The draft Direct Taxes Code that proposes to reduce the rate of corporate tax to 25 per cent from about 30 per cent may have overhauled the taxation structure and rates for companies, but experts see that in real terms companies may end up paying more corporate tax.
The current effective rate of corporate tax has been worked out to be 23-24 per cent. Besides, the code proposes calculation of taxable income that excludes certain expenditures, said Aseem Chawla, partner of Amarchand Mangaldas, and head of its tax practice. “At a first glance, 25 per cent appears attractive, but the Budget section on revenue foregone itself states that the effective tax was lower,” he added.
The code leaves no escaping from the dividend distribution tax for resident companies that would be required to pay 15 per cent of the amount, declared as DDT. Foreign companies would not be paying DDT but will have to pay a branch profit tax of 15 per cent, which is equivalent to 15 per cent of DDT, said Shyamal Mukherjee, executive director, PricewaterhouseCoopers (PwC).
Chawla said the branch tax was akin to the permanent establishment tax prevalent in the United States. He is critical of the provisions of the minimum alternative tax, stating that it was proposed to be levied on the basis of value of gross assets which would put capital-intensive industries at a disadvantage though IT companies might benefit since their asset is mainly the employees.
India Inc. has welcomed the release of the draft Direct Tax Code Bill, which would simplify the tax law along with streamlining the various provisions in such a manner that there is less scope for litigation and easy compliance. “The intent of the direct tax code appears to address the interpretation issues and help reduce litigation,” said Vikas Vasal, executive director, KPMG.
On transfer pricing, Samir Gandhi, partner of Deloitte, welcomed introduction of advance pricing arrangements (APA) as it provides certainty to the tax payers on the issue of transfer pricing for a specified period of time and prevent time consuming litigation and examination for taxpayer and tax authorities.
It also provides both the taxpayer and the tax authorities to consult and cooperate in no adversarial spirit and environment avoiding confrontation position, Gandhi added.
This is very important for India which is today one of the fastest-growing economies with increasing flow of goods, services, funds, intangibles and, of course, will benefit Indian MNCs expanding their operations in other countries, said Gandhi.
Second, the risk-based assessment from a quantity-based selection process of Rs 15 crore to a more quality-based selection of cases for transfer pricing assessment would benefit both the tax payer and tax authorities, Gandhi said. While the exact mechanism is still awaited, some of the fallout, which one needs to avoid, is having too many unilateral APAs (without any other country being involved) or having difficult critical assumption.
However, challenge would be to keep data, trade secrets and other sensitive information and documents confidential and not share with tax auditors and third parties. In other countries, APAs have been introduced for small taxpayers and APA should not be limited to only large corporations, said Gandhi.
Separate tax computation regime for eight sectors
Releasing the draft Direct Taxes Code for public discussion today, the government has provided for separate tax computation regime for eight businesses. Spread over separate schedules, it would govern companies in business of insurance, shipping, oil and gas producers, power, special economic zones, hospital, fruit and vegetable processing, and infrastructure.
There is another set of 11 businesses, including airlines, civil construction, retail trading, construction of power plants and oil exploration service providers, for whom the determination of profit on presumptive basis will continue.
