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India: Indian government proposes revised version of Indian Tax Laws

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Rajendra Nayak


Aastha Jain

In an attempt to revise and simplify the structure of Indian tax laws (ITL) into a single legislation, the Indian government introduced a Direct Tax Code (DTC) in 2010 which was open for recommendation from various stakeholders and a finance committee specifically formed for this purpose. Consequently, a revised version of DTC (DTC 2013) has been recently released for public comments. Some key proposals under DTC 2013 are enlisted below:

  • A company incorporated outside India will be a resident if its place of effective management is situated in India, at any time during the tax year. This results in taxation of global income of such company and levy dividend distribution tax in India.

  • Income is deemed accrue in India on transfer of a capital asset situated or deemed to be situated in India. A share or interest in foreign entity is deemed to be situated in India, if it derives at least 20% of its value from assets located in India.

  • Source taxation in respect of interest, royalty and technical fees has been widened. Taxability is triggered with respect to interest paid by a non-resident (NR) on debt used for earning income from source in India. Definition of royalty and technical fees is widened as compared to current provisions of ITL.

  • Tax rates of foreign companies (FCs) are reduced from 40% to 30%. Further, a branch profit tax of 15% is levied on income attributable to permanent establishment of a FC or on immovable property situated in India. This levy is not presently there in ITL and it results in effective tax rate of 40.5% on income of FC attributable to its branches in India.

  • An additional tax levy of 10% is proposed if the total dividend income of a resident taxpayer exceeds INR10 million ($165,000) in a tax year.

  • FCs or NRs engaged in specified eligible business maybe be taxed on presumptive basis wherein their total income is estimated based on gross receipts or gross income. Such taxpayers may declare a lower income by complying with conditions such as maintenance of books, audit, production of books and accounts.

  • Similar to current ITL provisions, the taxpayers are required to furnish a tax residency certificate from the specified authority and other prescribed information for availing benefits of tax treaty.

  • General anti-avoidance rules are present along the lines of the ITL.

  • A separate set of rules for controlled foreign companies (CFC) is envisaged, wherein all the income of the CFC is attributed and taxed in the hands of the resident shareholder of the CFC. Presently these provisions are absent in the ITL.

It may be noted that the draft of DTC 2013 can be implemented only on it being approved by Parliament. Nevertheless it would be helpful to assess the impact some of the proposals could have on current structures and business models.

Rajendra Nayak (rajendra.nayak@in.ey.com) & Aastha Jain (aastha.jain@in.ey.com)

EY

Tel: +91 80 6727 5275

Website : www.ey.com/india

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