Revised draft takes care of some concerns of FIIs

The much-awaited revised discussion paper on the Direct Taxes Code (DTC) was released by the Central Board of Direct Taxes (CBDT) on June 15 for public debate and comments. The revised discussion paper delves upon the 11 critical proposals introduced in the DTC earlier.

Undoubtedly, the revised discussion paper has brought cheer on various fronts like the minimum alternate tax , special economic zone grandfathering, personal taxation, etc.

At the same time, it reflects the government’s receptivity to the representations made by various stakeholders in the past.

The revised paper takes care of some of the issues concerning foreign investors in India.

The revised draft proposes to roll back the treaty override provisions, albeit with a rider. It is proposed to retain the preferential status of DTC over tax treaties, where General Anti-Avoidance Rule (GAAR) or Controlled Foreign Corporation provisions are invoked or the branch profit tax is levied.

The earlier draft gave the Commissioner of Income-Tax sweeping powers to amend, disregard or re-characterise an arrangement under certain circumstances. A lot of apprehensions were raised on the possible misuse of the GAAR provisions. Thus, the revised draft proposes to introduce following safeguards to prevent such a situation.

 

 

CBDT will issue guidelines to provide for circumstances under which GAAR may be invoked 
 

GAAR to be invoked where tax avoidance is beyond a specified threshold limit 
 

The forum of Dispute Resolution Panel to be available where GAAR is invoked 

It has been clarified in the paper that GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be classified as an impressible avoidance arrangement. Since GAAR provisions as introduced in the original Code have been retained with only some checks, it is imperative to have clear and stringent guidelines to ensure that GAAR is invoked only in a case of tax avoidance.

In the discussion paper concept of “place of effective management” has been introduced for determining residency. This is an internationally recognised concept for determination of residence of a company incorporated in a foreign jurisdiction and is a welcome change.

Finally, in the context of Foreign Institutional Investors (FIIs), it has been proposed that income arising on purchase and sale of securities shall be deemed income chargeable under the head ‘capital gains’.

On a concluding note, the discussion paper reflects the resolve of the government to make DTC workable and implement it within the proposed timelines. However, as a next step, it is expected that some of the finer points would be discussed by the finance ministry with the stakeholders to make introduction of DTC more receptive.

Shyamal Mukherjee Executive Director & Joint Leader of Tax Practice, PwC