Direct Taxes Code: Revised bill makes avoiding tax tougher for foreign companies
April, 12th 2014
The government has tightened a provision in the revised direct taxes code (DTC) Bill that will make it tougher for overseas companies to avoid paying taxes in India on transactions where underlying assets are located in the country.
This would pertain to deals such as the one between Vodafone Group Plc and the Hutchison Whampoa group (both foreign companies) over the acquisition of what is nowVodafone India.
The revised draft law proposes that if 20% of the total assets of a company are located in India, then the income arising from such a transaction will be taxed in the country. The previous version of the Bill had said such transactions would be taxed if 50% of the total assets were located in India.
The new version, which was published on the income tax department website for comments from the stakeholders on Tuesday, is aimed at widening the tax net, removing ambiguities and plugging loopholes in the current tax laws. To be sure, a new government at the centre could revise some of the provisions of the Bill before it is tabled in the Parliament.
Levying a capital gains tax on such transactions has been a bone of contention between the income tax department and various multi-national companies involved in cross-border transactions. The tax department is currently contesting various cases in Indian courts against companies on the taxability of such transactions where a share transfer is between two non-resident companies.
In the Vodafone case, the Supreme Court ruled in January 2012 that a transfer of shares of a foreign company having an Indian subsidiary from one non-resident to another non-resident does not amount to transfer of a capital asset in India and hence the gains from this transaction are not liable to be taxed in India.
The case involved the overseas transfer of a single share of a company with underlying assets in India. Vodafone International Holdings BV, a Dutch unit of the British telecom operator, acquired the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) for more than $11 billion through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also a Cayman Islands company.
Following the adverse Supreme Court ruling, the government brought in a retrospective amendment to tax laws stating that it was always the intent of law to tax such transactions where the share “derives its value substantially from the assets located in India”. DTC proposes to now clearly define what is substantial.
Many companies have challenged the retrospective amendment clause in courts.
“ At present, section 9 of the income tax Act does not provide any threshold as to what is the meaning of substantially deriving value from assets located in India. Though this now brings in clarity, lowering the threshold from 50% to 20% will lead to many more indirect transfer cases coming under the tax ambit,” said Sunil Jain, a tax partner at J. Sagar Associates.
“But one will have to wait for the new government to know what is their stance on this piece of legislation,” he added.
DTC 2013 also proposes to introduce another tax slab for individuals earning more thanRs.10 crore a year by taxing them at 35% rate. The government, however, has not accepted recommendations to widen individual income tax slabs, citing a revenue loss of almost Rs.60,000 crore. The revised code also proposes to include financial assets under the ambit of wealth tax as compared to only physical assets at present. The draft also proposes to levy an additional 10% tax on the recipient of dividend payments if the dividend income exceeds Rs.1 crore.
This could bring promoters of big companies who receive a huge amount of income as dividend under the net.
Currently, a dividend distribution tax of 15% is levied on the company distributing the dividend and not on those who receive the dividend.
“While the original intent was to simplify the language, there are material changes that are sought to be brought about in the existing legislation,” said Ketan Dalal, joint tax leader, PwC India, in a note. The new law proposes to bring virtually all assets under wealth tax including shares, he said, adding that it has also expanded the list of stringent provisions in relation to penalties and prosecution.
The first draft of the direct taxes code was released in August 2009. Subsequently, the DTC 2010 Bill was tabled in Parliament in August 2010 and then referred to the standing committee on finance that submitted its report in March 2012. Due to the large number of changes that had to be incorporated, the government decided to bring a fresh Bill.
The government has accepted 153 of the 190 recommendations made by the standing committee.
KEY CHANGES IN THE REVISED DIRECT TAXES CODE 2013
—An indirect share transaction will be liable to be taxed in India if 20% of the assets are based in India.
—New tax slab introduced; individuals earning more than Rs10 crore a year to be taxed at 35%.
—No changes in other tax slabs for individuals; age for senior citizens relaxed to 60 years from 65 years.?
—Levy an additional 10% tax on the recipient of dividend payments if the dividend income exceeds Rs1 crore.
—Financial assets included under the ambit of wealth tax as compared to only physical assets at present.
—Rationalization of provisions related to non-profit organizations.
—Ring-fencing of losses from business availing investment linked incentives.