KPMG Direct Tax Code 2009

KPMG IN INDIA

26 AUGUST 2009

Direct Taxes Code Bill, 2009Direct Taxes Code Bill, 2009Key provisions impacting foreign businessesKey provisions impacting foreign businesses

1© 2009 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Setting the context


Tax framework in India

The existing tax framework is decades old (Current

Income tax legislation was passed in the year 1961)

Frequent amendments have made the current tax

legislation complex and ambiguous

Government committed to ushering a new era in

tax compliance and administration, primarily by

way of:

New Direct Tax legislation

Shift to the Goods and Service Tax regime (GST)*

Government introduced the new Direct Taxes Code Bill, 2009 (‘DTC’) for public discussion on 12 August 2009

*Timeline of Year 2010 reaffirmed in the Union Budget 2009


Direct Taxes in India


Increased focus on Direct taxes

1.6 1.8 1.8 2.2 2.6

2.6 2.83.5

4.14.3

5.45.6

5.8

5.96

0

2

4

6

8

10

12

14

2004-05 2005-06 2006-07 2007-08 2008-09

Personal Income Tax Corporate Tax Indirect Tax

Tax to GDP ratio Increasing contribution of direct taxes

Source: Economic Survey 2008-09; KPMG Analysis* Budgeted Estimate@ For FY 2008-09 (as per news reports)

6.05.46.94.2

2008-092004-052008-092004-05

Indirect Taxes(in percent)

Direct Taxes(in percent)

*

Direct tax collections@- USD 64.5 Bn

Indirect tax collections@- USD 50.7 Bn

Shift of focus towards direct taxes and ensuring enhanced compliance

Years

Rat

e


Corporate tax rates in BRIC countries – A Comparison

Source: KPMG Corporate Tax Rate Survey, 2008; information in public domain

20

25

34 34

25

05

101520253035

Russia China Brazil India

Present Proposed

Perce

nt

China has also reduced its rate from 33% in 2008


New Direct Taxes Code Bill: The Rationale


Reduction in corporate tax rates – in line with global trends

Ambiguities causing conflicting judgments on same issues by courts

Rationale for the new code

Direct Taxes Code Bill, 2009Income Tax Act, 1961

Interpretation issues leading to litigation

and controversies

Increased cost of compliance and administration

Numerous amendments - perplexing for the tax payers

Attempt to minimize litigation / tax controversies

Proposals to increase the tax base

Simple and easy to comprehend


Some Significant Amendments - An Overview


Tax Rates and new taxes

Reduction in Corporate tax rates

Move in line with International trend

Additional Branch profit tax on Foreign Companies @ 15 %

34.80

9.80

25Proposed

9.60Effective Dividend distribution tax

43.60

34CurrentParticulars

Effective Corporate tax rate

TOTAL TAX

Current effective rate

34%Proposed rate

25 %

36.25

11.25@

25Proposed

Nil

42.23

42.23Current

Domestic company Foreign Company

Transfer to reserve rules have been ignored@ 15%*(100-25)= 11.25 Branch not defined


Tax residence of a foreign company

Residence of a company determines its tax obligation in India

Partial Control and Management of a

foreign company in India at any time during the year

Current Status

Proposed Status

Non residentTax on India sourced

income only

ResidentTax on worldwide

income

Partial control and management not defined


Expansion of source rule

Source Rule – Taxability where income is earned / Asset is situated

Current position: Services utilized in India but rendered outside argued as not taxable

Proposed: All services utilized in India sought to be taxed

Current position: Ambiguity in taxation of overseas transfers having underlying interest in India

Proposed: Gains arising on indirect transfer of capital assets in India to be taxed

Will Impact Cross border M&A transactions

Place of rendition of services not

relevant anymore


Treaty override and implications

India has entered into tax treaties with 75 countries

Current position: Tax treaties supersede domestic law to the extent more beneficial to the tax payer

Proposed: - Treaty and Domestic tax provisions brought at par- Provisions later in point of time to prevail in case of conflict- Tax residency certificate required to claim treaty benefits


Royalty / Fees for Technical Services (FTS)…

Scope of definitions widened

Royaltyto include consideration for use / right to use of:

- Transmission by satellite, cable, optic

fiber or similar technology

- Ship or aircraft- Live coverage of any

event

FTS to include:

- Development and transfer of design,

drawing, plan, software or similar

services

Withholding tax rate (on gross basis) increased from 10% to 20%


…Impact analysis- An Illustration

Specific exclusions from the definition of royalty in tax treaty between India - the Netherlands / Belgium

− Right to use of any industrial, commercial or scientific equipment

− Films or tapes for radio or television broadcasting

Wider definition in DTC coupled with treaty override provisions may render these

beneficial provisions redundant


General Anti-Avoidance Rule - Setting the context

Historical perspective

- Tax havens such as Mauritius extensively used for tax planning – Foreign investment (‘FI’) from Mauritius constituting 43%* of India’s total FI

- Various developed countries (including the Netherlands and Belgium) have anti abuse provisions giving power to disregard transactions entered solely for obtaining tax benefit

- The DTC has introduced anti-avoidance provisions in line with international standards

*as per information in the Press


General Anti-Avoidance Rule - Purpose and implications

Conditions to be fulfilled for invoking provisions

Entering into any of the following arrangements with the main purpose of deriving a tax benefit:

- Without a bona fide business purpose

- Not at arm’s length

- Misusing or abusing any tax provision

- Lacking commercial substance

Objective sought to be achieved- Deter tax avoidance

- Preventing misuse of any provision


Tax incentives linked to profits

Tax Incentives - Key Changes

Current regime

- Expenditure linked: Capital investment also eligible for tax breaks

- No tax holiday for units in: SEZs, STPI, EOUs

- Certain existing tax incentives grandfathered

Proposed regime


Introduction of Advance Pricing AgreementsUpfront determination of an arm’s length price

Valid for a period upto 5 years

Binding on the taxpayer and tax authorities

Safe Harbor provisions retained

Transfer Pricing

Definition of Associated Enterprises widened

one-third

10%Proposed

one-halfNomination of Directors

26%CurrentCriteria

Share holding with voting power


− Minimum Alternate Tax now calculated as a % of ‘Value of Gross Assets’ (as against ‘Book Profits’)

− All capital Gains taxed at normal rates (lower regime of capital gains done away with)

Positives Negatives

− Unlimited carry forward of business loses

− Depreciation benefit extended to amortized expenditure

− Provisions relating to foreign tax credit introduced

Miscellaneous Provisions


Concluding Thoughts

- The DTC proposes significant changes to the current tax system

- Stringent anti-avoidance measures could impact bona fide business structures

- Businesses should consider the following actions:

Impact assessment of proposals on their current structures and business modelsActive dialogue with the Government for presenting their views

Government to consider public comments before tabling legislation in Parliament


Contact details

Naveen AggarwalExecutive Director

KPMG India

Tel (Direct): +91 124 307 4416Cell: +91 98112 03453

e-mail: [email protected]

Richard RekhyChief Operating Officer

KPMG India

Tel (Direct): +91 (124) 307 4303Cell: +91 9845170801

e-mail: [email protected]

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