Revisting Direct Tax Code
The Government’s Revised Discussion Paper has watered down some of the draconian provisions of DTC, which will give a relief to the tax payers especially the stakeholders in the infrastructure sector. Jayesh Kariya presents a brief analysis
Considering the sensitivities around the Direct Tax Code (DTC), the Government relooked at couple of items and issued a Revised Discussion Paper on June 15, 2010. Let us discuss some of the relevant provisions.
The gross assets based taxation was strongly protested by all sections of the industry. The Government appreciated the practical difficulties and restored MAT on book profits. In fact, the MAT regime should be completely abolished as the rationale on which it was introduced does not survive given the shift from profit linked incentives to investment linked incentives. If the MAT credit provisions are restored, the infrastructure sector will not benefit at all. The way the industry operates, the capital expenditure based incentive could never enable a company to avail MAT credit. Further, given the long gestation period, the cap on the period of carry forward even if continued, could effectively result into non-utilisation of the MAT credit. Thus, MAT tax liability could become the actual tax liability for infrastructure player. Therefore, the MAT regime should be abolished.
If the Government wishes to continue with the MAT, then the existing provisions relating to computation of book profits, carry forward of MAT credit and exemption from levy of MAT to SEZ developers as well as SEZ units should be continued. Additionally, the exemption from levy of MAT should be extended to various infrastructure sectors which then existed.
The DTC has proposed profit-linked deductions to SEZ developers for the unexpired period whereas there was no such benefit for the SEZ units. Fortunately, the Government fathomed this dichotomy and corrected its stand by extending the tax benefits to the existing SEZ units for the unexpired period.
Rewriting effects of treaty override
The Government appreciated that the proposed provisions on the DTC would have not only shattered the confidence of foreign investors but would have also significantly curtailed the flow of FDI. Further, it also appreciated that restoring the preferential status to selected tax treaties through renegotiation process would not have been feasible.
The beneficial treatment provided in the treaty over the provisions of the domestic tax law was restored. However, to protect the misuse of tax treaties it is proposed that tax treaties will not have such preferential status over the domestic tax law where the GAAR is invoked; or when CFC provisions are invoked; or when Branch Profits Tax is levied.
This embargo should be applied only when the GAAR provisions are established and not invoked.
Secondly, the condition of CFC provisions should be removed as CFC regulations are applicable qua Indian residents and not non residents. Generally, the concern on treaty shopping is envisaged in the context of non residents having transactions with India. The condition of Branch Profits Tax should also be removed as it would be inappropriate and harsh to deny treaty benefits to non residents.
Jayesh Kariya is Partner with BSR and Associates, Chartered Accountants. He would like to thank his colleague Dipna Jobanputra in compiling this article.