Structure of the Code:The Code has been divided into 9 parts:

Part A Income TaxPart B Dividend Distribution TaxPart C Tax on Distributed IncomePart D Branch Profits TaxPart E Wealth TaxPart F Prevention of Abuse of the Code (Transfer

Pricing and GAAR)

Part G Tax Management (Administration etc)Part H General (PAN, TAN, Agreements with foreign

countries, notices etc)

Part I Interpretation and Miscellaneous

The Direct Taxes Code, 2010:

The DTC has 319 Section and 22 Schedules.

Definitions are contained in Section 314, which has 297 definitions.

The Direct Taxes Code, 2010:Guide to the Schedules of the Code:

1 Rates of Income Tax

2 Rates of other taxes.

3 Rates for Deduction of tax at source

4 Rates for deduction of tax at source in the case of non-resident deductee

5 Procedure for Recovery of Tax.

6 Income not included in total income (=Section 10)

7 Person, entity or Funds not liable to income tax.

8 Computation of Profits of the Insurance business.9 Computation of Income from special sources.

10 Computation of profits of business of operating a qualifying ship.

11 Profits of business of mineral oil or natural gas12 Computation of profits of the business of developing of an

SEZ, manufacture or production of article or things or providing of any service by a unit established in an SEZ.

13 Computation of profits of specified business.14 Determination of income on a presumptive basis.15 Depreciation.16 Contributions or donations eligible for 175% deduction.17 Determination of cost of acquisition in certain cases.18 Minerals and group of associated minerals.

19 Approved provident, gratuity, superannuation funds.

20 Computation of income attributable to a controlled foreign company.

21 Orders appealable before Commissioner (Appeals)

22 Deferred Revenue Expenditure Allowance (NEW CONCEPT)

The Direct Taxes Code, 2010:

The DTC has 319 Clauses and 22 Schedules.

Definitions are contained in Clause 314, which has 297 definitions.

The Direct Taxes Code, 2010:

First Draft of the DTC was released in August 2009, along with a Discussion Paper for public comments.

Revised Discussion Paper was released in June 2010.

Based on comments received, a Bill named “Direct Taxes Code, 2010” has been introduced in the Parliament.

When enacted, The Code will replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957

The Code is proposed to come into force on 1-4-2012.

It extends to the whole of India.

Objects and Reasons:

The 1961 Act has undergone numerous revisions, not less than 34 times by amendment Acts besides amendments carried out using Finance Acts.

Due to this, the basic structure of the Act has become over-burdened and the language, complex.

Concerns were raised by administrators, CAs and tax payers.

The Govt. therefore had decided to revise, consolidate and simplify the language and structure of direct tax laws.

Further rationalization of tax rates (which have been steadily decreasing over 25 years) may not be feasible without corresponding increase in tax base.

Objects and Reasons (Contd):

Strategy for broadening tax base comprises of three elements:

1. Minimize Exemptions- This will result in higher tax-GDP ratio, enhance GDP growth since tax exemptions distort allocative efficiency. This will also improve equity, reduce compliance costs, lower administrative burdens and discourage corruption.

2. Remove ambiguity in law which facilitates avoidance. It is necessary to undertake periodic exercise of rewriting The Code in light of new trends.

3. Checking of erosion of the tax base through tax evasion.

The DTC is designed to reflect this strategy.

Interpretation of The Code:

DTC is NOT an attempt to ‘improve’ the Income Tax Act. Some assumptions which have held the ground for many years have been discarded.

In drafting the Code, the CBDT has, to the extent possible, started on a clean drafting slate.

It is advisable to read the Code without any preconceived notions and, as far as possible, without comparing with the provisions of the Act.

Let us examine the claims of the Discussion Paper with an example.

Interpretation of The Code:Proviso Sec. 17(2) (Definition of Perquisite) says that “nothing in this clause shall apply to- (v) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family, so, however that such sum does not exceed 15,000 rupees in the previous year”

Definition of Perquisite under the Code Clause 314(191):Perquisite does not include-(v) Any sum paid by an employer in respect of any expenditure incurred by an employee on medical treatment of himself or his family members to the extent that it does not exceed Rs. 50,000 in a financial year.

A comparison of the above provision regarding medical reimbursements being excluded from perquisites do not reflect a ‘clean drafting slate’

Simplification of Law:

One cosmetic effort made by the Code to do away with the ‘Jungle and maze of words’ is to separate the concepts of ‘Previous Year’ and ‘assessment year’ with the unified concept of ‘Financial year’

Another example is that formulae have been used instead of using phrases like “shall bear the same proportion as such and such bears to such and such”, as well as tabular and schedule based presentation.

Law remains as complex as before, with the added effect of not being able to completely rely on principles expounded under the Income Tax Act by Courts and other authorities.

It is expected that litigations will continue unabated under the Code.

Tax rates:

For Individuals, HUF:

For resident individual who is above 65 years of age during the financial year, the basic exemption is Rs. 250,000

No distinction made between male and female assessees.

Taxable Income Income tax

Total Income does not exceed Rs. 200,000 Nil.

Total income between Rs. 200,000- Rs. 500,000 will be taxed at

10%

Total Income between Rs. 500,000 and Rs. 10,00,000 will be taxed at

20%

Income above Rs. 10,00,000 will be taxed at 30%

Tax Rates:

Companies will be taxed on the whole of total income at 30%

Tax on book profits- MAT- 20%

Dividend Distribution tax by domestic company- 15%

Income distributed by Mutual Fund to unit holders of equity oriented fund- 5%

Income distributed by life insurer to policy holders of approved equity oriented life insurance scheme – 5%

Wealth Tax at 1% of the amount by which net wealth exceeds Rs. 1 crore.

Tax Rates:

Branch Profits tax on Foreign Companies- at 15% of branch profits. (Newly introduced)

Foreign company shall be liable to branch profits tax in respect of branch profits of a financial year. This is in addition to income tax payable by the foreign company.

Payable irrespective of whether branch profits are remitted to head office abroad.

Branch profits shall be the income attributable, directly or indirectly, to the P.E. or an immovable property situated in India included in the total income of the foreign company for the financial year, as reduced by the amount of income tax payable on such attributable income.

Permanent Establishment:

P.E. means a fixed place of business through which the busienss of a non-resident assessee is wholly or partly carried on. It includes a place of management, a branch, office, factory, workshop, sales outlet, warehouse in relation to person providing storage facilities for others, farm, mine, building site, furnishing of services, installation or structure. (Larger definition that what is in the Act)

P.E includes a person other than independent agent who acts on behalf of the N.R assessee if he1. Concludes contracts, unless activities are limited to purchase

of goods.2. Maintains stock of goods in India and delivers them.3. Secures orders in India mainly or wholly for the N.R. and other

N.R Controlled by the that N.R.

Permanent Establishment:

PE also includes the person acting in India on behalf of an assessee engaged in insurance business through whom the assessee collects premiums in India and insures risks situated therein.

PE also includes a substantial equipment in India which is being used by, for or under any contract with the assessee.

Basic Concepts:No more ‘previous year’ and ‘assessment year’. Only one term ‘Financial year’ to be used.

Income will be taxed as per the provisions of the Code as they stand on 1st April of that financial year. Under the Act, income is taxed based on provisions as they stand on the 1st day of assessment year.

Under the DTC, tax rates are specified in the Schedules, therefore no annual Finance Bill. Rates will be changed by amending Schedules to the Code through Amendment Bill.

‘Assessee’ now also includes any person who files return regardless of whether he was required to, any person who is required to furnish information under the Code, and any person to whom amount is to be refunded under the Code.

Basic Concepts:

For Individuals and HUF, the concept of Resident but not ordinarily resident is proposed to be abolished. However, even though the category will be abolished, ‘not ordinary residents’ will still enjoy exemption in respect of their foreign sourced income.

‘Income deemed to accrue or arise in India’ u/s 9 of the Act as regards salary, dividend, interest, royalty and technical fees are retained in Clause 5 of the Code. In addition, the code also includes:1. Insurance premium shall be deemed to accrue or arise in India

if it is accrued from or payable by any resident or non-resident in respect of insurance covering any risk in India.

2. See Next Slide.

Basic Concepts:Income accruing or arising will now include:Income from transfer, outside India, of any share or interest in a Foreign Company if at any time in 12 months preceding the transfer, the fair market value of the assets in India, owned directly or indirectly, by the company, represent atleast 50% of the Fair Market Value of all assets owned by the company. (This is a ‘look through’ provision to be introduced so that shares of a foreign company is artificially unbundled to find out the assets that it represents)

This may have been specifically introduced to counter the Hutch/Vodafone case, where a Foreign Company(A) transferred shares in a foreign company(B) to another foreign company(C). In case of this case, foreign company (B)’s assets almost entire comprise of assets in India held indirectly for which the assessee denied liability to tax.

Other points of comparison (Not exhaustive):

Point Act Code

Residence of companies

U/s 6(3), a company is treated as a resident, if it is an Indian company, or if its control and management is situated 'wholly' in India.

Under cl. 4(3) of the Bill, a company is treated as resident if it is an Indian company, or if its place of 'effective management' at any time of the year is in India. The test for determining residence has been altered and made broader. 'Place of effective management' is defined under cl. 314(192) to mean either the place where the Board/executive directors of a company make their decisions or, in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.

Other points of comparison (Not exhaustive):

Point Act Code

'Indian company'

U/s 2(26), an Indian company is one which is formed and registered under the Companies Act, 1956 or established by or under a Central or State Act. A Proviso requires the registered/principal office to be in India.

Under cl. 314(132), an Indian company is a body corporate which is registered or established or constituted by or under the Companies Act, 1956 or another State or Central Act. The requirement of the proviso is separately included. The change in language seems clarificatory.

Other points of comparison (Not exhaustive):

Point Act Code

Residence of other legal persons

U/s 6(4), other legal persons are treated as residents in India in any previous year in every case, except where the control and management of his affairs is situated wholly outside India.

Under cl. 4(4), every other legal person is to be treated as a resident in any financial year, if the place of control and management of its affairs, at any time in the year, is situated wholly, or partly, in India. The language seems to have changed, but the test seems same – if any part of management is carried out in India, the person is a resident.

Other points of comparison (Not exhaustive):

Point Act Code

Scope of total income

Residents are taxed on worldwide income; non-residents on a source-based model

Essentially the same model, but 'source' has been widened as we will see a few slides later.

In addition, cl. 3(3) provides that any income which accrues to a resident or is received by a resident outside India during the year shall be included in the total income of the resident, whether or not such income has been charged to tax outside India.

Other points of comparison (Not exhaustive):

Point Act Code

Deemed accrual in India

Section 9(1)(i): Through or from any business connection, property, or asset/source in India, or through the transfer of a capital asset situate in India. Where operations are not carried on entirely in India, only that income which is reasonably attributed to operations in India is deemed to accrue in India.

Cl. 5(1): The same four categories apply – it is clarified that income arising 'through or from' all the 4 would be covered (as opposed to the present Section, where 'through or from' qualifies the other 3 categories but the provision only read 'through' the transfer of a capital asset. Business connection has been defined in cl. 314(40) to include a permanent establishment. Definition of PE has been discussed a few slides earlier.