Even as the Centre pushes for a Cabinet nod to introduce the Direct Tax Code Bill in Parliament, India Inc on Wednesday sought more clarity on some of the clauses and refinement in the Bill.
The DTC Bill, which has undergone several revisions from its first version, would be placed before the Cabinet shortly so that the revised version could be taken up in the winter session starting December 5.
“We are working on the DTC Bill and want to bring it (to Parliament) as soon as possible,” revenue secretary Sumit Bose told reporters on the sidelines of a CII summit here.
While speculations are rife that the revised Bill may erase the 35% tax on super-rich and propose a lower corporate tax rate of 25% as compared to the earlier plan of 30% and do away with some of the exemptions, industry experts feel the DTC Bill should clarify on how the profits of a subsidiary unit of a multinational firm should be taxed.
The finance ministry also allayed fears that general anti-avoidance rule (GAAR), which will be part of DTC but effective from 2015, will hurt investor sentiments now that the government has put in place adequate safeguards to prevent its misuse. “GAAR is inevitable. But we should not be afraid of that as invoking GAAR is outside the tax administration and it would be overseen by a panel headed by a judge,” said Sunil Gupta, a joint secretary at the Central Board of Direct Taxes.
Still, industry experts said the government should lay down illustrations in the DTC of cases where GAAR will apply and where it won’t as it was done by the Shome committee in its report to the government. Also, going by the protracted litigation between the government and Vodafone, some experts feel the government should amend tax laws to give dispute resolution panels (DRPs) powers to negotiate and settle tax cases.
Though the concerns of foreign investors over GAAR has been largely addressed, industry experts point to other clauses in DTC such as those pertaining to place of effective management (POEM) and controlled foreign corporation (CFC) that need clarity if the country wants bigger doses of foreign direct investment flows.
“The concern now is how the DTC Bill defines POEM and CFC. The government should provide greater clarity on these,” said Sudhir Kapadia, national tax leader of Ernst & Young, India.
The DTC clause on POEM, which is related to tax residency status, tax implications for foreign firms. A company, which is a resident in India, is taxable on its worldwide income as opposed to a narrow scope for a non-resident.
Under the DTC, the concept of POEM is one of the tests to determine the residential status of a company. At present, a company, to be a resident in India, has to be either an Indian company or the control and management of its affairs has to be situated wholly in India.
But under the DTC, a company is treated to be a resident in India if it is an Indian company or if the companies board of directors or executive directors make their commercial and strategic decisions in India.
A misinterpretation of the definition of POEM will discourage foreign firms to hold board meetings in India apart from triggering other disputes over taxation, said Kapadia.
The other concern is how CFC is defined and interpreted in DTC. The proposed CFC regulations pertains to taxation of undistributed profits of overseas subsidiaries of Indian companies. At present, dividends transferred by overseas subsidiaries of Indian MNCs are taxed at 15% and no credit is provided for the foreign taxes paid by the subsidiaries. This discourages Indian MNCs to bring home the dividend income of their overseas arms into India.
“There is a disconnect between the government policies on attracting capital flows into India and the tax reform (like DTC) especially on the penal tax laws. The tax on dividends of overseas subsidiaries of Indian companies are high. The government should provide for some credit on taxes paid abroad,” said PK Ghose, executive director of Tata Chemicals.
Kapadia said that the tax on dividend repatriated by overseas subsidiaries of Indian companies should be lowered to 5% and the dividend linked to investment and job creation in India as it has been done in US. This will boost foreign exchange inflows and help narrow the current account deficit, he added.
Industry experts also voiced their concerns over how Indian tax authorities deal with the OECD’s proposed action plan on base erosion and profit shifting (BEPS) especially for cross-border e-commerce.
While admitting that BEPS remains a key concern for developing countries, Bose said ?residence-based? taxation is under strain and is no longer an efficient method for just and fair allocation of profits.
