revisiting the necessity to bring the code to replace the I-T Act, 1961. However, they add a final call on the issue will be taken by Finance Minister Arun Jaitley.
The original DTC draft was put in the public domain in 2009 but revised the next year before being presented in Parliament. It was referred to the Standing Committee on Finance in 2010, which gave its report in 2012. The finance ministry tried to bring the revised DTC in the Cabinet last year, but a decision was deferred. The previous government finally put the draft Bill, 2013, in the public domain early this year, at a time when general elections were underway.
The version of DTC tabled in Parliament in 2010 had proposed General Anti-Avoidance Rules (GAAR), advance-pricing agreements (APAs) and taxation on indirect transfer of capital assets, among other things. All these have been provided under the I-T Act now, though GAAR is scheduled to come into effect from the 2016-17 assessment year. In fact, there have been demands that taxation of indirect transfer of capital assets, included in the Finance Act of 2012 through retrospective amendments of the I-T Act, be reversed.
Another important aspect of DTC was giving exemptions to investments rather than profits. For that, Budget 2011-12 has already imposed minimum alternate tax on the book profits of developers of and units in special economic zones. Now, the demand is to roll it back.
“Many of the DTC provisions have come. What were primarily left included Controlled Foreign Company (CFC) and exempt exempt tax (EET) provisions,” Rahul Garg, executive director (direct tax), PricewaterhouseCoopers, told Business Standard.
CFC provisions are for taxing the undistributed income of global entities controlled by Indians. Distributed income is already taxed at present. The idea was that the income earned from offshore entities is deliberately not distributed to Indians to defer tax. The provisions were there in both the Bill tabled in Parliament and the revised DTC Bill, 2013.
“For CFC provisions, Indian entities will have to go for consolidation of their subsidiaries globally. I don’t think the country is ready for this at the moment. At this point, the economy does not need CFC,” said Girish Vanvari, co-head of tax at consultancy firm KPMG in India.
Then comes the issue of taxing long-term savings at the time of withdrawal. Under the existing system, contributions, accretions and withdrawal are exempt from tax (EEE method) in government provident fund, recognised provident fund, public provident fund, traditional life insurance schemes, etc.
However, DTC’s 2009 draft had proposed to exempt only contribution and accretions to funds in these schemes, while withdrawals were suggested to be taxed (EET method). After the proposals drew flak, the Bill tabled in Parliament proposed to bring back the EEE method of taxation for specified provident funds and approved pure life insurance products. It even proposed to extend the benefits of the EEE scheme to annuity-based products. The DTC Bill, 2013, is silent on the issue.
“For such a small issue, the DTC Bill should not be brought. It could be clarified under the Income-Tax Act itself,” Vanvari said.
He said the original idea of DTC was to provide a tax structure that would be easier to be implemented through better administration. However, much time had passed since DTC was originally proposed and many changes had taken place in the tax administration system. The government should rely more on the Tax Administrative Reforms Commission (TARC), headed by tax expert Parthasarathi Shome, which had already given its first report, Vanvari added.
The original DTC, drafted in 2009, proposed less exemptions and wider I-T slabs
- It proposed levy of 10% I-T on annual income of Rs 1.6-10 lakh, 20% on Rs 10-25 lakh and 30% on more than Rs 25 lakh
- Slabs were narrowed as more exemptions were sought
- Currently, 10% tax is imposed on Rs 2-5 lakh, 20% on Rs 5-10 lakh and 30% on more than Rs 10 lakh
- The 2013 draft also proposed a 35% super-rich tax on those earning more than Rs 10 crore. Budget 2013-14 imposed surcharge of 10% for those earning over Rs 1 crore annually
- Advance-pricing agreements, proposed in DTC to bring down transfer-pricing disputes, have already been signed with 5 MNCs earlier this year
- GAAR, another DTC proposal, was proposed in Budget 2012-13 but deferred twice to the 2016-17 assessment year
- DTC also proposed to tax indirect foreign deals for acquiring assets in India but the Finance Act, 2012, included a retrospective amendment to the I-T Act for this