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Representation
Foreword :
1. At the outset, we appreciate the initiative taken for
circulation of Revised Discussion Paper (RDP) revealing some of the conceptual
changes to be made in the proposals contained in the Direct Taxes Code, 2009 (DTC),
which is going to replace the current Income-tax Act, 1961 (I.T. Act). This
shows that the Government appears to have an open mind to address the genuine
concerns raised by the taxpayers and others in response to the proposals
contained in the DTC. We also believe that the same approach will continue till
the final DTC gets enacted and becomes the law of the land as the same will
reflect the Direct Taxes Policy of the Nation for a long time to come.
2. In the DTC, many conceptual changes have been proposed
with regard to tax system and its administration as compared to the I.T. Act.
Many of such proposals have been found highly objectionable/debatable. For this,
a detailed representation has been made by the BCAS, in which each chapter, in
most cases, has been divided into two parts, namely, (a) Structural changes
(where the policy/concept itself required reconsideration/change), and (b)
Changes suggested with regard to specific provisions contained in the DTC. The
RDP deals with only some of the conceptual changes to be made in the DTC in
certain areas. However, it is completely silent with regard to the concerns
raised at conceptual level in respect of many other areas of the DTC and for
which no mention is found in the RDP, such as : Taxation of Business Income, Tax
Deduction at Source (TDS), Branch Profit Tax, Wide Powers for Tax
Administration, etc. The taxpayers and the people at large are in dark with
regard to the approach of the Government in respect of the remaining areas which
are also equally of great concern to the taxpayers and others. We only hope that
the rational view will be taken in respect thereof while drafting the final
proposals to be incorporated in the Bill.
3. In the introduction part of the RDP, it is stated that
there are a number of other issues which have been raised in the public
feedback, which, though do not form the part of the RDP, will be considered
while finalising the Bill for introduction in the Parliament. We believe
that the suggestions with regard to the conceptual changes made in the remaining
areas of the DTC as well as the suggestions made with regard to the specific
provisions contained in the DTC in our earlier representation will be seriously
considered and will find positive response in the final proposals contained in
the Bill for introduction in the Parliament. Therefore, those suggestions
have not been reiterated in this representation.
4. We also take this opportunity to recognise some of the
welcome decisions taken by the Government which are stated in the RDP, such as:
continuance of provisions relating to Minimum Alternative Tax (MAT) based on
book profits, continuance of EEE for tax treatment of certain savings,
continuance of the currently available exemption in respect of retirement
benefits of the employees, realignment of house property tax to actual rent
basis, continuance of present system of levying wealth tax, etc. However, some
of the proposals contained in the RDP require reconsideration/modification as
they are likely to create genuine hardships to the taxpayers considering the
ground realities of the tax administration in the country. In this
representation, attempt has been made to point out such cases for
reconsideration of the decisions taken as mentioned in the RDP with the hope
that the same will get serious consideration and positive response before
introducing the Bill in the Parliament for enacting the DTC.
5. It would not be out of place to reiterate that in the
Indian context, proposal for continuance of discretionary and arbitrary General
Anti Avoidance Rules (GAAR) is highly undesirable even with some of the apparent
safeguards mentioned in the RDP. The continuance of such discretionary and
arbitrary powers may create an unmanageable situation in the times to come and
will also keep uncertainty and apprehension in the minds of taxpayers even with
regard to the genuine commercial decisions taken by them. In this context, we
need to recall the experience of provision empowering assessing officers to make
prima facie adjustments and consequent levy of additional tax u/s.143(1A) while
processing the Return of Income introduced from the A.Y. 1989-90 and the havoc
that the provision created for few years. Ultimately, the said provision had to
be withdrawn by the Finance Act, 1999. In the anxiety of catching few smart
assessees who may have abused some of the provisions of the Act, it would be
totally unjustified to introduce such unfettered arbitrary powers.
If at all such provisions are found essential for any reason,
the same should only be applied only to international transactions and that too
after providing substantial higher threshold for the same, so that the common
taxpayers do not suffer with regard to their normal commercial decisions.
In view of the above, it is earnestly requested that each of
the suggestions made in this representation needs serious consideration and
proper debate
with open mind before final decision is taken in the matter.
1. Chapter I — Minimum Alternate Tax — Gross Assets
vis-à-vis Book Profit :
1.1 One of the widely welcomed proposals in the RDP is that
of dropping the levy of a flat 2% tax on assets in favour of the present regime
to levy tax on book profits. We welcome this change and hope that the same
existing MAT provisions will get
reintroduced in DTC.
1.2 MAT is supposed to be collection of tax in advance on the
basis of book profit and not to deny the benefits to the taxpayer. With this
objective MAT credit was introduced. However, MAT credit is allowed to be
carried forward for ten assessment years immediately succeeding the assessment
year in which tax credit becomes allowable.
It is, therefore, suggested that under the DTC, the MAT
credit should be made available for indefinite period.
2. Chapter II — Tax Treatment of Savings — Exempt Exempt
Tax (EET) vis-à-vis Exempt Exempt Exempt (EEE) basis :
2.1 We welcome the continuation of the EEE method of taxation
for Government Provident Fund, Public Provident Fund and Recognised Provident
Funds and pension scheme administered by Pension Fund Regulatory and Development
Authority, Approved Pure Life Insurance Products and Annuity Scheme in the
proposed Direct Tax Code (DTC).
2.2 The Revised
Discussion Paper (RDP) contemplates continuation of the EEE method only for
specified categories of provident funds, pension schemes and pure life
insurance products. Consequently all other investments will fall in the EET
category. Para 3.1 of the RDP already provides that investments made prior to
the commencement of the DTC will continue to enjoy the EEE method for the
tenure of the financial instrument. It is suggested that all investments in
or subscriptions to any scheme made prior to 1st April 2011 (the proposed
commencement date of the DTC) should continue to be governed by the earlier EEE
method of taxation.
2.3 It is an
accepted fact that India is in need of substantial investment in
infrastructure. It is therefore suggested that investment in, or
contribution to, infrastructure schemes/funds (including subscription to
deposit of companies, bank deposits), should continue to enjoy the EEE method
of taxation under the DTC. The funds so collected should be used for meeting
the requirements of the funds for the Government for development of
infrastructure needs of the country.
2.4 The RDP
recognises that our country does not have in place a social security net for
senior citizens. In view thereof it is suggested that even after the DTC
comes into force, a withdrawal from any scheme which is otherwise covered by
the EET method, by a senior citizen should not be taxed i.e., it should enjoy
the EEE method. This will to some extent augment the social security for the
senior citizen.
3. Chapter III — Taxation of Income from
Employment — Retirement Benefits and Perquisites :
Reintroduction
of Standard Deduction :
3.1 A salaried
employee incurs certain expenses wholly and exclusively for the performance of
office duties, which are not reimbursed by the employer. The employee is not
allowed any deduction for such expenses incurred. It is therefore suggested
that a standard deduction, as was provided earlier in the present Act, should
be reintroduced, so that the employee pays tax on his real income.
4. Chapter IV — Taxation of Income from
House Property :
4.1 The policy
decision to tax income from house property only on the basis of actual rent and
not on any notional basis is a step in the right direction. This will avoid
litigation in future with regard to the determination of the amount of gross
rent for the purpose of taxation as currently, litigation is going on in large
number of cases with regard to determination of ‘annual value’ (which is the
current basis of taxation) for the purpose of taxation of income from house
property.
4.2 In the DTC,
it is provided that income from house property shall be the gross rent less
specified deduction. It is also proposed to reduce specified standard deduction
(for repairs, etc.) to 20% from 30% currently available under the I.T. Act.
It may be noted
that even the current deduction of 30% provided under the I.T. Act itself is
not adequate and is having a very adverse effect in large number of cases. This
is on account of the fact that apart from the repairs, in most cases, the
assessee has also to pay lease rent, insurance premium at a higher amount for
various valid reasons. Further, the society charges in the metros and most of
the larger cities, administrative and other statutory expenses incurred in case
of corporate entities, etc. are also very high. Apart from this there is also
no clarity as to deductibility of various taxes and cesses levied by the State
Governments, for which litigation is on under the I.T. Act.
In view of the
above, it is suggested that specified standard deduction should be retained at
least at the current level of 30% and specific provisions should be made for
deduction of all taxes/cesses paid to the State Governments in respect of house
property.
4.3 In the DTC,
it is provided that letting of machinery, plant, furniture or any other
facility, if inseparable from the letting of the house property, then the same
will be taxed under the head ‘Income from House Property’. In such cases, the
standard deduction of even 30% (assuming that the present proposal of 20% will
be increased to 30% as suggested above) will be totally inadequate. Therefore,
in such cases, adequate provisions should be made for allowance of depreciation
in respect of such other assets, which are let out with house property due to
its nature of being inseparable. Alternatively, the income in such cases should
be taxed under the head, ‘Income from Business’ and not under the head ‘Income
from House Property’.
5. Chapter V — Taxation on Capital Gains :
5.1 At the
outset, it must be recognised that the scope of the Chapter relating to Capital
Gains has been substantially narrowed down in the Direct Taxes Code (DTC), as
the same applies only to Investment Assets. In the Income-tax Act, 1961 (I.T.
Act), the Chapter relating to Capital Gains covers every Capital Asset whether
related to business or not. Unfortunately, under the DTC, business-related
Capital Assets are excluded from the scope of this Chapter and hence, the
profit/loss on transfer of Business Capital Asset (BCA) is governed by the
Chapter relating to business income as per the proposal contained in the DTC.
This is totally unfair and unjust. This is the major issue which has not been
addressed and considered in the Revised Discussion Paper (RDP) as the same only
deals with the treatment of Capital Asset, being Investment Asset.
Therefore, it is
suggested that all capital assets including Business Capital Assets should be
governed by the provisions relating to Capital Gains and accordingly, the
Chapter relating to Capital Gains should be made applicable to all Capital
Assets on the lines of similar provisions contained in the present I.T. Act.
5.2 As against
the total exemption presently available to Long-Term Capital Gain arising on
transfer of listed equity shares (Equity Shares) or unit of equity-oriented
fund (Specified Units), it is now proposed to grant deduction at the specified
rates while computing such Capital Gain without any indexation. It is suggested
that in respect of Capital Gain/Loss arising on investments made in such assets
up to 31-3-2011, the present treatment of exemption should continue and
appropriate provision in that respect should be made in the DTC. This will
effectively continue the present position of total exemption with regard to old
Investments and that will also obviate huge transactions in the capital market
before the commencement of the DTC with a view to claim exemption before that
date and/or to increase cost for future. Such large-scale sales in the stock markets
will have a destabilising effect which ought to be avoided.
It is also
noticed that in case of such Equity Shares or Specified Units, there is no
provision for option to substitute cost of acquisition by fair market value as
on 1-4-2000. There is no reason not to make such provision as in the case of
other capital assets. Therefore, alternatively, option to substitute the cost
of acquisition by fair market value as on 1-4-2000 should be provided to the
taxpayer.
5.3 In the RDP,
it is also proposed that in case of such loss, the same also will be scaled
down in the similar manner. It is totally unfair to scale down such long-term
loss in the similar manner as in the case of such capital gain. The deduction
at the prescribed percentage is necessary while computing gains as a large
portion of such gain may be on account of inflation. However, if the assessee
suffers a loss in such investments, then he will be hit twice, firstly on
account of financial loss and secondly, on account of scaling down of loss for
the purpose of taxation.
In view of the
above, it is suggested that in case of such long-term capital loss, the same
should not be scaled down as proposed, but provision should be made to enhance
the cost of acquisition by making appropriate indexation provision.
5.4 It is also
proposed not to introduce any Capital Gain Savings Scheme under the DTC. This
is totally unfair and unjust. The assessee must have an opportunity to claim
exemption from the long-term capital gain by making investment in such scheme,
which may be framed on lines of present S. 54EC of the I.T. Act with one
change, that is, there should not be any limit on the amount of investment
which can be made in the scheme. Till the year 2007, there was no limit for
such investments under the I.T. Act. In fact, the amount available out of such
investments can be used for the purpose of meeting the requirements of funds
for various infrastructure projects.
Therefore, it is
suggested that appropriate provision for the Capital Gain Savings Scheme on the
lines of present S. 54EC (without any ceiling on the amount of investment)
should be introduced in the DTC.
5.5 In the RDP,
it is proposed that the Securities Transaction Tax (STT) will be calibrated
based on the revised taxation regime for capital gain as the STT is a tax on
specified transactions and not on income. This is totally unfair. The STT was
introduced by the Finance (No. 2) Act, 2004 and that was effectively in
consideration for the exemption granted to long-term capital gain and providing
concessional rate of tax for short-term capital gain in such cases at that
time. This is evident from the speech of the Hon. Finance Minister made at that
time while introducing the relevant Finance Bill, in which he has stated as
under (at para 111 of his speech) :
“Capital gains
tax is another vexed issue. When applied to capital market transactions, the
issue becomes more complex. Questions have been raised about the definitions of
long-term and short-term, and the differential tax treatment meted to the two
kinds of gains. There are no easy answers, but I have decided to make a
beginning by revamping taxes on securities transactions. Our founding fathers
had wisely included Entry 90 in the Union List in the Seventh Schedule of the
Constitution of India. Taking a cue from that Entry, I propose to abolish the
tax on long-term capital gains from securities transactions altogether.
Instead, I propose to levy a small tax on transactions in securities on stock
exchanges. . . . . . . ”
In view of the
reintroduction of tax on such capital gain, the STT should be abolished as the
basis on which it was introduced would no longer exist.
6. Chapter VI — Taxation of Non-Profit
Organisations :
6.1 The law
relating to exemption of charitable and religious trust has now got fairly well
settled. It is, therefore, suggested that the existing basic scheme of
exemption of charitable and religious trusts contained in S. 11 to S. 13 of the
Income-tax Act, 1961, should be continued in the DTC.
6.2 The revised
discussion paper on the Direct Taxes Code (DTC) deals with public religious
institutions in para 3(b). If the trust/institution is wholly for public
religious purposes, it will be exempt subject to conditions (A) to (H)
mentioned therein. Sub-paragraph (c) also envisages exemption for partly
religious and partly charitable institution for which conditions are specified
as follows :
6.2.1 the
predetermined ratio between charitable and religious activities required to be
set out in the Trust Deed/Memorandum should not pose much difficulty for
societies or S. 25 companies, which can carry out the amendment through a
resolution. However, for trusts, the procedure for amending a trust deed
involves a long-drawn court procedure, taking more than 6 months. It is,
therefore, suggested that in case of trusts set up prior to 1-4-2011, the
predetermined ratio need not be set out in the trust deed, but can be
determined in a resolution of the Board of Trustees passed within one year of
commencement of the Direct Taxes Code.
6.2.2 The
requirement of separate books of account to be maintained for religious and
charitable activities will be too cumbersome, as most of the religious trusts
may be having limited resources. Further, the common expenses will have to be
split up between the two sets of books where there may be difference of opinion
by the AO. Hence it is better to have one set of books of account and financial
statements with separate ledger accounts for religious and charitable expenses.
If necessary, a requirement of additional statement of Income & Expenditure
Account in respect of charitable activities may be prescribed for such trusts.
6.3 Accumulation
for 3 years is not sufficient. A period of at least 5 years should be allowed
for accumulation. A trust wanting to fund a major project may not be in a
position to do so in 3 years. Further, the restriction on the amount of
accumulation would defeat the very purpose of accumulating funds for large
projects. There should be no limit on the amount of accumulation.
6.4 Permitting
only cash system of accounting on the ground of simplicity and easy
administration is not justified, as the mercantile system being followed by the
trust is not difficult, and trusts are used to the said system. The mercantile
system is the more accurate method of accounting whereas the cash system may
not show the true and correct position of the trust by deferring the income or
expenses. The concept of real income for NPOs is well settled and should not be
disturbed with an artificial concept of income. Both cash and mercantile
methods of accounting should be permitted for NPOs.
6.5 Only
specified outgoings are allowed as deduction. Therefore several outgoings may
not be allowed as a deduction. All outgoings should be allowed as a deduction.
6.6 Taxation of
NPOs on the net worth is extremely harsh and may result in double or even
triple taxation.
6.7 Trusts set
up prior to 1961 should continue to be treated as NPOs, even if they are for
the benefit of a particular caste.
6.8 There should
be provision for setting off deficit of one year against the income of
subsequent year(s).
6.9 Capital
gains on transfer of investment assets, being financial assets, are to be
computed under the head ‘Capital Gains’, and will not be exempt. The present
position of S. 11(1A) for taxation of gains on such asset as income and
exemption of such income as spent for charitable or religious activities if
reinvested, should not be altered. The term ‘Financial Asset’ needs to be
clearly defined.
6.10 Loss of
exemption if any property of the value of exceeding Rs.1,000 is diverted to the
specified persons u/s.13(3), is too harsh. The limit should be raised to at
least Rs. 10,000.
6.11 Limit for
applying for registration should be extended to 6 months from the end of the
relevant financial year. There should be provision for condonation of delay in
filing application for registration in genuine cases.
6.12 Any surplus
resulting from activities in the nature of trade or commerce will result in
denial of exemption for a trust advancing objects of general public utility. If
such activity is meant to feed charitable objects, there is no reason to deny
exemption.
7. Chapter VII — Special Economic Zones —
Taxation of Existing Units :
7.1 It
is laudable that
the provision for
the extension of the profit-linked deduction (for the unexpired period)
to the existing SEZ units has been brought in the revised DTC proposal. This is
certainly a welcome change.
However, it is
suggested that for the purpose of development and growth of exports, the
incentives should be made available for newly set up SEZ units also.
8. Chapter VIII — Concept of residence in
the case of a company incorporated outside India :
Introduction of
the provisions of Controlled Foreign Corporation :
8.1 The
provisions of Controlled Foreign Corporation (CFC) are proposed to be
introduced to avoid deferral of tax of the passive income earned by a foreign
company which is controlled directly or indirectly by a resident in India and
where such income is not distributed to the shareholders.
8.2 Presently,
barring two tax treaties (i.e., Singapore and Mauritius) the underlying tax
credit is not available to the Indian MNCs for the dividends received from the
foreign subsidiaries. Also, India does not have Participation Exemption Regime.
8.3 Introduction
of CFC provisions will reduce international competitiveness of Indian MNCs.
Moreover, when transfer pricing regime is in place and ‘Place of Effective
Management’ is being introduced, it is premature to introduce CFC provisions
and it can be deferred for the time being.
8.4 Therefore,
it is suggested that the introduction of the CFC provisions at this stage seems
untimely and premature. Time may not be ripe for introduction of such
provisions in India as the Indian MNCs are still in their nascent stage of
going outbound.
9. Chapter IX — Double Taxation Avoidance
Agreement (DTAA) vis-à-vis Domestic Law :
DTAA
vis-à-vis Domestic Law :
9.1 The
discussion paper proposes that in case of conflict, the Domestic Law or the
DTAA whichever is more beneficial to the taxpayer shall apply. It is also
proposed that DTAA will not have preferential status over the domestic law in
the following circumstances :
(i) When GAAR is invoked
(ii) When CFC provisions are invoked
(iii) When Branch Profit Tax is levied
9.2 A unilateral
amendment of this nature in the domestic tax law leading to an override of the
existing treaties should be avoided. We suggest that this proposal be applied
in respect of only new treaties signed after the introduction of DTC.
9.3 If domestic
law is to be applied over the treaty, it should be done through the process of
Mutual Agreement Procedure to enable the non-resident to avail tax credit in
the residence country.
10. Chapter X — Wealth Tax :
10.1 For giving
effect to exempted productive assets from wealth tax, the current definition of
assets u/s.2(ea) of the Wealth-tax Act, 1957 should be adopted.
10.2 Exemption
with respect to any one house or part of a house or a plot of land should be
made available irrespective of the date of its acquisition and/or construction.
It should not be restricted to those acquired or constructed before the 1st day
of April, 2000 as is proposed in the Direct Tax Code.
11. Chapter XI — General Anti Avoidance Rule
:
11.1 The
discussion paper clarifies that very arrangement for tax mitigation would not
be classified as an ‘impermissible avoidance arrangement’.
11.2 An
arrangement would have to satisfy any one of the following conditions to
qualify as an ‘impermissible avoidance arrangement’ :
(i) It is not at arm’s length;
(ii) It represents misuse or abuse of the
provisions of the DTC;
(iii) It lacks commercial substance;
(iv) It is carried out in a manner not
normally employed for bona fide business purposes.
11.3 GAAR
creates a high degree of subjectivity in the application of tax laws and unless
it is approached with extreme caution, it may lead to several unintended
consequences. GAAR provisions would continue to allow the tax authorities to
override the tax treaty provisions. GAAR provisions in its current form would
have an impact on several cross-border investments and M&A structures.
11.4 The
Proposed GAAR is so wide in its scope and has far-reaching implications that it
is going to affect ordinary, everyday business transactions. It will introduce
uncertainty in even normal business transactions. Though, the purpose of the
GAAR is to serve as a deterrent to impermissible tax avoidance/ evasion
transactions, but its introduction in the present form will have an adverse
impact on the business of the honest taxpayer. Therefore, in our view, it would
not be appropriate to introduce GAAR in its current form.
11.5 If at all,
GAAR provisions need to be introduced, we suggest as under :
11.5.1 At least,
GAAR provisions should apply only to international transactions and not to the
domestic transactions in any circumstances. Presently, the Department has
enough power to unearth domestic transactions of the resident taxpayer under
domestic law and take penal action.
11.5.2 A
threshold limit of substantially higher transaction value should be set for
which GAAR provisions could be applied.
11.5.3 Whenever
the question involved is of determining the beneficial owner, the GAAR
provisions should provide that the treaty of the country of the beneficial
owner so determined would apply. This is with a view to clarify that the treaty
benefits would not be denied totally.
11.5.4 The Code
should provide for establishment of a GAAR Authority similar to the Authority
of Advance Rulings, comprising experts to invoke these Rules and deal with the
consequences under the Rules. A process such as that prescribed for the AAR
rulings must be prescribed for the administration of GAAR to achieve the stated
objectives of the Code: reduction of litigation, transparency, fairness of
administration of tax, certainty and voluntary compliance.
11.5.5 The
factor of ‘transaction not at an arms length’ is already addressed by the
Transfer Pricing provisions and hence should be deleted vis-à-vis GAAR
provisions.
11.5.6 The term
‘commercial substance’ should be objectively defined to specifically mean as a
transaction which is backed by a reasonably strong commercial reason.
11.5.7 The
factor of ‘misuse or abuse of the provisions of the DTC’ and the term ‘bona
fide business purpose’ is subjective and should be deleted.
