It is indeed heartening to note that the tax rates applicable to non-resident corporates are sought to be brought at par with the domestic companies, to be taxed at the rate of 25 per cent. However, correspondingly, the concept of the branch profit tax is proposed to be introduced (which appears to be somewhat akin to the permanent establishment tax levied on profits of business carried on by foreign companies in the United States), whereby an additional tax of 15 per cent on branch profits is sought to be levied.

Another feature of the draft Direct Taxes Code is the proposal to introduce the concept of what is known as Treaty Override in international tax parlance, seeking to neutralise the provisions of the treaties entered into by India with various countries, by providing that provisions of Treaty or Code, whichever is later in time, shall prevail. A corresponding provision in the Code, however, provides for the continuance of applicability of existing tax treaties entered into by India, once the Code comes into force.

The aforesaid provisions certainly give rise to some confusion and dichotomy of views as regards Treaty Override. In this context, it would be pertinent to note that Treaties are solemn obligations that should not be disregarded except in extraordinary circumstances, and, as is often done, the country overriding the tax treaties should consult with its treaty partners.

The Code also seeks to introduce General Anti-Avoidance Rules (GAAR) giving wide powers to the commissioner of income-tax (CIT) to declare an arrangement as impermissible if the same has been entered into with the objective of obtaining tax benefit and which lacks commercial substance.

The taxpayer is to establish that obtaining a tax benefit, was not the main purpose of the arrangement. On invoking the GAAR, the CIT may determine the tax consequences by amending, disregarding or re-characterising the arrangement. GAAR would also override the applicable treaties, and directions of CIT would be binding on the assessing officer.

Currently, a company is considered resident in India for tax purposes, if control and management of the affairs of such company is situated wholly in India. It is now sought to provide for a more stringent test for tax residency a foreign company would be resident in India even where a fraction of the control and management of its affairs are situated in India, thus leading to worldwide income of such companies being taxed in India.

The Code further seeks to widen the tax net to bring within its purview income earned from transfers, directly or indirectly, of any capital assets situated in India. The intent, among other things, seems to tax overseas income from transfer of shares of companies abroad having downstream India holdings; this controversy has also recently been a subject matter of extensive litigation by the revenue authorities at the highest judicial levels.

The definitions of fees paid to non-residents in respect of technical services, or royalty payments are sought to be widened to include development and transfer of design, drawing, plan and software, consideration for use/right to use of transmission by satellite, cable, optic fibre, ship or aircraft and live coverage of any event.

As there are many new concepts that are being introduced by the Code, due deliberations and discussions would be required to identify and fully comprehend the impact of the provisions before the Code is finally made into law of the land.