The government's announcement in November that headline corporate tax may soon be reduced from 30 to 25 per cent is confirmation yet again that the Direct Taxes Code (DTC) is dead and buried. This particular reform was to have been an important component of the DTC package. It is another matter that the announcement has corporate houses worried, since, alongside the reduction, all current exemptions will also be withdrawn. Currently, the exemptions enable most companies to effectively pay 22-23 per cent corporate tax, and once these go, taking the additional surcharge and education cess into account, they could well end up paying around 29 per cent.
For a number of years under the previous United Progressive Alliance (UPA) government, the DTC was spoken of in the same breath as the Goods and Services Tax (GST), as the two reforms that would transform the country's tax system. But with the coming of the National Democratic Alliance (NDA) government, while the GST has been taken up in right earnest - though it is being hotly debated in Parliament with many points of contention - the DTC has been all but forgotten. Indeed, its death knell was sounded by none other than Finance Minister Arun Jaitley himself, when he declared in his last Budget speech that "there is no great merit in going ahead with the DTC as it exists today".
Why not? Mainly because even as it spoke about the DTC at length, the UPA government never attempted to make it a law in its entirety. There were plenty of consultations and three successive drafts with numerous modifications were prepared. The UPA government implemented some of the DTC proposals piecemeal through amendments in the Income Tax Act, 1961. As the forewarning over corporate tax law changes indicates, the NDA government is taking much the same approach.
The basic objective of the DTC, which was to replace the I-T Act, was to make tax compliance easier by removing ambiguities in tax laws. "The language used in parts of the I-T Act is so obtuse that different courts have interpreted the same provisions differently," says a Central Board of Direct Taxation (CBDT) official. "The DTC was an attempt to bring in simpler laws that would be easy to understand." But in late October 2015, the NDA government set up a 10-member panel, headed by former Delhi High Court judge R.V. Easwar, to do much the same thing all over again - simplify tax laws and, in particular, identify "the provisions/ phrases in the I-T Act which are leading to litigation due to different interpretations, the provisions of the Act for simplification (of language) and those which are impacting the ease of doing business".
Already in Force
What are the changes the DTC was intended to bring about that are already in place? There is, for instance, the Advance Pricing Agreement (APA) mechanism, which was to have been part of the DTC, but was incorporated in the I-T Act by the UPA government in 2012. Intended to reduce transfer pricing disputes, it sets out criteria by which industries and tax authorities can reach an advance agreement over the transfer pricing method to be used over a fixed period of time. "The APA sets out a process by which tax authorities and taxpayers can consult and cooperate in a non-adversarial spirit," says Naveen Aggarwal, Partner and Head of Tax (North), KPMG in India. "It facilitates principled and practical negotiations and resolves transfer pricing issues expeditiously and prospectively." So far the government has signed 14 APAs across sectors like telecommunications, oil exploration, pharmaceuticals, finance/banking, software development services and IT enabled services (BPOs).
Another key proposal that was to have been part of the DTC, but is already in force, is the Place of Effective Management (POEM) concept, which sets out rules for determining if a company is resident in India (and should pay taxes here). This proposal was incorporated by the NDA government in early 2015. It has widened the ambit of 'residency' for tax purposes, thereby upsetting foreign investors who were expecting a less stringent tax regime from the NDA government. The POEM specifies that for tax purposes, a foreign company would be considered resident in India even if a small part of its control and management was exercised from India. Earlier, tax demands arose only if the company's management was wholly located in India.
A third DTC proposal already incorporated in the I-T Act in 2012 - and further amended in 2015 - relates to indirect transfers of assets, bringing direct and indirect transfer of capital assets within the tax purview. "Among other things, the intent seems to be to tax overseas income from transfer of shares of companies abroad having downstream India holdings," says Aggarwal of KPMG. A fourth is the expansion of the definition of 'fee for technical services or royalty payments' to include payment for software used, any consideration given for use of transmission by satellite, cable or optic fibre, and payment for live coverage of any event. Such earnings by a company not resident in India are also now taxable.
The biggest bone of contention in the proposed DTC Act, however, had been the General Anti-Avoidance Rules (GAAR), under which all Commissioners of Income Tax have powers to declare impermissible any commercial transaction carried out in a manner that a tax benefit has accrued, or any transaction they believe is phoney, lacking in 'commercial substance'. The decision would be binding on the assessing officer. GAAR also overrides applicable treaties with countries like Mauritius. It was first suggested by then Finance Minister - and now President - Pranab Mukherjee in his Budget speech of 2012/ 13, and would have been included in the I-T Act that year itself, but it raised such howls of protest that its implementation was deferred to April 2016. Many hoped the NDA government would scrap it altogether, but Jaitley has merely postponed it, once again, by another two years.
What's Left out Still
These changes are all very well, but there was more to the idea of replacing the I-T Act with the DTC than amendments in specific areas. The DTC had been framed to accommodate changes that may have to be made in coming years - as, with the economy expanding, new tax issues arise - without resorting to amendments every time. It was to consolidate the definition of terms, and the provisions relating to incentives, procedures and tax rates, as well as provide tax rate stability, obviating the need to change them through the Annual Finance Bill. Will the Easwar Committee look at these larger issues too? "The presence of Arbind Modi (IRS) on the committee indicates that the larger picture could well be taken up, since he was in the team that drafted the DTC as well," says M.C. Joshi, former CBDT Chairman. But most tax experts fear that the terms of reference of the Easwar panel are too narrow for it to draft a DTC-like document. Both Easwar and Modi were non-committal, telling Business Today it was too early to comment.
"I don't think DTC is dead," says Sunil Shah, Partner, Deloitte Haskins & Sells LLP. "There is still a need for it if India wants to bring sweeping changes to its tax laws." However, the overwhelming view is that it is over and done with, and besides, not all are lamenting its demise. "We were never comfortable with DTC," says Ved Jain, Chairman, National Council on Direct Taxes at industry body ASSOCHAM. Some contest that the DTC would have made compliance easier. "The GAAR provisions would have increased litigation," says a tax expert at rival industry body FICCI, who prefers not to be named. "We would rather the DTC is not revived, especially after so many of its provisions are already in the I-T Act. Reviving it would require tax payers to realign themselves to another set of rules."
Jain is even sceptical about the Easwar Committee's report achieving anything worthwhile. "Unless the tax department's attitude changes and it stops treating every taxpayer as a possible tax evader, no panel can solve taxpayers' problems," he says. He points to the report of the Tax Administration Reforms Commission, headed by Parthasarthi Shome, submitted in June 2014. It broadly called for a shift in the IT Department's focus, making it not an enforcement agency, but a service provider for taxpayers. "If the recommendations of that committee alone are implemented, it will solve many problems," he adds.
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