DTC misses the point

Apr 03 2014, 02:56 IST
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SummaryTaxing the rich more may impact savings and investments

The government has re-initiated the debate over the Direct Taxes Code (DTC) by releasing a revised draft of the Direct Taxes Code Bill for public comments. At the outset, the timing of the release of the draft is odd, to say the least. Given the impending elections, there is no possibility of the DTC being enacted in the current Lok Sabha, and as such this document may end up serving as only a point of reference for consideration by the new government after the elections. Further, considering the many amendments made to the Income-tax Act, 1961, to enact several of the proposals originally contained in the DTC, a question arises as to whether the DTC will be a modern new law for the future or whether it will end up as a mere re-written version of the current Income-tax Act.

The draft released by the government has taken into considerations the detailed recommendations made by the Parliamentary Standing Committee on Finance in its report submitted in March 2012. The draft DTC also takes into account the several amendments that have been made in the Income-tax Act, 1961, and the Wealth Tax Act, 1957, by the Finance Acts of 2011, 2012 and 2013. The result is a comprehensive draft that contains many significant and far-reaching changes.

There will obviously be a more intense and focused debate on many of the finer aspects and nuances of the draft DTC in the coming days. However, if one were to take a somewhat wider perspective, a few broad themes are manifest in this draft DTC, which in particular may warrant a more detailed and serious policy debate over the coming days and months.

Foreign companies and investments

First, some of the changes proposed in the DTC could result in significant tax costs on foreign companies. For instance, on the controversial question of indirect transfers (i.e. the taxation in India of transfer of shares of foreign companies with underlying Indian assets), the DTC makes a significant departure from both the recommendations of the expert committee under the chairmanship of Parthasarathi Shome as well as the Direct Taxes Code Bill, 2010. The Expert Committee as well as the earlier Bill had provided that India should tax gains from transfer of shares in foreign companies only if the shares derived more than 50% of their value from assets in India. This threshold percentage is now sought to be substantially reduced to

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