Income from interest, royalty and technical fees are taxed at 10 per cent, while dividend is taxed at nil rate. Even if set off is given, the tax payable will be jacked up and be higher than the rate both under the domestic law and the Agreements.

Branch Profits Tax (BPT) is a new tax brought in by the Direct Taxes Code. It is applicable, like tax on gross assets, only for foreign companies with tax rate at 15 per cent on the branch profits. Branch profits will be the total income of the branch for the financial year as reduced by the amount of income tax thereon vide Sec. 100(2) of the Code. But this is not made clear. Is it the tax on normal income, which a foreign company may be liable under Sec. 5 of the Code from its Indian activities? There is no specific provision for set off of such tax against BPT or BPT against such normal tax in Chapter VII dealing with branch profits.

Levy of BPT will go against both spirit and letter of the Double Tax Avoidance Agreements which limit liability only to income attributable to non-residents operations in India. Income from interest, royalty and technical fees are taxed at 10 per cent, while dividend is taxed at nil rate. Even if set off is given, the tax payable will be jacked up and be higher than the rate both under the domestic law and the Agreements.

The subject of BPT does not find a place in the discussion paper. Branch profits will normally be part of the deemed income under Sec. 6 because of business connection listed therein or because of other criteria.

It is unlikely that the intention of the Code is to tax non-resident foreign companies under Sec. 5 of the Code and again independently tax its branch income as BPT leading to double taxation.

Branch profits may well include the income from purchase operations of the branch of the foreign company in India. Sec. 5(4) of the Code following the present law will exclude the income from purchase operations in India. If the provisions relating to BPT in Sec. 100 in Chapter VII override Sec. 5, as it is likely to be understood, this would be against the present policy of encouraging sale of goods for export. This will need clarification. Since branch profits would ordinarily become liable under Sec. 5 of the Code (Sec. 9 of the present law), BPT is a redundant tax.

Non-profit organisations

Exemption hitherto available for universities and other educational institutions under Sec. 10(23C) with requirement of notification only for those with gross receipts of over Rs. 1 crore does not find a place in the Code. Their eligibility now available under Sec. 11 is severely restricted.

Chapter IV, which deals with non-profit organisations, applies to all trusts and institutions with the same charitable purposes as in Sec. 2(15) of the present Act but described as permitted welfare activities under Sec. 284(202) read with Sec. 96(g) of the Code. Fresh registration will be required on application, which is bound to be responded within three months.

Computation of income has to follow Sec. 94 and 95 of the Code.

When both the provisions are read together, all voluntary contributions, other than corpus donations, the net income from incidental business other than what relates to an object of general public utility (excepting protection of environment and monuments), net income from investments, any amount of incomings, realisations, proceeds, donations or subscriptions, excluding only loan, borrowing, advances and capital gains from investment assets (and not receipts from transfer of business capital assets of permitted business) would constitute income. Capital expenditure for the objects of the trust, besides any amount other than loan or advance to any other non-profit organisation would be deductible.

Outgoings abroad is additionally permitted by the Code, if it is for promoting international understanding or otherwise notified. Instead of permitted investments under the present law, Sec. 91 of the Code lists prohibited investments with more to be prescribed. Bar against benefit to interested person is more elaborately listed under Sec. 92 of the Code.

In effect, a non-profit organisation is required to apply its 100 per cent income during the same year without the provision for accumulation within five years as of now.

Voluntary contributions received at the fag end of the year, which could not be utilised before the end of the year, will attract tax.

A non-profit organisation will be liable for 30 per cent tax, if it converts into any form or organisation, which does not qualify to be a non-profit organisation or ceases to be a non-profit organisation or fails to transfer upon its dissolution of its assets to any other non-profit organisation. It will be liable to tax at 30 per cent on its net worth. The reasoning apparently is that the net worth contains the entire relief of exempt income so as to require withdrawal of such exemption, but overlooking the fact that the net worth may contain initial corpus and corpus donations, which do not have the character of income. It may also contain income which has been taxed at 15 per cent under the Code.

Rate of tax for a non-profit organisation is prescribed at 15 per cent on income computed under Chapter IV vide Paragraph C of Schedule I of the Code. Since non-profit organisations with object of general public utility having income from commercial activity does not figure in Chapter IV, should they be liable at normal rate? Since they are also non-profit organisations with their income not being exempt, they should also be liable only at 15 per cent, an inference, which requires official confirmation, if the Code becomes law.

Donations

The Sixteenth Schedule gives the details of donation eligible for deduction as under the present law. Contributions to scientific research to a registered association or a national laboratory or any university, college or other institution engaged in research will qualify for weighted deduction at 125 per cent as under Sec. 35(1)(ii) of the present Act. Those which qualify for 100 per cent deduction as under the present law are retained in the Code. So are the deductions for others at 50 per cent as at present.

Is the code simpler?

The Code has not made the tax law simpler. There are 298 sections in the Code as against the present 285 sections in the present Act. The number of schedules has been enhanced from 14 to 18. Definition Sec. 284 at the end of the Code has as many as 318 entries as against 48 entries in the corresponding Sec. 2 at the beginning of the Act.

There are more definitions in the Chapters as for example, 26 definitions in Sec. 113 dealing with anti-avoidance rule.

There are 43 items listed for operating expenditure and 25 clauses deeming receipts as income. No doubt, explanations and provisos have been removed, but they have found their way in sub-clauses in clauses in sub-sections in sections as for example, under Sec. 68(3)(d)(i) to (iii) or Sec. 148(2)(a)(i) to (vii). The schedules are equally lengthy. Further more delegated legislations by way of rules would continue as under the present Act with more provisions requiring prescription of rules. The Rules book will, therefore, not be smaller.

Artificial disallowances will continue in computation of business income. Deeming of income, where it is not income in conventional sense, is also to be continued. Accounting Standards prescribe the method of computation of income. There was no reason for not adopting it with modifications in the Code, where necessary. This would have made the law simpler.

Assessment of charitable institutions is rendered even more complex. Procedural provisions are also lengthier with more powers for tax administration, which are liable to be abused with less protection for a taxpayer. Income tax return, which will have to take into account the provisions of law would become bulkier than the present return form, which itself requires professional assistance for filling it up. The law is not in the least simpler. It may be that the income-tax law cannot be that simple, but it has no reason to be so complex.