kpmg dtc2010 presentation

8/6/2019 KPMG DTC2010 Presentation

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TAX

KPMG IN INDIA

Direct Taxes Code Bill 2010

September 2010


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2010 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a

Swiss cooperative. All rights reserved.

2

Agenda

1 Background

2 Personal Tax

3 Capital Gains

4 Corporate Tax rates

5 Overview Sources of Income

6 Classification of Assets

7 Business Income

8 MAT

9 SEZs, SEZ units & Infrastructure Sector

10 DDT Credit

11 International Taxation

12 Transfer Pricing and Wealth Tax

13 Hits and Misses / Key Focus Areas

2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity. All rights reserved.

2


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2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a

Swiss entity. All rights reserved.

3

Background

DTC 2009 unveiled in August 2009

The Government received over 1,600 representations on DTC 2009

RDP released in June 2010 on 11 specific issues

DTC 2010 tabled in the Lok Sabha on 30 August 2010

DTC 2010 to cost the Exchequer revenue loss of INR 531,720 Million on reduced rates

After clearance from the Parliamentary Standing Committee, the Bill may be passed in

the Winter Session

The DTC 2010 to be effective from FY commencing 1 April 2012

319 Sections and 22 Schedules in DTC 2010 vis--vis

298 Sections and 14 Schedules in the ITA

Simplified Legislation ?


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4

Existing Slabs

(ITA)

Proposed Slabs

(DTC 2010)

Tax Rate

(percent)

Upto INR 160,000 Upto INR 200,000 Nil

INR 160,001 to 500,000 INR 200,001 to 500,000 10

INR 500,001 to 800,000 INR 500,001 to 1,000,00020

Above INR 800,000 Above INR 1,000,000 30

Personal Tax - Rates of Income Tax

Tax Liability / Income (INR) 3,000,000 2,000,000 1,000,000

Savings in percent income

ITA vis--vis DTC 2010

1.55 1.88 2.86


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5

Gain on transfer of Equity Shares / Units ofEquity Oriented Fund

DTC 2009 DTC 2010

LTCG No STT / Taxable @25 percent STT / CG Exempt

STCG No STT / Taxable @25 percent

STT / Only 50percent gains are

taxable @ 30percent

Capital Gains

LTCA : Period of holding of shares / units

One year from the date of acquisition or

One year from the end of the FY in which the shares / units are purchased ?


6/29 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a


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Category ITA (Headline Rates) DTC 2010

Income Tax - Indian Company 30 percent 30 percent

Income tax - ForeignCompany

40 percent

30 percent

Additional branch profit tax - 15percent

MAT 18 percent 20 percent

DDT 15 percent 15 percent

Income distributed by mutualfund to unit holders of equityoriented Funds

Not applicable 5 percent of income distributed

Income distributed by lifeinsurance companies to policyholders of equity oriented lifeinsurance Schemes

Not applicable 5 percent of income distributed

Corporate Tax Rates




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Income

Pari materia with DTC 2009

Overview Sources of Income

Special Sources

Non-Resident

Investment Income (Interest,

Dividend, Capital Gains, etc.)

Royalty and Fees for TechnicalServices, etc.

Non-Resident Sportsman / SportsAssociation / Institution

Winning from lottery, race, horse race,any game or betting, etc. for allAssesses

Ordinary Sources

Other than Special Sources:

Income from Employment

Income from House Property

Income from Business

Capital Gains

Income from Residuary Sources




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Business Trading Assets Business Capital Assets Investment Assets

Stock-in-trade

Raw materials

Consumable stores

Tangible capital assets

Intangible capital assets

Self-generated assets

Other capital assetsexcept land

Any capital asset other than

business capital asset

Security held by FIIs

Undertaking / Divisionof a business

TaxableasBusinessIncome T

axa

bleasCapitalGains

Classification of Assets

Impact / Issues

Slump sale to be taxed as capital gains and not business income, unlike DTC 2009

Transfer of Security held by FIIs chargeable to Capital gains and not Income fromBusiness




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Sale of carbon credits to be taxable as business income : Impact on earlier years ?

Expenditure to be allowed in the year of payment of TDS Two years limitation under

DTC 2009 dropped

Weighted deduction for in-house scientific R&D facility increased to 200 percent in line

with ITA

Non-moving creditors beyond five years to be treated as taxable business income as

against three years in DTC 2009

Deduction for specified deferred revenue expenditure to be allowed on straight-line

basis over 6 / 10 years as against allowance on WDV basis @ 25 percent / 15 percent

as under DTC 2009

Business Income




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Asset based levy in DTC 2009 substituted with Book Profits based levy as under ITA

SEZ developers / SEZ Units no longer exempt from MAT

Headline Rate increased from 18 percent to 20 percent

MAT Credit : Similar Mechanism as under ITA

Carry forward of MAT credit upto 15 years as against 10 years in the ITA

MAT credit to lapse in case of conversion of a private company or an unlisted public

company into a limited liability partnership

MAT

Impact / Issues

No specific provision for grandfathering of unutilized MAT credit carried forward from ITA

No provision for carry forward of MAT credit in case of business reorganisation


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11

SEZs / SEZ Units

Particulars Incentives to SEZ Developers Incentives to SEZ Units

ITA DTC 2010 ITA DTC 2010

Profit-linkedincentives

Yes irrespective ofdate ofnotification

Yes notifiedup to 31.3.2012

Yes irrespective ofdate ofcommencementof operations

Yes commencementof operations before31.3.2014

(No condition for duedate for notification of

SEZ)Investment-linkedincentives

Not Applicable Yes notifiedon or after01.04.2012

Not Applicable Yes commencementof operations on orafter 01.04.2014

MAT payable No Yes irrespective ofdate ofnotification

No Yes irrespective ofdate ofcommencement ofoperationsDDT payable No Yes


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Investment linked tax incentive retained and extended to

specified hotel, hospital and an SRA vis--vis DTC 2009

No deduction for expenditure incurred on acquisition of

land (including long term lease) Ambiguity resolved

No tax incentives to successor in case of business

reorganisation (brought on par with ITA)

Tax incentives for specified business

Increase in rate for calculating

presumptive income for businessesrelating to oil exploration, shipping

operation, air transport etc.

Actual profits taxable if higher than

presumptive profits

Presumptive taxation (non-residents)

Infrastructure Sector

Impact / Issues

LLPs may be explored for infrastructure facilities

Non-residents falling under presumptive tax regime :

Additional tax outgo

Necessity to maintain books of accounts for Indian operations?


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ITA

DTC 2009

DTC 2010

Same as ITA

Same as ITA, except condition no. 3 deleted

DDT Credit

In computing DDT, amount of dividend declared (INR 100) by a Company (X) to bereduced by dividend received (INR 70) from another Company (Y), if:

1) dividend (INR 70) is received (by X) from a subsidiary (Y)

2) subsidiary (Y) has paid DDT on such dividend (INR 70); and

3) recipient company (X) is not a subsidiary of any other company (Z)

Impact / Issues

X eligible for DDT credit under DTC 2010 unlike ITA, even if X is a subsidiary of Z:

Significant relaxation for intermediate holding companies

Availability of Multi-level DDT credit (DDT on INR 70 paid by Y and set-off by X) flow through toZ for dividends declared by Z?


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CFC provisions introduced

Total income of residents to include income attributable to a CFC

CFC means a foreign company:

that is a Resident of a Territory with lower rate of taxation

whose shares are not traded on any stock exchange recognized by such Territory

over whom person(s) resident in India exercise control

that is not engaged in active trade or business

has specified income exceeding INR 2.5 million

Lower rate of taxation, exercise control, active trade or business, specified incomedefined

Active trade or business interalia not to include income from sale of goods or supply of

services to any associated enterprise

International Taxation CFC (1/2)


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Income attributable to a CFC to be computed as per Specified Formula

Resident assessee to furnish details of investments and interest in entities outside India

Wealth tax to be levied on resident assessee

International Taxation CFC (2/2)

Impact / Issues

Evaluate impact on overseas investments / intra-group supply chain arrangements

DTC 2010 follows a Global and Entity Approach in taxing CFC Income either All or

None of the CFC income will be attributable

Applicability of CFC regime to downstream investment subsidiaries of overseas operatingcompanies?

Applicability of CFC regime to non-corporate overseas entities?

Computation of profits of the CFC for measuring lower rate of taxation could pose complexitiesCredit / deduction in India for Foreign Taxes paid by CFC?

Gains on sale of CFCs shares to be taxed without offsetting prior years taxes paid due toapplication of CFC

Set-off between profits and losses of different CFCs?

Double taxation on account of applicability of TP and CFC provisions?


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GAARs invoked -Is main purpose

Arrangement of taxbenefit?

(impermissibleavoidance

arrangement)Deemed connected

person as same,etc

Treat the arrangementas void

Disregardaccommodating

parties/ Treat partiesas one and the same

Re-allocate

income, expenses,relief, etc

Disregard/ combine/ re-characterize

the arrangement

Re-characterizeEquity -Debt,

Income, expenses,relief, etc

Rights / Obligationsnot at arms-length

Misuse /Abuse of DTC

Lacks commercial/

economic

substance

Is not for bonafide

purposes

International Taxation GAARs (1/2)


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International Taxation GAARs (2/2)

Impact / Issues

GAARs to override tax treaties: Sustainability of tax treaty protection with Mauritius,

Cyprus, etc. in absence of appropriate substance / commercial rationale, etc.?

GAARs not to be invoked for every arrangement involving tax mitigation (RDP)

To watch out for CBDT guidelines on GAARs

Effectiveness of DRP route for resolving GAARs related disputes

Availability of AAR mechanism?


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DTC 2010

DTC 2009

International Taxation Treaty Override

Restoration of Treaty supremacy over domestic law as under ITA

Limited Treaty Override - Tax Treaty not to have preferential status when

GAAR invoked; or

CFC triggered; or

BPT levied

No preferential treatment between DTC or the Tax Treaty

Provision which is later in point of time to prevail

Impact / Issues

Deeming provisions for non-residents: Scope enlarged in DTC 2010

Treaties to override deeming provisions


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ITA

DTC 2009

DTC 2010

International Taxation- Tax Residency for Foreign Companies

Control and management of affairs situated wholly in India

Control and management of affairs situated wholly or partly in India, at any time in

the FY

Place of effective management (POEM) situated in India, at any time in the FY

place of effective management of the company means -

the place where the board of directors of the company or its executivedirectors, make their decisions; or

in a case where the board of directors routinely approve the commercial andstrategic decisions made by the executive directors or officers, the place

where such executive directors or officers perform their functions.

Impact / Issues

Residency for non-corporate entities continues to be based on control and management test

Expression at any time very wide

Meaning of the expressions routinely / commercial and strategic decisions

Multiple POEMs in India and abroad : Application of tie-breaker test in tax-treaty?


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DTC 2010

Income deemed to accrue / arise, directly or indirectly, in India from the transfer of a capitalasset situated in India (Same as ITA)

However, following shall be not be deemed to accrue / arise in India: (New)

Income from transfer, outside India, of shares or interest in a foreign company unless FMV

of assets in India (owned directly or indirectly by the company) represent atleast 50 percent

of the FMV of all assets owned by the foreign company50 percent test to be applied at any time during the 12 months prior to transfer (New)

Tax on income computed under DTC 2010 to be pro-rated based on FMV proportion of India

assets/ total assets of foreign company (New)

DTC 2009Income deemed to accrue/arise, directly or indirectly, in India from the transfer, directly orindirectly, of a capital asset situated in India

International Taxation- Transfer of Assets by non-residents

Impact / Issues

Overseas transfer of assets / shares (with underlying economic interest in India) whether taxable?

Meaning of the expressions interest in a foreign company / owned directly and indirectly by theCompany

Exclusions applicable only for shares or interest in a foreign company and not to intangible assets liketrademark

Guidelines awaited on FMV methodology, which are critical in determining applicability of this provision

Provision can be overridden by a favourable tax treaty


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PE defined : Relevant for Business Connection and BPT

PE includes :

Fixed place PE,

Service PE (no time threshold specified),

Construction / Installation / Assembly / Supervisory PE (no time threshold specified),

Substantial Equipment PE (no time threshold specified) and

Agency PE (excludes independent agents)

International Taxation- Permanent Establishment

Impact / Issues

Non-specification of time thresholds : Impact thereof

No exclusions for preparatory and auxiliary activities

No definition for Independent Agent

Provision of Services in India resulting in Service PE : Taxability on a gross basis vs. net basis

PE definition in Treaties to over-ride Business Connection test

BPT not subject to treaty protection; hence, treaty definition of PE not relevant for BPT

Chargeability to BPT in a situation where PE exists under the DTC 2010 but no PE under treaty

(and consequently no liability to Income tax) ?


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APA regime continues as provided under DTC 2009

Audit Process

Proposal to select cases based on Risk dropped

TPO no longer required to issue show-cause before making adjustment

AE definition generally aligned with ITA; some broadening

Location - Enterprises in any specific location (to be prescribed)

Provision of Services - where amount / conditions are influenced by other

enterprise

Shareholding, loans, nomination of directors etc. aligned with ITA

Transfer Pricing


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Every person (other than a NPO) will be liable to pay wealth-tax

Wealth-tax payable at the rate of 1 percent on net wealth exceeding INR 10 Million (as

against INR 500 Million proposed in the DTC 2009)

Specified assets for computing net wealth in line with WTA with certain additions i.e.:

Archaeological collections, drawings, paintings, sculptures or any other work of art

Watches with a value in excess of INR 50,000

Bank deposits outside India, in case of individuals and HUFs, and in any other case,

any such deposits not recorded in the books of account

Interest in a foreign trust or any other body located outside India other than a

foreign company;

Any equity or preference shares held by a resident in a CFC

Cash in hand in excess of INR 200,000 in the case of an individual and HUF

Valuation guidelines to be notified

Wealth Tax


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Exemption from LTCG on listed shares

MAT leviable on Book Profits as against

Gross Assets

Income Tax Holiday for SEZ / SEZ units

partially extended

Supremacy of Tax Treaty in most cases

Beneficial Tax regime for LLPs continues

APA regime

Settlement Commission

Continuity of E-E-E

MAT for SEZs / SEZ Units

DDT for SEZs

Wide-sweep of GAARs retained

CFC Regulations

Non-Rationalisation of DRP regime

Uncertainty in taxability of cross-border

transactions / overseas M&As

Expansion of Wealth Tax net

HITS

MISSES

Hits and Misses
http://images3.wikia.nocookie.net/__cb20080724042410/fci/images/8/84/Symbol_thumbs_down.svhttp://www.clker.com/clipart-29226.htm


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Key Focus Areas for India Inc / MNCs

Representation before Parliamentary Standing Committee

CFC Regime : Evaluating impact on outbound investments / acquisitions by India Inc.

Inbound Investments through Mauritius / Cyprus etc: Evaluating substance / migration?

Preparing for APAs

Evaluate withholding tax implications on cross border transactions

Taxability of overseas Mergers and Acquisitions

Life beyond Tax Holiday: Assess impact


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AAR Authority for Advance Rulings

AE Associated Enterprise

APA Advance Pricing Agreement

BPT Branch Profits Tax

CFC Controlled Foreign Companies

CBDT Central Board of Direct Taxes

CG Capital Gains

DTC 2009 Direct Taxes Code Bill 2009

DTC 2010 Direct Taxes Code Bill 2010

DRP Dispute Resolution Panel

DDT Dividend Distribution Tax

E-E-E Exempt-Exempt-Exempt

FII Foreign Institutional Investors

FMV Fair Market Value

FY Financial Year

GAARs General Anti Avoidance Rules

HUF Hindu Undivided Family

ITA Income-tax Act, 1961

LTCA Long-term Capital Asset

Glossary

LTCG Long-term Capital Gain

LLP Limited Liability Partnership

MAT Minimum Alternate Tax

NPO Non Profit Organisation

PE Permanent Establishment

POEM Place of Effective Management

RDP Revised Discussion Paper on Direct Taxes Code

R&D Research & Development

SEZ Special Economic Zone

STCG Short-term Capital Gain

STT Securities Transaction Tax

TDS Tax Deducted at Source

TP Transfer Pricing

TPO Transfer Pricing Officer

WTA Wealth Tax Asset


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Questions

Answers


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Uday VedHead of Tax

KPMG in IndiaTel: +91 22 3090 2130Email: [email protected]

Dinesh KanabarDeputy CEO & Chairman - Tax

KPMG in IndiaTel: +91 22 3090 1661Email: [email protected]

THANK YOU ALL FORYOUR ATTENTION !


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Mumbai

Lodha Excelus, 1st Floor,

Apollo Mills Compound,

N.M. Joshi Marg, Mahalakshmi,

Mumbai 400 011

Tel +9122 39896000

Fax +91 22 39836000

New Delhi

Building No.10, Tower B,

8th Floor, DLF Cyber City,

Phase II

Gurgaon 122002 Haryana

Tel +91 124 3074000

Fax +91 124 2549101

Bangalore

Maruthi InfoTech Centre

11/1 and 12/1, East Wing, II Floor,

Koramangala,Inner Ring Road

Bangalore 560 071

Tel +91 80 3980 6000

Fax +91 80 3980 6999

Hyderabad

8-2-618/2

Reliance Humsafar, 4th Floor

Road No. 11, Banjara HillsHyderabad 500 034

Tel +91 40 6630 5000

Fax +91 40 6630 5299

Chennai

No. 10 Mahatma Gandhi Road,

Nungambakam,

Chennai 600 034

Tel +91 40 3914 5000

Fax +91 40 3914 5999

Kolkata

Infinity Benchmark,

Plot No.G-1, 10th floor,

Block - EP & GP,

Sector - V, Salt Lake City

Kolkata 700091

Tel: +91 33 44034066Fax: +91 33 4403 4199

Pune

703, Godrej Castlemaine,

Bund Garden,

Pune 411 001

Tel +91 20 305 85764/65

Fax +91 20 305 85775

Kochi

4/F, Palal Towers,

M. G. Road,

Ravipuram, Kochi 682016

Tel +91 (484) 302 7000

Fax +91 (484) 302 7001

Chandigarh

SCO 22-23

Ist Floor, Sector 8 C

Madhya Marg

Chandigarh 160019

Tel +91 72 3935 781

Fax +91 72 3935 780

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information,

there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional

advice after a thorough examination of the particular situation.

2010 KPMG I di P t hi d m mb fi m f th KPMG t k f i d d t m mb fi m ffili t d ith KPMG I t ti l C ti (KPMG I t ti l)

www.kpmg.com/in

kpmg dtc2010 presentation

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