The projected Direct Tax Code (DTC) eases worries of double taxation, aims to change India's 50-year-old Income tax law and generate a system that simplifies the tax structure and updates the commercial tax rates for foreign companies.
Relief from Double Taxation
The DTC replaces the current well established principle. The provisions of domestic law or Double Taxation Avoidance Agreement (DTAA), whichever is more advantageous to the tax payer should exist. Therefore, bringing relief to the tax payers.
Though this principle will not be relevant in certain situations including:
- When the General Anti Avoidance Rule is invoked.
- When the Controlled Foreign Corporation provisions are invoked.
- When branch profits tax is imposed.
Indian companies are progressively setting up International Holding Companies (IHC) for investments abroad to gain commercial and financial benefits. In line with this underlying principle, the DTC has the CFC provisions to shun such tax evasions. A few important aspects of the CFC provisions are - CFC provisions are engrossed when a foreign corporation is controlled by Indian tenant tax payers. Control has been stated where one or more persons resident in India, individually or cooperatively, directly or indirectly, hold shares hauling not less than 50% of the voting authority or funds of the company. The other condition is that the person is a tenant of a country with lesser level of taxation, i.e. the sum of tax payable in a foreign country is less than 50% of the subsequent tax payable under the DTC.
General Anti-Avoidance Rule (GAAR)
The Direct Tax Code has launched a General Anti-Avoidance Rule (GAAR), in line with the plans of the discussion papers, to control the situations where a taxpayer enters into an agreement or arrangement to get a tax benefit and
- The arrangement is in a method not normally used for authentic business purposes.
- The arrangement is not at arm's length.
- The arrangement exploits the Direct Tax Code.
- The arrangement lacks profitable substance.
In spite of the protests, the Indian government has not altered GAAR except clarified that not every agreement or arrangement that would lessen tax liability would be classified as an avoidance arrangement and it has projected that the Central Board of Direct Taxes will issue rules to offer for such situations and thresholds under which GAAR could be invoked. In addition, the government also clarifies that the Dispute Resolution Panel would be made available when the GAAR is invoked against a taxpayer.
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Gaurav Khurana is an expert on Tax Savings . He is the Founder Director of DIALABANK.COM (Call 60011600) and Ex National Sales Head – ING Investment Mgt India and Vice President Citibank N.A
