The much-awaited revised version of the direct taxes code (DTC) has been widely welcomed with relief. Clearly, the government has been smart to have released a tough version first and followed it up with a softer one, thus earning plaudits! Among the more widely welcomed proposals is that of dropping the one to levy a flat 2 per cent tax on assets in favour of the present regime to levy tax on book profits. The rate determination has, however, been left out and one hopes that the rates are brought to a more reasonable level than the present 18 per cent. The finance ministry has fudged any expression of a view on the proposed 25 per cent rate for corporate income tax. This is an important issue for the corporate sector that needs further clarification. The idea of subjecting corporate tax rates to an annual review and revision does not make economic and business sense. Perhaps the finance ministry has good reasons for not taking a view, but it should do so sooner than later. The omnibus powers given to tax administration for overriding the terms of tax treaty convention have been rightly diluted keeping in mind the Vienna convention. Though, this comes with a rider that domestic law can override in circumstances where General Anti-Avoidance Rules (GAAR) or Controlled Foreign Corporations (CFCs) provisions are invoked or where foreign companies are paying branch office tax. The last provision is tricky and can subject all foreign companies to a treaty override other than in situations where they earn passive income in the nature of royalties, fees for technical services, dividends and interest which are subject to fixed rate of withholding tax. Though the GAAR provisions have been diluted, one has to read the supplementary law which would prescribe guidelines since the brief published text on this important piece of legislation does not clarify matters.
Indian companies will, however, resent the provisions relating to CFCs. These would certainly prove to be a dampener for Indian companies going global. Indian firms which were otherwise not paying domestic tax on the non-repatriated part of their offshore earnings will now have to do so. Though such laws are prevalent in many countries, it is premature in the Indian context as Indian companies have gone global only in the past decade. If this legislation is passed, it can only be hoped that suitable foreign credit mechanisms are put in place to reduce the impact of profit after tax ( PAT). As for individuals paying tax, the finance ministry has shown seriousness about implementing the EET (exempt, exempt, tax) scheme and has done away with the EEE (exempt, exempt, exempt) system for all categories of savings except for government and public provident funds, statutory PF and pension schemes approved by the regulator. It would have been beneficial to continue with EEE in the case of long-term saving instruments, such as life insurance policy and infrastructure bond, along with PF products. In sum, the government has succeeded in calming nerves and comforting tax payers after having created alarm with the original DTC. Hopefully, it will pay equal attention to the feedback on the revisions now published and bring changes in the tax code to Parliament in the monsoon session itself. It is best to take all views on board and move carefully on the tax reform front since neither should the government suffer on account of lost revenues nor the taxpayer take the hit on account of lack of clarity and inconsistency.