Budget 2012: Parts of DTC that can be adopted now

The new Direct Taxes Code is unlikely to be passed by Parliament any time soon, but the Budget could unveil some key provisions of the Code, especially those that will prevent Vodafone-type deals to escape tax

General Anti-Avoidance Rule (GAAR)

A broad set of rules that will empower tax authorities to examine and in appropriate cases to disregard any arrangement where the arrangement has been entered into with the main purpose of obtaining a tax benefit and is characterized by features such as non-arm's length dealing, abuse or misuse of tax law, lacking in commercial substance or bona fides.

Indirect Transfer (IT)

The DTC provides for taxation of gains arising on transfer of shares of a foreign company if assets held by such foreign company in India, directly or indirectly, at any time during the year preceding the transfer, constituted at least 50% of its total assets. Thus, if the asset holding threshold is met, indirect transfers will be taxable in India.

Place Of Effective Management (POEM)

Aimed at preventing tax base from shifting out of country, the proposed law tightens definition of who qualifies as a resident. Proposed law provides that a company will be resident in India if it is an Indian company or if at any time during a financial year its place of effective management is in India. The present law defines India resident companies as those which are registered or are controlled and managed wholly in India.

Controlled Foreign Company (CFC)

Presently, income of Indian controlled foreign companies is not taxed in India until such income is brought back to India. The proposed CFC regime aims to tax this income.

Branch Profits Tax (BPT)

The code proposes to impose 15% tax on branch profits in addition to the income-tax payable. The branch profit for the purpose of levy of this tax will be the income attributable, directly or indirectly, to a permanent establishment or an immovable property situated in India as reduced by the amount of income-tax payable on such attributable income.

Advance Pricing Agreement (APA)

This is a measure aimed at providing certainty. APA is an arrangement between a taxpayer and the tax authority covering future transactions, wherein the transfer pricing method to be applied for a certain future period of time are mutually agreed upon.

Compiled by PWC