The existing provisions of the Income Tax Act, 1961, have given birth to such myriad interpretations that its practitioners are often left wondering that perhaps only Bhagwad Gita could have more possible interpretations. Considering the sheer volume of litigation arising, not to mention the moolah involved as a result of differences in opinion of reading of complex clauses, simplification of tax laws was the crying need of the hour.
The finance minister, while introducing the draft Direct Tax Code (DTC) stressed the fact that DTC represents an attempt to simplify the tax laws of the country by removing ambiguities and thereby encouraging voluntary compliance by the taxpayers. One must appreciate the vision of the finance minister and his team, including the former finance minister, who had a significant say in shaping the DTC in the form it exists today.
However, as it often happens, the intentions and the vision of the legislators are sometimes not translated into black and white and a slight omission here and a misplaced word there can cause lot of discomfort to the tax payers, as many of the non-resident oil & gas service providers may find out in near future.
Under the existing provisions of Section 44BB of the Act, which has non-obstante clause overriding the other provisions of the Act, non-resident service providers to oil & gas industry enjoy a tax regime wherein 10% of the gross receipts are deemed to be their income and tax is levied at the rate of 42.23% on the income so determined, resulting into effective tax rate of 4.23%.
Further the section provides that non-resident service providers at their option, can claim their actual taxable income to be lower than the deemed income computed as mentioned above, by furnishing duly audited accounts of the business to the tax authorities. Under the DTC, corresponding provisions of Section 44BB of the Act can be found in serial numbers 6 & 7 of the Rule 1 of Schedule Fourteen.
It is interesting to note that this benefit shall not be available to service providers to the natural gas exploration companies. The language used in the serial numbers 6 & 7 of Rule 1 covers the assessees providing services in connection with prospecting/extraction/production of mineral oil.
Mineral oil and natural gas are separately defined in the DTC, unlike under the existing provisions wherein mineral oil is defined to include natural gas. Therefore, it appears that the benefit of presumptive taxation would not be available to service provider to natural gas exploration companies.
This will result into an unwelcome rigour for non-resident service providers since in reality it is extremely difficult to forecast at the prospecting/exploration stage whether the operations would lead to a discovery of natural gas or mineral oil or both. Further in some cases, the outcome of the operations would be known only after several financial years.
In such a case, what should be the position adopted by the non-resident service providers while determining their taxable income during the intervening periods, is a question to which seemingly there are no answers.
Further Rule 2 of the said Schedule provides that the amount of income determined under Rule 1, shall be further increased by excess of the amount of income, if any, actually earned by the assessee. Thus a question arises as to why there shall be a further addition to the income when the income is to be determined on a presumptive basis.
This mystery is further deepened when one looks at Rule 6 of the said Schedule, which states that provisions of the section shall not apply to the business referred in Rule 1 if: the assessee maintains the prescribed books of accounts; the books of accounts are duly audited; the accounts are correct and complete to the satisfaction of the tax officer (there again is a disconnect between audited accounts and need for the tax officer to determine the accuracy of audited accounts); the income can be properly deduced from the accounts; the assessee produces the accounts as and when called for by the tax officer.
On a conjoint reading of Rule 2 and Rule 6 of Schedule 14 to the DTC, it seems that once the non-resident service providers maintain books of accounts and subject to satisfaction of other conditions mentioned in Rule 6, any income over and above the 10% of gross receipts determined under Rule 1, would be subject to tax as well.
Having said the above, it should be noted Rule 2 is independent of Rule 6 and in a situation where the income can be ascertained without application of Rule 6, then such income, in excess of presumptive income, shall also be taxable under the schedule.
In contrast, in a situation where the actual taxable profits are less than 10% of the gross income, it remains to be seen whether the income under Rule 6 would be deemed to be taxable income since Rule 2 apparently applies only in situations where the income under Rule 6 exceeds the deemed income.
In the above backdrop, it appears that intention of the legislature is to levy tax on income of non-resident service providers in a situation where the real income exceeds the deemed income. Since the thought process behind introduction of the DTC is simplification and avoidance of litigation, an amendment to the code resolving the aforesaid issues would be most welcome as it would bring about clarity and would save massive amount of litigation.
Shailesh Monani is associate director & Gaurish Zaoba is assistant manager, PricewaterhouseCoopers