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Direct tax code needs overhaul: Experts
September, 22nd 2009

A raft of tax experts and professional bodies including chambers of commerce across the country thinks virtually every line of the new direct tax code may have to be rewritten to shield domestic companies and their operations, both in India and overseas.

The new code will have an effect on Indias IT companies, especially those with business operations abroad, said Himanshu Patel, senior tax expert with Deloitte, at a meeting organised by the Eastern Regional Council of the Institute of Company Secretaries of India (ICSI- EIRC).

According to Mr Patel, the transfer pricing mechanism provisions will have a negative impact on international transactions unless these are revised sufficiently to deal with some of the crucial issues like period of agreement and threshold equity limits.

Stock market stalwarts like Rakesh Jhunjhunwala and Shankar Sharma too have expressed their fear about outflows of foreign funds by the end of the current financial year if the new Tax Code sought to be in place by April 2011 is not revised, a tax expert pointed out.

ICSI-EIRC chairman Ashok Pareek thinks that the draft direct tax code, which is doing the rounds across the length and breadth of the country, is likely to take time before it is finalised.

Views and comments from various sections will have to be taken into account by the ministry before they can introduce the final version in Parliament, he added.

The code has, for the first time, introduced the advance pricing agreement in which the definition of associated enterprises has been made more stringent by lowering some of the important threshold limits currently existing under the scope of transfer pricing regulations. While voting power thresholds have been lowered to 10% from 26% earlier, loan threshold has been reduced to 26% compared to 51% prescribed earlier to qualify entities as associated enterprises.

Indeed, the previous threshold limits on shareholding, loan, directorship etc, Mr Patel explained, was linked to a reasonable control over a business entity.

For instance, an equity holding of 26% gives the shareholder power to block special resolutions. A 10% holding in a foreign entity may not give a shareholder even minimum control over its activities.

To consider such an entity as an associated enterprise for the purpose of taxation under transfer pricing regulations, is certainly unfair, he said.

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