The Direct Taxes Code Bill, 2010

What you simply must know

October 2010
www.deloitte.com/in
Foreword
We are pleased to present this booklet incorporating key
features of the Direct Taxes Code Bill 2010 presented by the
Indian Finance Minister to Parliament on 30 August 2010.The
law is proposed to be effective from 1 April 2012.
The Direct Taxes Code and the original discussion paper,
unveiled on 12 August 2009 to replace the current Income
Tax Act, 1961 (ITA) proposed to bring about significant
structural changes to direct taxation in India. The strategy
set out was to broaden the tax base by way of minimizing
exemptions, address the problem of ambiguity in the law
which facilitates tax avoidance and finally checking the
erosion of the tax base through tax evasion. It was indicated
that the measures would result in a higher tax-GDP ratio,
enhance GDP growth, improve equity, reduce compliance
costs, lower administrative burdens and discourage
corruption.
Consequently, a revised discussion paper issued in June 2010
responded to several comments and concerns of various
stakeholders. The August Bill can be considered an amalgam
of provisions in the existing ITA, the 2009 draft and discussion
papers and includes some provisions that were not in the
original draft. Hence, it needs to be evaluated whether the
other objectives of removing ambiguity, improving equity,
reducing compliance costs etc would be fulfilled. Further, the
economic impact and increase in revenues may need to be
re-assessed.
Several new concepts have been proposed to be introduced
e.g. anti avoidance rules, controlled foreign company rules,
branch profit tax, treaty override provisions, new test for
residency, which may address the objective of tax avoidance
or tax evasion. On the other hand, some of the changes
proposed for minimizing exemption have been retained,
though the base rate of tax has been marginally reduced.
The booklet outlines the key features and changes being
proposed. We hope that you shall find the same useful.
The Direct Taxes Code Bill, 2010: What you simply must know 1
Index

Glossary 3
Tax rates 4
Residential Status 8
Business Income 10
MAT 21
DDT 22
Business Reorganization 23
International Tax 26
CFC 33
GAAR 35
Salaries 38
Income from House Property 39
Capital gains 40
Residuary sources 41
Withholding tax 42
Wealth tax 43
Contacts 44

2
Glossary
APA- Advance Pricing Agreement
BPT – Branch Profit Tax
CFC – Controlled Foreign Companies
CIT – Commissioner of Income-tax
DDT – Dividend Distribution Tax
DRP- Dispute Resolution Panel
DTAA – Double Taxation Avoidance Agreement
DTC 2010 – Direct Tax Code 2010
FTC – Foreign tax credit
FTS – Fees for technical services
GAAR – General Anti-Avoidance Rule
ITA – Income-tax Act, 1961
LLP – Limited Liability Partnership
MAT – Minimum Alternative Tax
PE – Permanent Establishment
POEM – Place of Effective Management
SAAR – Special Anti-Avoidance Rule
SCRA – Securities & Contract Regulation Act, 1956
SEZ – Special Economic Zone
SEZ Act – Special Economic Zone Act, 2005
STT – Securities Transaction Tax
WTA – Wealth tax Act, 1957
The Direct Taxes Code Bill, 2010: What you simply must know 3
Tax rates

Individuals
The income slabs and rate of taxation are detailed hereunder:
For Individual (Male and Female) For Senior Citizen
Slab of Income (`) Rate of Tax ( percent) Slab of Income (`) Rate of Tax (percent)
Up to `2,00,000 Nil Up to `2,50,000 Nil
2,00,001 - 5,00 ,000 10 percent 2,50,001 - 5,00 ,000 10 percent
5,00,001 - 10,00 ,000 20 percent 5,00,001 - 10,00 ,000 20 percent
10,00,001 and above 30 percent 10,00,001 and above 30 percent

• Maximum tax rate retained at 30 percent. This will be applicable for income above `10 lacs
• No preferential treatment for women
• Education cess @ 3 percent proposed to be abolished

4
Corporate

Particulars ITA ( Base rates) DTC 2010

Indian company 30 percent 30 percent
Foreign Company 40 percent 30 percent
BPT - 15 percent
DDT 15 percent 15 percent
MAT 18 percent 20 percent
Effective tax rate for foreign company 42.23 percent* 40.5 percent
Effective tax rate for Indian company 42.73percent** 39.13 percent

* Including surcharge and education cess

** After considering DDT

• Surcharge and education cess proposed to be abolished

The Direct Taxes Code Bill, 2010: What you simply must know 5
Capital Gains taxes

Particulars ITA# DTC 2010

STT paid STT not paid STT paid STT not paid
Listed equity shares / units of equity oriented fund
- held for more than one year Nil 10 percent/ 20 percent* Nil 30 percent
- held for one year or less 15 percent 40 percent 15 percent 30 percent
Unlisted equity shares / other assets
- held for more than one year 20 percent 30 percent
- held for one year or less 40 percent 30 percent##
DTC 2010:
Held for one year from the end of the financial year

* 10 percent without the benefit of indexation or 20 percent with the benefit of indexation, whichever is less.
# Excluding surcharge and cess.
## Capital gains of a branch taxed at BPT rate

6
Other specified sources of income
Particulars ITA DTC 2010 Key Highlights
Other Streams of income • Tax rates provided in the Act; yearly exercise dispensed
Royalty 30/20/10 percent# 20 percent$ with
FTS 30/20/10 percent# 20 percent$ • Basic tax rates maintained with marginal increase in
slab rates for individuals
Dividend** 20 percent 20 percent
• Benefit of higher slab rates for females withdrawn
Interest 20 percent 20 percent
• BPT introduced for foreign companies
Non-resident sports persons*** 10 percent 10 percent • No levy of surcharge and education cess
Non-resident sports association/ 10 percent 10 percent • MAT based on profits
institution (in respect of guarantee • Securities Transaction Tax to continue
money in relation to games/ sports
played in India

# Excluding the applicable surcharge and education cess

$ If the non-resident has a PE in India, then these tax rates would not apply
** Dividends which are not subject to DDT
*** In respect of income from participation in sporting events in India, advertisements and contribution of articles

The Direct Taxes Code Bill, 2010: What you simply must know 7
Residential Status
Residence of an Individual
Resident
• Stay in India is greater than or equal to 182 days or
• Stay greater than or equal to 60 days in the financial year
and greater than or equal to 365 days in the preceding 4
financial years (The condition would not apply in the case
of citizen of India leaving India as a member of a crew of
an Indian ship or for the purposes of employment outside
India)
Non- resident
• Where stay is less 60 days in the year or less than 365
days in the preceding 4 years Other changes proposed
• The term of ‘Resident but not ordinarily resident’ to be
removed but no changes proposed on the applicable
criteria for taxation of global income in individuals’ hands.
Extended time limit of 182 days available to Indian citizens
/ persons of Indian origin (PIOs) coming on visit to India to
qualify as resident to be dispensed with
8
Residence of a company
• A company would be considered as a resident if it is an
Indian company or its POEM at any time of the year, is in
India.
– POEM would mean
• The place where the Board of Directors of the Company
or its executive directors, as the case may be, 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 such functions
Residence of any other person
Any other person would be a resident, if the place of control
and management at any time in the year is situated wholly
or partly in India
The Direct Taxes Code Bill, 2010: What you simply must know 9
Business Income
Business income would be computed on the basis that:
• Income from transactions in all business assets would be
considered as ‘income from business’
• Concept of taxing business income on the basis of business
assets has been introduced; business assets defined as
business trading asset and business capital asset
• Each business shall be treated as distinct and separate
from other businesses, if there is no interlacing or inter-
dependence between them
• Where same activities are being carried on by two units,
they shall be treated as distinct from each other if they
are physically apart, or use different raw material, or have
different manufacturing processes, or where separate
books of accounts are capable of being maintained
• Income of certain specified businesses to be computed as
provided in the Schedules. All other business income to
be computed in accordance with the provisions under the
head ‘income from business and profession’
• A business would be set up on:
– The date on which the manufacture, production or
10
processing of the goods begins after successful trial run
of the plant, in the case of a business of manufacturing,
production or processing of goods or
– The date on which it is ready to commence its
commercial operations, in any other case
• Allowances and deductions would be permissible based on
the nature of business assets
Computation of income from business
• Income from business shall mean “profit” earned from such
business being equal to ‘gross earnings’ minus ‘business
expenditure’ incurred
• Scope of business income widened to include:
– Consideration accrued/received with respect to a self
generated asset
– Remission/ cessation of any liability with regard to a loan,
deposit, advance or trade credit
– Consideration received/accrued on transfer of carbon
credits
 Asset (Illustrative)

Business Asset Investment Asset

Business Trading Asset manufacture or produce; right to carry • A capital asset which is not a business capital
• Stock in trade on business; tenancy right; licence right asset
• Consumables or permit • Security held by a FII
• Raw materials • Tangible asset in the nature of building, • Undertaking or division of business
Business Capital Asset machinery, plant or furniture
• Capital asset self generated in business • Any other capital asset (not land) used
• Intangible capital asset : goodwill; for the purpose of business.
trade mark; brand name; right to

• Gross earnings shall include all accruals and receipts • Income from letting out of house property included under
derived from or connected with the business, irrespective house property income
of whether it is derived from business capital assets • Income from transfer of investment assets
or business trading assets and would include inter alia
amongst others, amount received as reimbursement of any • Business expenditure to be allowed under the following 3
expenditure incurred, amount received from a business categories:
after its discontinuance. However, business income would – Operating expenditure
not include: – Finance charges
• Dividend – Capital allowances
• Interest other than interest accruing to financial institutions • Operating expenditure includes any expenditure laid out

The Direct Taxes Code Bill, 2010: What you simply must know 11
 or expended, wholly and exclusively, for the purpose of
business. Exhaustive lists of expenses which shall be/shall
not be allowed under this category have been provided
• Finance charges include payment for interest on borrowed
capital, interest on trade creditors, incidental financial
charges, discount or premium on any bond or debenture
etc.
– Finance charges would not include interest paid on
borrowed capital for a period prior to commencement of
business or asset being put to use
– Interest payable to a financial institution would be
allowed on payment basis
• Capital allowances include depreciation and initial
depreciation on business capital assets, terminal allowance
on the transfer of the asset, scientific research and
development allowance, deferred revenue expenditure
– Depreciation, initial depreciation or terminal allowance
shall be allowable on a business capital asset
12
– In addition to the normal depreciation, initial depreciation
shall be allowed at the rate of 20 percent of the actual
cost of asset
– Terminal allowance would be allowable in the case block
of assets ceases to exist and the percentage specified for
computing depreciation in respect of the block of assets
is zero
– In the case of a finance lease, depreciation on the asset
would be allowed to the lessee
– In the case of a business reorganization, depreciation
would be allowed to the predecessor and successor
proportionately based on the date of reorganization
– Certain specified expenditures such as non-compete
fee, business reorganization expenses, etc. would be
allowable on a deferred basis over a period of 6 years
– Expenditure incurred by a resident on any operations
relating to prospecting for any mineral or development of
a mine or other natural deposit, etc. shall be deductible
over a period of 10 years
Income from specified businesses (mentioned below), • Profit of other insurance business shall be profits disclosed
to be computed in accordance with the computation in the annual accounts, subject to certain adjustments
mechanism provided in the respective schedules of the DTC • Income distributed to the policyholders of ‘approved equity
2010: oriented life insurance scheme’ by life insurance company
Nature of business Schedule shall be liable to distribution tax at the rate of 5 percent
– Profit from the business of insurance shall be aggregated
Insurance Eighth
after setting off of any unabsorbed loss of the past years
Operating a qualifying ship Tenth
from the business of insurance
Mineral oil or natural gas Eleventh • Losses in an insurance business cannot be set off against
Developing of SEZ etc. Twelfth income from any other source
Other specified business Thirteenth
Where income is determined on Fourteenth Income from the business of operating a qualifying ship
presumptive basis • Taxpayers shall have the option of computing their profits
under the tonnage income scheme
Income from insurance business • If profit determined under this scheme is negative then it
• Profits would be determined in shareholder’s account in shall be treated as ‘nil’
accordance with the Insurance Act, 1938, subject to certain • Book profits or losses from core shipping activities of a
adjustments specified in the DTC 2010 qualifying ship shall be excluded for MAT purposes
• Such income shall be subject to tax at the rate of 30 • The successor in a business reorganisation shall be allowed
percent (as against 12.5 percent under ITA) deduction in respect of negative profit determined under

The Direct Taxes Code Bill, 2010: What you simply must know 13
 the tonnage income scheme of the immediately preceding
year

Income from the business of mineral oil and natural gas,

setting up an SEZ or a unit in an SEZ and in respect of
specified business
• There has been a paradigm shift to allow investment based
deduction as compared to profit linked incentives
– The provisions would be applicable only on the fulfilment
that:
• The business has not been set-up by splitting up or
reconstruction of a business already in existence
• It is not set up by the transfer to the business of
machinery or plant previously used
– Profits would be considered as the gross income and
as reduced by business expenditure specified in the
Schedule
– Capital expenditure incurred would be allowable as
deduction

14
 – Expenditure incurred before the commencement of
business shall be allowable as deduction
Specified businesses under the Schedule, inter alia,
include the following:
• Business of generation, transmission or distribution of
power
• Business of processing, preservation and packaging of
fruits and vegetables
• Business of laying and operating a cross country natural
gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral
part of the network
• Business of operating and maintaining a hospital
• Business of setting up and operating a cold chain facility
• Business of developing, or operating and maintaining, any
infrastructure facility. Infrastructure facility means the
following facilities:
– Road including toll road, a bridge or a rail system
– Highway project including housing or other activities
being an integral part of the highway project
– Water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste
management system and
– Port, airport, inland waterway or inland port
• Business of laying and operating a cross country natural gas
or crude or petroleum oil pipeline network for distribution
etc. The provisions of the Schedule shall apply upon
fulfilment of the following additional conditions:
– It is owned by a domestic company
– It has been approved by the Petroleum and Natural Gas
Regulatory Board
– It has made certain specified percentage of its total
pipeline capacity available for use on common carrier
basis, by any person other than the assessee
Tax Holidays under the ITA are being grandfathered
• SEZ developer engaged in developing, operating and
maintaining of an SEZ which is notified on or before 31
March 2012 under the SEZ Act, would continue to be
The Direct Taxes Code Bill, 2010: What you simply must know 15
 allowed a deduction under the DTC 2010, for the balance • Deductions under the following Sections of the repealed
period under Section 80 IAB of the repealed ITA subject to ITA would continue to be allowed for the balance period
fulfilment of certain conditions. under the DTC 2010, subject to fulfilment of certain
• SEZ units within an SEZ, who begins to manufacture or conditions :
produce articles or things or provide any service in the unit
Sectio n Details
in SEZ on or before 31 March 2014, would continue to be
allowed a deduction under the DTC 2010, for the balance 80 IA Industrial undertaking or infrastructure development
period under Section 10 AA of the repealed ITA, subject to 80 IB Industrial undertaking other than infrastructure development
fulfilment of certain conditions. (except sub section 9)
80 IC Enterprise in special category states
80 ID Hotels & Convention centres
Tax Holidays under the ITA 80 IE Undertaking situated in North – Eastern states

are being grandfathered for 80 JJA

80 JJAA
Collecting and processing of Bio-degradable waste
Employment of new workmen
SEZ developers, SEZ Units 80 LA Offshore banking unit / International financial service centre
and other industrial
undertakings
16
• Deduction under sub section 9 of Section 80 IB of the
repealed ITA shall continue to be allowed subject to
fulfilment of certain conditions, for the balance period to an
assessee engaged in the following business;
– Commercial production of mineral oil in any blocks
licenced under a single contract awarded under
New Exploration Licensing Policy (NELP) before the
commencement of this DTC 2010
– Refining of mineral oil and such activity begins on or after
1 October 1998 and before 31 March 2012
– Commercial production of natural gas in blocks awarded
under NELP VIII or Coal Bed Methane (CBM) IV and such
activity has been started on or after 1 April 2009

The Direct Taxes Code Bill, 2010: What you simply must know 17
Computation of income on presumptive basis
• Income from some of the following businesses shall be calculated on presumptive basis, as under:
Nature of business Amount of income Condition
Plying, hiring or leasing of heavy goods or light goods vehicle • `5000 for each heavy goods Where the vehicles owned by the assessee is less than 10 in a financial
vehicle for every month year
• `4500 for each heavy goods
vehicle for every month
Any business other than a business specified above 8 percent of the total turnover or Resident individual/ HUF or a firm ( not being an LLP) and the total
gross receipts turnover or gross receipts in the financial year is Rs 10 million or less
Civil construction in connection with approved turnkey power project 10 percent Taxpayer is a foreign company
Erection, testing or commissioning of plant or machinery in connection 10 percent Taxpayer is a foreign company
with approved turnkey power project
Providing services or facilities in connection with the prospecting for, or 14 percent Taxpayer is a non-resident
extraction or production of, mineral oil or natural gas
Supplying plant and machinery on hire, used or to be used, in the pros- 14 percent Taxpayer is a non-resident
pecting for, or extraction or production of, mineral oils or natural gas
Operation of ships 10 percent Taxpayer is a non-resident
Operation of aircraft 7 percent Taxpayer is a non-resident

• The income determined as above shall be further increased by the excess of the income actually earned from the business
over the amount specified above.

18
Aggregation of income and set off of losses
• Income from each source under a head of income shall be
aggregated to arrive at the income from a head of income
for the year
• Income from all ordinary sources shall be aggregated to
arrive at the current income for the year
• Brought forward losses (other than capital loss, speculation
business and loss from the activity of owning and
maintaining race horses), if any, shall be allowed to be set
off against the aggregate income from ordinary sources
• Similarly, income from all special sources after setting off of
past unabsorbed losses shall be aggregated to arrive at the
gross total income from special sources
• No time limit for the carry forward and set off of past losses
• Total income of a person shall be the net income from
ordinary sources and special sources
• Unabsorbed current loss of the predecessor shall be treated
as loss of the successor, subject to fulfilment of specified
conditions, in the following cases:
– Business reorganisation, or
– Conversion of a company into a limited liability
partnership
• Income from capital gain, speculative business and owning
and maintaining race horses shall be aggregated in the
following manner:
– Income from under each of the above sources shall be
aggregated separately to arrive at the net income
– Brought forward losses from the past years shall be set
off against the current income
– In case current income after set off of past losses is
negative, then the same shall be treated as nil for the
purposes of aggregation with the other income from
ordinary sources
– Thus, loss from the above sources can be set off only
against income from the respective source
• If the return of income is not furnished by the due date
then unabsorbed current loss from any source shall not be
allowed to be carried forward to the extent it exceeds the
corresponding amount in the preceding financial year
The Direct Taxes Code Bill, 2010: What you simply must know 19
 Key Highlights
• Business income to be computed on the basis of
income generated from business assets
• Income from investment assets to be considered as
income from capital gains
• Scope expanded for certain receipts to be considered
as income
• Provisions simplified for claim for deduction of
Miscellaneous
expenses and allowances
• Although ITA and WTA shall be repealed with effect from 1
• Allowance for specified deferred expenses
April 2012, the provisions of these Acts shall continue to be
• No distinction between business loss and depreciation
effective with respect to the following:
for set off and carry forward
– Any assessment proceedings pending on the
• Business loss allowed to be carried forward indefinitely
commencement of this DTC 2010
• Focus on capital based incentives, Profit based
– Any proceeding with respect to a return of income filed
incentives to be eased out; Likely impact on low
before the commencement of this DTC 2010
investment businesses
– Proceeding for imposition of penalty with respect to
• Presumptive tax rates marginally increased for certain
assessment completed before the commencement of this
income/businesses
DTC 2010
20
Minimum Alternate Taxes
Chargeability
• Applicable to all companies
• Book profits to be taxed at 20 percent
• Pre-paid taxes has been defined to include credit for tax
paid on book profit
• MAT applicable to SEZ developers and units
• Book profits or losses from core shipping activities of a
qualifying ship shall be excluded for MAT purposes
Tax credit
• Tax credit allowed, for a financial year, shall be the excess
of tax on book profit over the tax under normal provisions
of DTC 2010
• Tax credit allowed to be carried forward for a period not
exceeding 15 years
• Tax credit to be allowed in financial year in which the
income-tax under normal provisions of DTC 2010 exceeds
the tax on book profits. Credit available only to the extent
of excess income-tax under normal provisions of DTC
2010 over tax on book profit
• Availability of unutilised tax credit under the extant laws
not clarified
• Tax credit benefit not available to a LLP on conversion of a
private company/ unlisted company into an LLP
The Direct Taxes Code Bill, 2010: What you simply must know 21
Dividend Distribution Tax
Tax on dividend distributions by domestic companies
• Every domestic company is liable to pay tax on amount
declared, distributed, or paid as dividend (whether interim
or final)
• DDT to be paid at the rate of 15 per cent
• For the purposes of calculating DDT liability, a company
can reduce the amount received as dividend from its
subsidiary company during the financial year, provided the
subsidiary has already paid the DDT
• Requirement of the holding company being the ultimate
holding company to claim the benefits dispensed with
• SEZ developers liable for DDT
Tax on income distribution by mutual funds and life
insurance companies
• Distribution of income by mutual fund to unit holders of
equity oriented mutual funds shall be liable to a tax on
distribution at the rate of 5 per cent on the amount so
distributed or paid
22
• Distribution of income by life insurance companies to
policy holders of approved equity oriented life insurance
scheme shall be liable to tax on distribution at the rate of
5 per cent on the amount so distributed or paid
• Equity oriented fund or equity oriented life insurance
scheme would be required to invest 65 percent of the
proceeds received by the fund or the total premium
received under the scheme by way of equity shares in
domestic companies
• Percentage of shareholding to be computed with
reference to the annual average of the monthly averages
of the opening and closing figures
Key Highlights
• No exemption for SEZs developers from MAT/ DDT
• No exemption for SEZ units from MAT
Business Reorganisations
Amalgamations conditions are required to be satisfied by the predecessor
• ‘Business reorganization’ would mean reorganization of
businesses of two or more residents, involving:
– an amalgamation* (includes amalgamation of companies
and succession of amalgamating unincorporated
body/ sole proprietary concern with an amalgamated
company);
– a merger under a scheme sanctioned and brought into
force by the Central Government under the Banking
Regulation Act, 1949; or
– a demerger
• Consequently cross border mergers and demergers (where
a foreign company merges into an Indian company or a
foreign company demerges an undertaking) into an Indian
company would be liable to tax
• In case of amalgamation of foreign companies, at least 75
percent of the value of shareholders of the amalgamating
foreign company continues to remain shareholders of the
amalgamated foreign company
• No restriction on carry forward of losses based on the
nature of business of the amalgamating company and no
company for the successor company to claim the carry
forward of the losses
• However, carry forward of losses of the amalgamating
company to be allowed on the test of continuity of business
being satisfied by the successor company
– Hold at least 3/4th of the book value of fixed assets
acquired for a period of 5 years
– Continue the business of the predecessor for a period of
5 years
– Comply with such other conditions as may be prescribed
for revival of the business of the predecessor or ensure
that the business reorganisation is for genuine business
Demerger
• Carry forward of losses of the demerged undertaking (upon
demerger) allowed in the hands of resulting company upon
satisfaction of the ‘test of continuity of business’
• Upon demerger equity shares be issued to the share holders
of demerged company
The Direct Taxes Code Bill, 2010: What you simply must know 23
Slump Sale
• ‘Undertaking’ has neither been defined separately for the
purpose of slump sale nor a reference has been made to
the definition of ‘undertaking’ under demerger
• ‘Net worth’ for the purpose of slump sale to be calculated
in the manner as may be prescribed
• A ‘transfer of division of business’ has been specifically
included
• Transfer on slump sale of an undertaking any time after one
year from the end of the financial year to be taxed as long
term capital gains
• The tax rate applicable for such long term capital gains
would be 30 percent
Limited Liability Partnerships
• The aggregate of capital contribution by the shareholders
of the company in the limited liability partnership shall not
be less than 50 percent of the total capital of the limited
liability partnership at any time during the period of five
years from the date of conversion as compared to the
24
condition of “maintenance of profit sharing ratio” under
the ITA
Other business reorganisation provisions
• The definition of transfer widened to include therein any
contribution of assets to a company in which the transferor
becomes shareholder
• Transfer of investment assets from holding company to
subsidiary company and vice versa and upon amalgamation
/demergers are exempt from tax, upon fulfilment of certain
conditions.
• Carry forward of losses in case of amalgamation of
unincorporated body/ sole proprietary concern available in
the hands of the successor company if the shareholding
of the sole proprietor/ partner is 50 percent or more for a
period of 5 years succeeding the financial year of business
reorganisation
• Carry forward of accumulated losses upon business
reorganisation allowed in respect of income from all
ordinary sources (salary, House property, business, capital
 residuary sources) and special sources (lottery, horse race,
gambling etc)
• Financial year of taxability
– Where a transfer of asset by holding company to
subsidiary company or vice versa is exempted and
the conditions are breached at the future date, i.e.
investment asset is converted by the transferee company
into or is treated as, business trading asset or holding
subsidiary relation ceases, such gains are taxable in the
year when the change in treatment takes place/ year in
which holding subsidiary relation ceases respectively
– Where the conditions precedent to allowability of carry
forward of loss in the hands of successor company are
not satisfied for a period of 5 financial years succeeding
the business reorganisation the total income for all such
past years will be rectified
• Assessment upon business reorganisation
• In the year of business reorganisation - in the hand of
the predecessor upto the date of business reorganisation
and in the hands of successor after the date of business
reorganisation
• Any pending proceeding under DTC 2010 taken against
the predecessor shall be deemed to have been taken
against the successor and would be continued against the
successor from the stage at which it stood on the date of
the business reorganization, if the predecessor does not
exist or cannot be found
Key Highlights
• Capital gains exemptions applicable only in respect of
investment assets. Business assets would be covered
under the business tax provisions
• Existing provisions retained to a large extent
• Business reorganisation defined to mean between two
or more residents
• Threshold for shareholders modified to value in case of
foreign company amalgamation
• No restriction on carry forward of losses. Continuity of
business test and closely held companies provisions to
apply
• Demerger would require only equity shares to be
issued
The Direct Taxes Code Bill, 2010: What you simply must know 25
International tax

Definitions
Residence of a company
• A company would be considered as a resident if it is an
Indian company or its POEM at any time of the year, is in
India.
– POEM would mean
• The place where the Board of Directors of the
Company or its executive directors, as the case may
be, 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 such functions

Business connection and PE

• A business connection in relation to a non-resident would
include a PE
• A PE has been comprehensively defined on lines of DTAAs.
Additionally PE to mean
– The furnishing of services, including consultancy
26
 services, by the assessee through employees or other
personnel engaged by him for such purpose
– A mine, an oil or gas well, a quarry or any other place of
extraction of natural resources
– An installation or structure or plant or equipment, used
for exploration or for exploitation of natural resources.
– Agent of an assessee engaged in insurance, through
whom the assessee collects premium in India or insures
risks situated therein
– Substantial equipment in India which is being used by,
for or under any contract with the foreign company
would lead to creation of a PE of the foreign company
in India
– Additionally, income is deemed to accrue in India,
whether or not the payment is made in India or the
income has accrued in India
– Income not deemed to be accrue or arise in India
excluded:
• Collection of news and views in India for transmission
out of India by persons engaged in the business of
running a news agency or of publishing newspapers,
magazines or journals;
• Shooting of any cinematograph film in India by an
individual who is not a citizen of India, a firm which
does not have any partner who is a citizen of India or
who is resident in India or a company which does not
have any shareholder who is a citizen of India or who
is resident in India
Source rules and conditions for certain incomes
widened/enlarged
• Interest taxable as normal income if it is attributable to a
PE in India
• Interest payable by a non-resident if it is for earning
income from any source in India and which has been
claimed as tax deductible
• Definition of ‘royalty’ has been broadened to include:
– Ship or aircraft to be considered within the purview of
industrial commercial or scientific equipment;
– Transmission by satellite, cable, optic fiber or similar
technology;
– Cinematographic films or work on films, tapes or any
The Direct Taxes Code Bill, 2010: What you simply must know 27
 other means of reproduction; and
– Live coverage of any event
– A process would not be considered as a secret for it to
be within the purview of royalty
– The transfer of all or any rights in respect of copyright
of literary, artistic or scientific work’ to be considered
Further, for this purpose, films or video tapes for use in
connection with television or tapes for use in connec-
tion with radio broadcasting have not been included
• FTS to include:
– any consideration ( including lump sum consideration)
paid or payable directly or indirectly for the devel-
opment and transfer of a design, drawing, plan or
software or such other services
• Reimbursement of expenditure to be considered as
income
• Income from transfer outside India, of any share or
interest in a foreign company, is not deemed to accrue in
India, unless the fair market value of assets in India.
– Owned, directly or indirectly, by the foreign company,
– Represents at least 50 percent of the fair market value of
28
the assets owned by the foreign company at any time in
12 months preceding the transfer
– It is also proposed to be provided that in such cases, the
income deemed to accrue in India shall be computed in
accordance with the following formula: A * B
C
A = Income from transfer as if the transfer was effected
in India
B = Fair market value of assets in India, owned, directly
or indirectly, by the company
C = Fair market value of all assets owned by the
company
• Insurance premium, including reinsurance premium, in
respect of insurance covering any risk in India is deemed
to accrue in India, regardless of whether it is accrued from
or payable by a resident or a non-resident
• Head office expenditure attributable to Indian business be
limited to 0.5 percent of sales / turnover / gross receipts
• No special regime or concessions be provided for non-
resident Indians (NRIs)
Branch Profits Tax (BPT)
• BPT would be levied in addition to income-tax and is
payable by every foreign company @ 15 percent of its
branch profits
• BPT to be levied where the foreign company is present in
India, i.e. it has a PE in India or owns immovable property
in India
• Branch profits to be computed as under:
– Income attributable, directly or indirectly, to the PE or
immovable property in India XXX
Less: Income-tax payable on the
attributable income XXX
Branch profits XXX
– The effective rate for foreign companies having a
branch in India would be 40.5 percent
• BPT is payable by a foreign company regardless of the
provisions of the DTAA between India and the country of
residence of the foreign company

The Direct Taxes Code Bill, 2010: What you simply must know 29
Foreign Tax Credit • The amount of credit of foreign tax shall not, in any case,
A resident of India would be allowed a tax credit for the exceed the following:
income-taxes paid by it (by deduction or otherwise) in a (a) The Indian income-tax payable in respect of income
foreign country as under: which is taxed outside India; and
Scenario Tax credit mechanism and (b) The Indian income-tax payable on total income of the
quantum of credit assessee.
• The eligible FTC shall be deducted for the purpose of
Credit when Tax credit will be allowed for the
ascertaining advance tax liability / self assessment tax
DTAA exists foreign income- taxes paid against
liability, computation of interest and for determination of
the Indian Income tax payable
tax payable / refundable by the tax officer at the time of
according to the provisions of the
processing of return of income
DTAA.
• The Central Government may, for the relief or avoidance
Credit when In case tax rates of India and the
of double taxation, prescribe the following:
DTAA does not other country are different, credit
(a) The method for computing the amount of credit;
exists will be allowed at the lower of the
(b) The manner of claiming credit; and
following:
(c) Such other particulars as may be considered necessary
•Indian rate of tax; or
•the rate of tax of the other country
Transfer pricing
In case tax rates of India and the
• Advance pricing mechanism to be introduced
other country are equal, credit will be
– The CBDT, with the approval of the Central Government,
allowed at the Indian rate of tax.
may enter into an APA with any person for determining
30
 the arm’s length price in relation to an international
transaction
– The arm’s length price could be determined on the basis
of any transfer pricing method whether prescribed or
otherwise
– APA would be legally binding on the taxpayer and the
Income-tax authority for the transaction to which the
APA applies
– APA would be valid for a period specified in it, subject
to a maximum period of 5 consecutive financial years
– APA to remain in force as long as there are no changes
in the law on the basis of which the APA was entered
into
• Definition of Associated Enterprise widened to include:
– If the enterprises are located in any specific or distinct
location as may be prescribed by CBDT
– Where services are provided by one enterprise to
another and the amount payable and other conditions
relating thereto are influenced by the other enterprise
• Penalty reduced in a few instances.

The existing and modified penalty provisions have been summarized in the table below:

Particulars ITA DTC 2010

Transfer pricing adjustment 100 percent-300 percent of tax on adjustment 100 percent-200 percent of tax on
adjustment
Non-maintenance of documentation 2 percent of value of `50,000-200,000
international transaction
Non-furnishing of Accountant’s Report `100,000 `50,000-200,000
Non-furnishing of documentation 2 percent of value of international transaction `5,000-100,000

The Direct Taxes Code Bill, 2010: What you simply must know 31
Treaty override • The provisions of the DTC 2010 relating to the following
• A person shall not be entitled to claim relief under the shall apply even if the Treaty provisions are beneficial -
provisions of the DTAA unless a certificate of his being a – GAAR
resident in the other country is obtained by him from the – Levy of BPT or
tax authority of that country in a prescribed form. – CFC Rules

Key Highlights
• POEM to be determined “at any time” is very wide
• Overseas transfer of assets where economic substance in India as per specified limits could be taxable in India.
• Substantial expansion of the meaning of the terms royalty and FTS
• Income arising from insurance, re-insurance , transportation business to be considered as deemed to accrue arise in
India
• Business connection extended to collection of news & views and shooting of cinematographic films, shooting of any
cinematograph film in India
• Non specification of time thresholds for certain activities which would be considered as a PE.
• Provisions relating to BPT, CFC and GAAR to override DTAA provisions

32
Controlled Foreign Company
Income attributable to a CFC to be taxed in the
hands of a resident in India
• Resident to exercise control over a CFC in either way by:
– Possessing or being entitled to acquire directly or
indirectly shares carrying > 50 percent voting power or
> 50 percent capital of the company;
• Being entitled to secure that > 50 percent of the
income or assets of the company shall be applied
directly or indirectly for the resident/s benefit;
• Exercising dominant influence on the company due to
special contractual relationship;
• Directly or indirectly having sufficient votes to exert a
decisive influence in a shareholder meeting
• A foreign company to be considered as a CFC on satisfying
any of the following conditions:
– Foreign company is a resident of a territory with lower
rate of taxation;
• A company shall be regarded as resident of a territory
if in an accounting period, it is liable to tax therein
by virtue of its place of incorporation or place of
management
– Shares of the foreign company are not traded on any
stock exchange recognised by law of the territory of
which it is a resident;
– One or more persons, resident in India, individually or
collectively exercise control over the foreign company;
– Foreign company is not engaged in any active trade or
business;
– Specified income of the foreign company determined in
the manner prescribed exceeds `2.5 million
• Territory with lower rate of taxation
– Defined as a country or a territory outside India in which
the amount of tax paid, under the law of that country or
territory, on its profits is < 50 percent of the tax payable
on those profits computed under the DTC 2010 had the
company been a domestic company
• Foreign company shall not be deemed to be engaged in
active trade or business
– 50 percent or more of the income of the said foreign
company during the accounting period consists of
passive income
Passive income has been defined to mean dividend,
The Direct Taxes Code Bill, 2010: What you simply must know 33
 interest, rental income, capital gains, annuity payment,
royalty, sale or licensing of intangible rights on
industrial, literary or artistic property, income from
sale of goods or supply of services including financial
services to related parties, income from management,
holding or investment in financial assets (shares,
securities etc) and any other income falling under the
head “Income from Residuary sources”
– Method of computing income to be attributable of the
CFC specified
– Any equity or preference shares held by a resident
in a CFC would be considered for the purpose of
computing the net wealth

34
General Anti Avoidance Rules
General
• GAAR empowers the CIT to declare any arrangement as
impermissible avoidance arrangement if the same has
been entered into with the objective of obtaining tax
benefit
• The presumption is that the main purpose of the whole
arrangement is to obtain a tax benefit even if the purpose
of any one step in the arrangement is to obtain a tax
benefit
• The provisions would be applicable to domestic as well as
international arrangements
• Provisions would override tax treaties
• The provisions would be applicable where the transaction/
arrangement where
– The rights and obligations of the parties involved are
not at arm’s length
– It lacks commercial substance
– It is entered into not for any bona fide purpose
– It misuses or abuses any provisions of the DTC 2010
• The CIT in the circumstances could declare the same as an
impermissible avoidance arrangement and
– Disregard the combination or re-characterize any step
in, or a part or whole of the arrangement;
– Consider the arrangement as if it had not been entered
into or carried out;
– Disregard any accommodating party or consider any
accommodating party and any other party as one and
the same person;
– Deem the persons who are connected persons in
relation to each other to be one and the same person;
– Reallocate, amongst the parties to the arrangement any
accrual, or receipt, of a capital or revenue nature or any
expenditure, deduction, relief or rebate; or
– Re-characterize the capital, debt, income or expenditure
• An arrangement would be presumed to be for obtaining
tax benefit unless the taxpayer demonstrates that
obtaining tax benefit was not the main objective of the
arrangement. Hence the burden of proof would normally
always vest on the taxpayer
• The provisions may be applied in the alternative for, or
in addition to, any other basis for determination of tax
liability in accordance with prescribed guidelines
The Direct Taxes Code Bill, 2010: What you simply must know 35
Specific anti-avoidance rules
Disallowance of expenditure on payments made to
associated persons
• The tax officer may not allow deduction of capital and
revenue expenditure paid/ to be paid to any associated
person if it is considered to be excessive or unreasonable
having regard to its
– Fair market value; or
– The legitimate business need of the person incurring the
expenditure; or
– The benefit derived or accrued to the person from
incurring such expenditure
Sale and buy back transaction in Security
• The total income of a person (i.e. Mr A) shall include any
interest accruing from any security owned by other person
(i.e. Mr B) if:
– The person (i.e. Mr A) undertakes sale and buy back
transaction;
– Interest accrues to the other person (i.e. Mr B) as a
36
result of such transaction; and
– The income would have been included in the total
income of the person (i.e. Mr A) had the sale of security
not taken place
Buy and sale back transaction in Security
• Interest accruing to the other person (i.e. Mr B) is not to
be included in computing his total income
• Further, loss incurred by the other person (i.e. Mr B) in a
buy and sale back transaction is to be ignored. However,
loss to the extent of any other income accruing on such
security could be set off
Broken period income accruing from a debt instrument
• The income accruing from a debt instrument, transferred
by a person at any time during the financial year shall not
be less than the amount of broken period income from
the instrument
Key Highlights
• GAAR and SAAR(including CFC) rules introduced
to counter perceived tax avoidance
• Provisions have been drafted very widely
• Very wide powers given to the tax authorities
• Onus on taxpayer is very onerous and minimum
thresholds on leading evidence need to be
prescribed
• Treaty override could open gates for litigation
• Established judicially pronounced principles on
tax avoidance to be adhered to
• Guidelines to be issued by CBDT awaited
• Effectiveness of DRP to be tested on application
of GAAR provisions

The Direct Taxes Code Bill, 2010: What you simply must know 37
Salaries
• Income from Salaries would be considered as income from
ordinary sources
• Exemption for grossing up of tax liability in respect of tax
borne by employer on non-monetary perquisites has be
withdrawn
• Perquisite valuation to continue to be governed by
valuation rules which are to be notified
• Medical reimbursement limit enhanced from `15,000 to
`50,000
• Exemption for leave travel proposed to be dropped
• Ceiling limit on employer contribution to superannuation
fund be removed – contributions to be exempt without
any limit
• Employer contribution to pension/provident/superan-
nuation funds are not to be taxed. However, employer’s
contribution to any other fund is deemed to be received
in India in the financial year in which such contribution is
made
38
Tax Incentives
• A deduction up to `300,000 be allowed for savings. The
deduction is allowed under three categories namely
– Up to `100,000 for contribution by employee to
approved funds
– Maximum of `150,000 for interest payments on loan
taken for self-occupied house property
– Life insurance premium, health insurance premium &
tuition fees to the extent of `50,000
– Life insurance premium not to exceed 5 percent of
capital sum assured as against current limit of 20
percent
• Separate deduction for medical treatment of self besides
that for dependant with disability
Income from House property
• Income from House property would be considered as
income from ordinary sources
• Only let out property to be taxed. The concept of deemed
let out property dispensed with
• Rental income to be taxed based on actual rent after
allowing for statutory deduction of 20 percent (currently
30 percent) towards repairs and maintenance
• Interest on loan taken for the House property to be
allowed as a deduction. However, interest on loan for
reconstruction of house property not to be considered for
deduction
• House property located in a SEZ that is used as hospital,
hotel, convention centre or cold storage to be considered
as income from business
• Income from any other house property even if let out for
the business of the assessee to be taxed as income from
house property
• Brought forward loss to be set off against aggregate
income from ordinary sources
• Residuary loss to be deemed to be unabsorbed loss for the
relevant year
• No time limit for carry forward and set off of loss from
house property
The Direct Taxes Code Bill, 2010: What you simply must know 39
Capital Gains

• Capital gains to be considered as income from ordinary A table showing significant changes under DTC 2010 as compared to the provisions under
sources the ITA is drawn out below:
• Capital gains to be computed based on holding period of
the investment asset Instance ITA DTC 2010
• Base date for determining the indexed cost of acquisition
Indexation Investments held for 36 months Investment held for more than
be shifted from 1 April, 1981 to 1 April, 2000
benefit or more immediately preceding 12 months from the end of the
• Lock in period for new residential house to be reduced to
the date of its transfer relevant financial year in which it is
one year from the current tenure of three years
acquired
• A deduction at specified percentage (50/100 percent) to
Equity share / Effective tax rate is 15 percent for Effective tax rate will depend on the
be available for gains on transfer of equity share or unit of
unit of equity short term asset and exempt in slab rate of the individual. However,
equity oriented fund subject to securities transaction tax
oriented fund case of long term asset the maximum effect is maintained
subject to STT at 15 percent.
Foreign Institutional Investors (FIIs)
Income from the transfer of investments (securities in the Other invest- Slab rates are applicable for short Slab rates are applicable on the
case of FIIs) would be considered income from capital gains. ment assets term capital asset and hence the capital gains. Hence, the maximum
Securities to mean as defined under SCRA effective tax rate is 30 percent. rate is at 30 percent.#
The long term capital asset is
All provisions as such relating to capital gains would be taxed at 20 percent
applicable in the case of FIIs #Capital gains of a branch taxed at BPT rate

40
Residuary sources

• Income from residuary sources to be considered as income • Any investment made

from ordinary sources • Money, bullion, jewelry or other valuable article owned
• Income which does not form part of the ordinary or special • The amount of any expenditure incurred for which
source of income would be income from residuary sources there is no explanation about the source
and would be computed on the basis of the gross residuary – Income attributable of a CFC to a resident
income as reduced by specified deductions • Deductions from gross residuary income would be allowed
• Gross residuary income would comprise of inclusive list of in respect of any sum incurred, wholly and exclusively,
incomes that may be taxed as gross residuary income and to earn gross residuary income subject to fulfillment of
shall include, inter alia, the following: specified conditions, if any
– Sum received as family pension
– Interest income, other than interest received by financial
institutions
– Income not included under ‘income from business’
• Any amount received or retained on account of
settlement or breach of any contract
• Income from machinery, plant or furniture belonging to
the person and let on hire
– Amounts for which a reasonable explanation/justification
has not been provided:
• Any amount found credited in the books

The Direct Taxes Code Bill, 2010: What you simply must know 41
Withholding tax

• Tax is required to deducted and paid in respect of certain • Scope of the sources of income have been expanded:
payments made to deductees as indicated under the – FTS (as indicated under International tax)
Schedules – Royalty income (as indicated under International tax)
• Nature of incomes and rates of tax to be deducted at – Commission and brokerage income to include payments
source separately indicated for resident and non-resident in respect of transaction relating to securities
deductee • Instances of comparative rates where the deductee is
• Where the deductee does not furnish his PA number tax resident/non-resident
would be required to deducted at a rate of 20 percent or
the rate specified whichever is higher Nature of Income Resident deductee Non-resident deductee
• Where on an amount payable to a deductee, tax is Interest 10 percent 20 percent
deductible at source and the tax has not been deducted or Dividend other than on which 10 percent 20 percent
where deducted has not been paid before the due date, DDT has been paid
such amount would not be allowed as a deduction in Income distributed by a mutual 10 percent( in case of 20 percent
computing the income from that source find on which DDT has not been individual/HUF)
– The provision is applicable in respect of all sources paid 20 percent in other
of income and not only in respect of business cases
income
Royalty or FTS 10 percent 20 percent
– The deduction would be allowed in the subsequent
Non – compete fee 10 percent -
financial year where the amount has been deducted or
paid in the subsequent financial year Any other sum chargeable to tax 30 percent

42
Wealth Tax
Threshold limit of `10 million beyond which wealth tax is
payable
• The existing rate of tax at 1 percent to be continued.
• Purview of taxable wealth to be enhanced to include
assets such as helicopters, archeological collections
drawings, paintings, sculptures, or any art work, watches
where the value exceeds `50,000
• Foreign assets viz. to be brought under the purview of
wealth tax:
– Deposits in banks abroad
– Interest in foreign trusts or any other body located
outside India other than a foreign company and
– Any equity or preference share held in a CFC
• Foreign nationals to be covered by wealth tax regulations
if they qualify as a resident
• Wealth tax liability to be discharged through pre-paid
taxes i.e. through the payment of advance tax by the tax
payer himself
The Direct Taxes Code Bill, 2010: What you simply must know 43
Contacts
Ahmedabad
“Heritage” 3rd Floor,
Near Gujarat Vidyapith,
Off Ashram Road,
Ahmedabad – 380 014. Tel: + 91
(079) 2758 2542
Fax: + 91 (079) 2758 2551
Bangalore
Deloitte Centre, Anchorage II,
100/2, Richmond Road,
Bangalore 560 025.
Tel: +91 (080) 6627 6000
Fax: +91 (080) 6627 6409
44
Chennai
No.52, Venkatanarayana Road, 7th
Floor, ASV N Ramana Tower,
T-Nagar, Chennai 600 017.
Tel: +91 (044) 6688 5000
Fax: +91 (044) 6688 5019
Delhi/Gurgaon
Building 10, Tower B, 7th Floor,
DLF Cyber City,
Gurgaon 122 022
Tel : +91 (0124) 679 2000
Fax : + 91 (0124) 679 2012
Phone: +91 (0124) 679-2000
Hyderabad
1-8-384 & 385, 3rd Floor, Gowra
Grand S.P.Road, Begumpet,
Secunderabad – 500 003.
Tel: +91 (040) 4031 2600
Fax:+91 (040) 4031 2714
Kolkata
Bengal Intelligent Park Building,
Alpha, 1st floor, Plot No –A2, M2 &
N2, Block – EP & GP Sector – V,
Salt Lake Electronics Complex,
Kolkata - 700 091.
Tel : + 91 (033) 6612 1000
Fax : + 91 (033) 6612 1001
Mumbai
264-265, Vaswani Chambers,
Dr. Annie Besant Road,
Worli, Mumbai 400 030.
Tel: + 91 (022) 6619 8600
Fax: + 91 (022) 6619 8401
Vadodara
Chandralok,
31, Nutan Bharat Society,
Alkapuri, Vadodara – 390 007
Tel: + 91 (0265) 233 3776
Fax: +91 (0265) 233 9729
Notes

The Direct Taxes Code Bill, 2010: What you simply must know 45
Notes

46
The Direct Taxes Code Bill, 2010: What you simply must know 47
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48