DTC to be implemented from April 2013: Finance Secy
April, 20th 2012
India will implement the direct tax code (DTC) from April 1, 2013, Finance Secretary RS Gujral told CNBC-TV18 on Thursday.
The code, which will replace existing Indian Income Tax Act 1961, intends to cut tax rates to bring more people and companies under the tax net, phase out profit-linked exemptions for companies and replace them with investment-linked incentives.
Gujral said most parts of DTC have been finalised barring six or seven issues, which need to be resolved. As far as GST is concerned, he said, it will need more political consensus. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: You have reached out to the foreign institutional investors (FIIs). But at the end of every meeting, they come out and say while we like the fact that the government is talking to us, we are still uncertain about the fact that we dont know what will be considered a permissible structure or jurisdiction by the government, when it comes to the matter of paying taxes and therefore, it might be a judgment call by the tax authority or a very subjective assessment which makes us very nervous. What can you assure global investors on this issue, which is qualitative in nature? A: We have had a couple of meetings with the FIIs. I personally had a meeting for nearly about two-two and half hours with them. We did indicate to them that whatever are your concerns in terms of any interpretations of words, we will take that into account and we will address all those concerns.
But the basic issue is that it must be a permissible arrangement. It cannot be an impermissible arrangement. The FIIs asked me as to what is the impressible arrangement. My straight remark to them was that if they are based in USA, their trader is based in USA and the trading is being done on the Indian Stock Exchange based from New York and they show it on paper that it is out of one of the countries where they dont have to pay tax then clearly that is an impressible arrangement, if they have only a post office box address.
Their next question was that okay, is it going to be retrospective? Is it going to hurt us for the previous years? That point has been absolutely clarified to them that this is applicable only for income with effect from April 1, 2012. They still had certain concerns. They stated that there are certain clauses which give an impression as if a part tax benefit is obtained then the arrangement will be deemed to lack commercial substance. We gave them an assurance that there is no such intention.
The basic issue is that if it is a post office box type arrangement, it is clearly impermissible. It would be covered under general anti-avoidance rule (GAAR). In case it is a permissible arrangement then clearly nothing comes into play. No GAAR comes into play. It is the tax treaty which is enforced.
They then had the issue that okay if some of us are impermissible as of now, then if we do become permissible, if we make full arrangement there and we do our trading from that particular country then would it be impacted? I told them very categorically that whatever maybe the wording, we will clear in the GAAR rules that if the arrangement is permissible, if they are actually trading from there, they have their full staff, they have their full facilities there then GAAR will not be attracted. That is the point.
Thereafter, I had mentioned to them that we have already a committee which is examining the GAAR rules so that as soon as the Finance Bill is passed thereafter the GAAR rules should be notified without any delay. I did ask them to join in the deliberations of those committees. They did join. Whatever are their concerns, they have been taken on board. Categorically, it has been pointed out to them that there is no intention to trouble under GAAR, there is no intention to misuse any authorities under that. Finally, they requested one point. They said that in case we are willing to pay the 15% short-term tax because long-term in any case is not taxable then can we be assured that GAAR will not be applicable? Again this stems from their concern that in case GAAR becomes applicable then perhaps they may get leviable to perhaps 20% plus interest, plus penalty etc. So, this assurance has been given to them that we will incorporate in the rules. It is obvious from statute, but if you want a clear assurance, we will incorporate that in case tax is leviable and is paid then GAAR will not be attracted in any case.
The various safeguards that we have provided under GAAR were also all told to them in great detail. I must tell you that a lot of safeguards have been provided. First, the assessing officer has to come to a conclusion that there is an impermissible arrangement. The assessing officer has to come to a conclusion that the sole purpose is avoidance of tax or reduction of tax. In case he comes to this conclusion, he has to put up to his commissioner.
The commissioner will take an independent view whether all the proof is available that it is an impermissible arrangement. In case the commissioner, after giving notice to the party also comes to the conclusion that GAAR is invokable then the commissioner has to send it to a GAAR panel. There the request is that GAAR panel should have atleast some independent person outside the Income Tax Department. Thats a concern. We are trying to see how best we can address that. So, the GAAR panel will consist of three very senior officers. That is to also examine the whole case and come to a conclusion where GAAR is invokable.