After much delay, the Direct Tax Code Bill was finally tabled in the Parliament. Aimed at simplifying procedures for investors and bringing in more revenue by widening the tax net, DTC is a key reform for Indian economy. It would now be applicable from April 1, 2012, instead of March 1, 2011.
Rahul Garg, Leader, Direct Tax Practice, PwC has welcomed the move. In an interview to Media, Garg said that the delay is welcomed as assessment process is changed in the new norms. However he also added that there is no big bang change in tax in DTC Bill.
Mukesh Butani, Partner, BMR and Associates commented that the government will gather more money from taxpayers.
Saying that tax on unit linked insurance policies (ULIPs) is not a significant change, Butani remarked that a tax on graded short-term capital gains is a positive move.
According to DTC Bill, short-term capital gains will be taxed at income tax rates while short-term capital gains for companies is flat at 30%. Besides, the new DTC Bill will have dividend distribution tax (DDT) of 5% for both equity mutual funds (MFs) and unit linked insurance policies (ULIPs).
Minimum alternate tax (MAT) on book profit will be at 20% while DDT will be levied at 15%. Also, income distributed by mutual funds to unit holders will be at 5%. Tax on branch profits is at 15%, on net wealth above Rs 1 crore is 1% while exemption limit hiked to Rs 2 Lakh.
Q: What was the fuss all about? There was so much talk about DTC for the last many quarters, doesnt look like its a bunch of whole lot of excitement, is there?
Butani: People are reading the headline news only in so far as the tax rates and the slabs are concerned. If you look deeper into it, there are several changes in the procedural part of the law. There are some new concepts which have been introduced on general anti-avoidance, controlled foreign corporation (CFC) legislation and treaty overwrite.
Yes, the big bang reforms that captured the headline, wherein the maximum marginal rate applicable for individuals would be Rs 25 lakh and the corporate tax rate would be brought down to 25%, all of those have not come true, I guess in the right direction that the government intended to. I think the simple math couldnt add up.
There is no change in as far as the basic philosophy for tax rates is concerned, whether it is for individuals or it is for corporates. Otherwise it is a brand new code, completely different philosophy in so far as the administration and the policy are concerned and the procedure for doing assessments is concerned. Some new concepts, which I guess is going to help government gather more money from the tax payers.
Q: Why the delay? That is what everyone was scratching their heads about yesterday. This is not goods and services tax (GST). Why did DTC need to come only in 2012? Do you think it was a signal that both might come together in 2012?
Garg: I would think that the delay is welcome here for two reasons, there is significant change in relation to the process of assessment, and there is a significant change in respect of how the computation is made. For that both the tax payers and the government needs to gear up both structurally from their organizational point of view as well as the systems need a lot of gearing up. I think there is a breathing space for both the government and the tax payers to gear up before we venture into the new code. To my mind it is meaningful and sensible. The big bang radical reforms of sweeping nature have not been there in this code and if you look at it briefly, it is the anti-avoidance provisions whether you call it general anti-avoidance, whether you call it CFC, whether you call it some other process which are more stringent than before or widening the powers of the tax officers to reopen the cases etc. I would think that pretty much this seems the concept and the rates are also not too drastically changed. Therefore in terms of the revenue gathering, it is not hurrying up any changes and that is why I suppose the delay is alright and is meaningful.
Q: The tax on unit linked insurance policies (ULIP). How much of a deterrent or a step back do you see that as?
Butani: I dont know-there is a little bit of engineering that they have done on various aspects, including the ULIP aspect, but I dont think it is material as such. I think the biggest cheer for the market was long-term capital gains exemptions on listed securities. Even from a short-term capital gains standpoint a 50% reduction goes back to an old law that we had it used to be called ATT. I dont think that it is going to make any material difference on the ULIP tax rate.
Q: Have you looked at the special economic zone (SEZ) regulations or proposals? There seems to be some wrinkle on minimum alternate tax (MAT) on SEZs as well?
Butani: I think the biggest aspect on SEZ on the units front was, if the SEZ developers are going to complete building the infrastructure say by 2012, it is going to take time for units to be able to occupy. I think that date has been extended to 2014. The SEZ unit holders will enjoy profit link incentives if they start their operations by 2014 and the SEZ developers will have a deadline of 2012. If you look at the original code, it was not very clear as to what would be the date applicable for SEZ developers and the law was completely silent on SEZ unit holders. As far as the levy of dividend distribution tax and MAT is concerned, it goes against the grain of the SEZ law, not against the income tax law. When the SEZ law was legislated, they had prescribed for completely tax free status. That is a new avenue I guess that the government has figured out to be able to collect some amount of taxes on SEZ, entrepreneurs, developers and SEZ unit holders. But all in all you still have a saving of the corporate tax rate of 30%, which otherwise would have been paid by the developers and by the unit holders up to 2012 and 2014 respectively.
Q: Do you agree that the government has found ingenious ways of getting more taxes out from many of those taxpayers?
Garg: I think there is no ingenuity in the way. I would suspect that what is now sought to be done in the DTC is precisely in conformity with some principles of international tax. What needs to be seen is how is this administered and if it is administered in the true spirit and true letter of how it is done internationally, I think the aspects which are sought to be brought in whether it is CFC, whether it is General Anti Avoidance Rules (GAAR), whether it is limited override of treaty for GAAR reasons. I would say that the challenge now we would have is to see whether the system is mature enough to administer it the way it ought to be, not lopsided either way.
Q: What do you think, on issues like CFC and GAAR, do you have perfect clarity?
Butani: There is no clarity. That is also one reason why the law has been deferred till 2012. The GAAR and the CFC regulations had to have a set of subordinate legislations. These subordinate legislations could either come by way of rules or by way of guidelines by the Central Board of Direct Taxes. Both these subordinate legislations need not be an Act of Parliament. Just like the government debated, the direct tax code, I would anticipate that these subordinate legislations are debated threadbare. If they are not debated and views from various stakeholders are not taken into consideration, you are bound to have administrative challenges. To your point, is this the right time to introduce such legislation? Personally no, because India is a capital importing country and it will continue to be a capital importing country. The question is, jurisdictions all over the world are doing it and they are doing it with one sole reason, various governments are going through budget deficits and hence tax collection is the top priority of the governments. If you talk about tax collection, another guiding philosophy for tax administrators all over the world is make sure that bulk of the economic activity that you carry out is liable to tax in your jurisdiction. It is no longer true that in a globalized world, you are looking at economic activity that was spread across various jurisdictions. Now the aim and objective of various governments which is also very clear if you look at the various legislations that we are having, tax all economic activity in India to maximize your tax collection. That is the guiding philosophy.