Ushering in a new tax era

Some reduction is proposed in tax rates for companies but a branch profits tax for foreign companies will retain taxation of foreign companies at existing levels. Also,a foreign company will be treated as resident in India even if a part of the control is situated in India. This is likely to have adverse consequences for foreign companies,for instance in cases where even one director is based in India.

A significant shift has been to prescribe the tax rates in the code itself and not leave it to the annual Finance Bills.

To balance the reduction in tax rates,tax incentives are proposed to be rationalized. Savings based incentives are proposed to be under the Exempt – Exempt- Tax method. Charitable organization will be given a concessional tax treatment instead of complete exemption. Most profit based incentives are proposed to be substituted with investment based incentives but area based incentives are proposed to be protected. Concept of Minimum Alternate Tax (MAT) for companies has been retained but there is a significant shift in basis from profits to asset base. Capital intensive sectors are likely to be adversely affected by this as the benefit of enhanced depreciation available would be lost. Also,no carry forward of MAT will be allowed. Dividend distribution tax is proposed to be retained.

Business losses are proposed to be available for set-off indefinitely. This should help taxpayers make full use of brought-forward losses where revival of business takes a long time. The exemption available to long-term capital gains on listed shares is proposed to be done away with. Simultaneously,Securities Transaction Tax is proposed to be abolished. Distinction between long-term and short-term capital gains will be taxed at the same rate and will be treated on a par.

The tax administration is proposed to be streamlined with detailed guidelines provided for assessments,etc to reduce discretion. Surprisingly,the code proposes that guidelines framed for selection of cases for scrutiny,which were hitherto being shared,will not be disclosed under the new procedure. The overhaul of the tax laws has not changed the feeling of mistrust,it seems.

The code envisages some changes in Transfer Pricing regulations but the most significant is the introduction of Advance Pricing Arrangements which the taxpayer can agree in advance with the Revenue. This should substantially reduce litigation on transfer pricing matters.

The code envisages introduction of General Anti Avoidance Rules in line with such provisions in some other jurisdictions. The provisions seek to empower the Revenue to declare any arrangement as impermissible if it lacks commercial substance or is designed to obtain a tax benefit which would not be available under normal circumstances. The Revenue would be entitled to levy taxes on the basis that such transactions were never entered into. The anti-abuse provisions will also override any treaty benefit available to the taxpayer.

The code now specifically provides that credit will be given for foreign taxes paid by an assessee and such credit will be provided in a manner and to the extent prescribed by the Central government. Hopefully,the present confusion prevailing on claiming such credit would end once the provisions come into effect and guidelines are prescribed. The intent behind the code is positive and should usher in a new era in tax compliance and administration. However,for it to achieve its stated intent there would also need to be a substantial change in the mindset and attitude of both the taxpayer as well as the Revenue officers.

(Anurag Jain is Partner,BMR Advisors. The views are personal.)