In the midst of general elections, the finance ministry has taken an unexpected step by releasing the Direct Taxes Code, 2013 (DTC) for public discussion on April 1. The original intention to introduce the new Code was to simplify the Income Tax Act, 1961 (I-T Act) and broaden the tax base by minimising exemptions, removing ambiguity and checking tax evasion. However, for broadening tax base, now there are material changes being proposed in the DTC in comparison to the DTC Bill, 2010, which may have far-reaching implications. One of such changes relates to widening the purview of capital gains tax for non-residents.
In the DTC, it is stipulated that non-residents would be subject to tax on capital gains arising from the disposal of capital assets situated in India. The Code, inter alia, provides that share of a company registered or incorporated outside India shall be deemed to be situated in India if such share derives its value substantially from the assets located in India. By virtue of such deeming fiction, the law presumes that the underlying objective behind transfer of such share is nothing but to indirectly transfer the assets located in India. Hence, such indirect transfer is liable to be taxed in India on a proportionate basis.
In the earlier version of DTC, it was provided that to trigger such deeming fiction, at least 50% of the Fair Market Value (FMV) of global assets, owned by the foreign company, should be located in India. The revised DTC has lowered the 50% threshold limit considering it to be too high to the following situations:
n at least 20% of the FMV of all assets owned should be located in India
*FMV of Indian assets exceeds the prescribed amount.
Thus, the scope of deeming fiction has been enlarged. The revised provision now has two limbs. Under the first limb, the proportion of FMV of the Indian assets as compared to FMV of the global assets of a company has been reduced from 50% to 20%. The second limb is intended to tap high value transactions if FMV of the Indian assets exceed the prescribed limit even though the percentage may be less than 20%. The recommendation of the expert committee under the chairmanship of Parthasarathi Shome to tax gains from transfer of shares in foreign companies only if the shares derived more than 50% of their value from the assets located