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CBDT for tightening norms proposed in Direct Taxes Code
November, 12th 2009

The Central Board of Direct Taxes (CBDT) has urged tightening of the provisions on international taxation proposed in the new Direct Taxes Code, 2009.

According to official sources, two issues needing a close look are clarity on general anti-avoidance rules (GAAR) and widening the definition of permanent establishment (PE).

The ministry of finance is currently reviewing the Code for finalisation, following diverse feedback.

GAAR empowers the tax department to declare an arrangement or structure worked out by a company for any business purpose as an impermissible if it is wholly aimed at avoiding tax. While the Income Tax Act of 1961 did not have any such provisions, the new Code does, albeit with riders.

Officials added that the original intent for including this provision was to override provisions in double taxation avoidance agreements (DTAAs). Officials say while the provisions of individual DTAAs have their own relevance, it should not act as a tool for avoiding taxes.

A case in point is the recent discussion by the central government with tax-haven countries like Mauritius, where many Indian or foreign companies are creating special purpose vehicles to route business into India just to avoid paying taxes.

If it is felt that the objective of a structure is only to evade tax in India, then GAAR should prevail over any DTAA or any other provisions, said officials.

However, the Code also says that between any treaty and the Code, whichever comes into effect later should prevail.

Officials say DTAAs have been worked out under the Income Tax Act, 1961. They have to be reworked so as to ensure its relevance under the new Code. Going by this, provisions of DTAAs will prevail, since they will be reworked only after the new taxes code get finalised.

Therefore, it should be clearly stated in the Code that a GAAR provision should prevail over any treaty or any agreement if certain business arrangements have been entered into only for the purpose of avoiding taxes.

At present, there is no concept of PE for taxing income deemed to arise in India under Section 9 of the Income Tax Act, 1961, meant to tax income of foreign entities operating in India. Currently, the relevance of PE is restricted to provisions in transfer pricing.

While the definition has been incorporated in the draft Code, the scope is limited, since it only refers to a fixed place through which the business operates. CBDT has suggested reworking the definition on the basis of the model tax convention of the United Nations which includes a business site, a construction, assembly or installation project or supervisory sites, assembly and installation projects.

Besides, the UN model tax convention requires only a period of six months from the time of the setting up of such an arrangement to assume it as a permanent establishment.

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