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India Unveils Latest Direct Tax Code Proposals

Friday, April 4, 2014

Higher taxes on the wealthy and changes to the tax treatment of multinational companies feature among the proposals in the latest draft Indian Direct Taxes Code (DTC).

The Government has announced that it has accepted 153 of the 190 recommendations made in 2012 by parliament's Standing Committee on Finance (SCF). A further 61 suggestions were forwarded by the SCF at a later stage, some of which have also been accepted for incorporation in the revised Code. The Government says that it agrees with the SCF that simplicity is paramount, and that the legislation must be user friendly. It hopes to modernize all tax operations, and assure that its departments are capable of carrying out their work as assigned.

Under the Government's original DTC proposals, indirect transfers would have been taxed in India if the companies involved had at least 50 percent of their assets in the country. The Government has since concluded that this threshold is too high. According to a document available on the Income Tax Department's website, "There could be a situation [where] a company has 33.33 percent assets in three countries but it will not get taxed anywhere." The revised code accordingly provides for a 20 percent threshold. An exemption would be provided for the transfer of small shareholdings outside India.

Another major change relates to the wealth tax system. The amended code is intended to capture all assets in the wealth tax net, whether physical or financial. As the wealth tax provisions of the 2010 DTC Bill related only to unproductive assets, the Government grew concerned that the changes would substantially reduce the tax base. Under the latest plans, wealth tax would be levied on all individuals, Hindu Undivided Families (HUFs), and private discretionary trusts at a 0.25 percent rate. The threshold would stand at INR500m (USD8.35m).

The Government says that it will not go ahead with the SCF's recommendation for altered personal income tax slabs. These would have seen incomes of up to INR300,000 exempted from income tax. Those between INR300,000 and INR1m would have been taxed at 10 percent, those between INR1m and INR2m at 20 percent, and those above INR2m at 30 percent. The Government calculated that it stood to lose in the region of INR600bn from these changes. A new 35 percent income tax bracket would be introduced, however, for all income exceeding INR100m a year. The rate is up from the 30 percent previously under consideration.

The Code's implementation has been postponed numerous times. An initial draft was released in August 2009, and was designed to consolidate and amend the laws relating to all direct taxes. After a consultation period, a revised version was published in June 2010. It was however heavily criticized by the bodies appointed to review it. The Kelkar Committee warned that the DTC was "likely to result in considerable unacceptable losses on a continuing basis. Given the low tax-GDP ratio and the existing fiscal crisis, there is absolutely no fiscal space for such [a] large revenue loss."

The situation has been further complicated by subsequent changes to the Income Tax and Wealth Tax Acts. According to the Government, incorporating these reforms into the 2010 DTC legislation would require a large number of official amendments that would ultimately make the bill incomprehensible and the legislative process cumbersome.

In spite of the recent progress, the future of the DTC still hangs in the balance; India's general election begins next week. The ruling Congress-led Progressive Alliance is widely expected to lose out to a coalition headed by the Bharatiya Janata Party.