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Tax code clause overriding trade pacts may be nixed
May, 29th 2010

The finance ministry may drop a provision in the draft direct taxes code that allows local tax laws to override Indias tax treaties with other countries, as it looks to avoid uncertainties over existing bilateral tax arrangements.

The finance ministry has formed a special task force within the Central Board of Direct Taxes to rework the draft, which is expected to be made public next month.

The proposal had run into serious resistance from foreign companies and from within the CBDT, as such a provision would have given sweeping powers to tax authorities. Last week, finance minister Pranab Mukherjee had said his ministry was revisiting the provision. I am taking care of it in the final thing, Mr Mukherjee told ET in an interview last Thursday.

I have maintained that many of these proposals will be altered, amended after having response from the stakeholders. So, when the final version comes out it will be taken care of, he said.

Foreign investors have formed a group Foreign Investors Representation to Simplified Taxes to voice their concerns.

The group highlighted the implications of treaty override in its submission to the government.

This provision meant that Indian tax authorities would apply provisions in the code and not the agreed treaty on foreign investors, denying them due credit and rendering DTAAs redundant, said Ajay Kumar, executive director at consulting firm PwC.

Globally, US has such a provision in its domestic tax laws, but taxation experts say it is rarely put to use. The treaty override provision is there only as an exception and it is hardly used, Mr Kumar said.

The idea behind the provision was to correct the abuse of India-Mauritius DTAA, but with New Delhi pushing for renegotiation of the treaty, the CBDT itself is not in favour of putting such provisions in the code.

Moreover, India has added incorporating limitation of benefit (LOB) clauses and a general anti-avoidance rule in all new bilateral treaties to prevent abuse of DTAAs. It also plans to insert such provisions in older treaties when existing treaties are renegotiated.

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