The government on Ttuesday proposed relief for individuals, companies that pay minimum alternate tax and entities using the provisions of the Double Taxation Avoidance Agreements in the revised draft of the Direct Taxes Code.
More relief is in store as the revised draft suggested a less taxing dispensation for triggering the General Anti-Avoidance Rule.
The 35-page document, released for comments, said every arrangement for tax mitigation would not be liable to be classified as an impermissible avoidance arrangement. It would only be used in four situations and will come with further safeguards by way of detailed rules and a specified threshold.
But there could be some pain for those making capital gains, as long-term capital gains in case of listed companies will now be added to the income and taxed at the applicable rate.
At present, no capital gains tax is to be paid on long-term gains.
The higher burden could be partly offset through a reduction in the securities transaction tax, which was proposed to be abolished in the first draft. Investors are now awaiting the specific rates of deduction for capital gains, which would be finalised by the tax authorities.
In case of short-term capital gains, however, no change has been proposed.
There will be more burden on some foreign institutional investors, too, as the revised draft said any income arising through sale and purchase of securities will be taxed under capital gains.
At present, it is treated as business income of a foreign company and exempted from tax.
In a bid to check tax avoidance, the government also proposed to tax profits of overseas subsidiaries of Indian companies -- whether distributed or not by way of dividend in India. In addition, it has addressed some of the concerns on foreign companies that are not residents of India.
In all, there are 11 areas in which changes are proposed. But the revised draft is silent on the new rates of taxation. The earlier draft had suggested a taxation rate of 10 per cent on income up to Rs 10 lakh (Rs 1 million), 20 per cent for income up to Rs 25 lakh (Rs 2.5 million) and 30 per cent thereafter.
"The proposals in this revised discussion paper would lead to a reduction in the tax base proposed in the DTC. The indicative tax slabs and tax rates and monetary limits for exemptions and deductions proposed in the DTC will, therefore, be calibrated accordingly while finalising the legislation," the revised draft said.
Tax consultants said the biggest gain for Corporate India has come by way of changes in the proposed MAT regime. Instead of a system of computation based on gross assets, as proposed earlier, the revised draft has suggested that it should be linked to book profit.
The change in the system was expected to affect the capital intensive companies the most and result in an additional burden of over Rs 12,000 crore (Rs 120 billion).
Foreign investors will also draw comfort from the fact that the provisions of DTC will not override existing Double Taxation Avoidance Agreements.
Instead, only in cases where the provisions related to CFC or GAAR have been triggered, will the DTC override a tax treaty. Otherwise, between the domestic law and the relevant DTAA, the one which is more beneficial to the taxpayer will apply.
Even non-profit organisations can draw some comfort as income from public religious activities will be exempt from tax if they fulfill certain conditions.
Revenue Secretary Sunil Mitra told reporters there were a number of other specific issues on which feedback had been received.
These concerns would be addressed while finalising the Bill for introduction in Parliament in the upcoming monsoon session. The government plans to implement DTC from April 2011.
"If Parliament procedure is complete and it becomes a law, it will be implemented from April 1, 2011," Mitra told reporters after releasing the revised DTC draft.
S S N Moorthy, chairman, Central Board of Direct Taxes, said tax rates in the draft code were only suggestive and the finance ministry has not touched upon the matter in the revised discussion paper because the rates would be decided by the legislature.
As per the revised discussion paper, an employer's contribution to an approved provident fund, superannuation fund and New Pension Scheme, within the limits prescribed, shall not be considered as salary in the hands of the employee.
"Also, retirement benefits received by an employee will be exempt subject to specified monetary limits. Thus, the amount of gratuity received, the amount received under voluntary retirement scheme, the amount received on commutation of pension linked to gratuity and the amount received on account of encashment of leave at the time of superannuation are proposed to be exempt, subject to specified limits, for all employees," said Homi Mistry, tax expert with Deloitte.
The first draft of DTC, which will replace the decades-old Income Tax Act of 1961, was released in August 2009. The industry had opposed many provisions of the code.
Following that Finance Minister Pranab Mukherjee had agreed to address nine key areas of the code. The finance ministry received about 1,600 comments on the first draft code.
"It seems that the government is reverting to the existing position on MAT and taxation of savings," said former CBDT Chairman T N Pande. He added that the government had softened its stance on some of the issues.
"The government has covered 70-80 per cent of the distance. Now we need to see what more can we get," said Dinesh Kanabar, deputy chief executive officer and chairman (tax) for KPMG's operations in India.
