DTC only in 2013, key parts in this Budget

The new Direct Taxes Code (DTC) is to be now introduced only from April 2013, a year later than planned. Hence, the government will introduce some of its key provisions, such as General Anti-Avoidance Rules (GAAR), in Budget 2012-13 itself, finance ministry officials said on Wednesday.

An official said Parliament’s standing committee on finance was expected to give its report on the DTC Bill in the Budget session of Parliament, likely to commence from mid-March. After this, the ministry would table the revised Bill in the monsoon session of Parliament, usually convened around July.

“The standing committee will give its report in a month. After that, we will also need six months (to consider the recommendations) and table the revised Bill,” said the official.

Tax evasion and mitigation are two of three ways to reduce payment liability. The former, using illegal means to dodge tax, is illegal. Mitigation is the use of expressly legal means to pay less, such as diverting money from a bank deposit to a provident fund. Tax avoidance is the category in between, where the law isn’t clear and courts are called in to decide. DTC had proposed GAAR to ensure this was minimised; it has become more significant for the government after the the recent Supreme Court verdict in the Vodafone tax dispute.

The ruling was in favour of the company and was a big financial blow to the tax department. Wary of a revenue loss from similar deals in future, the finance ministry is expected to tweak the laws without more delay to make income from such cross-border deals taxable under domestic laws.

Officials say GAAR will be put to use only if an entity, apart from obtaining tax benefit, undertakes a transaction which is not at “arm’s length”. Alternatively, if it is found that there has been a misuse or abuse of the DTC provisions or a transaction lacks commercial substance. GAAR is to be invoked only where tax avoidance is beyond a specified threshold.

DTC is to replace the Income Tax Act, 1961, with its numerous amendments. It was first scheduled to be implemented from April 2011, but the government postponed this by a year, saying it wanted to give more time to the industry to adjust. Aimed at simplifying rules and widening the tax base, the Bill was tabled in the Lok Sabha in August 2010.