Revised Discussion Paper On The Indian Draft Direct Taxes Code

Posted: 21/06/2010 In August 2009 the Indian Government released for public comment a draft Direct Taxes Code (“Draft DTC”), foreshadowing the introduction of sweeping changes to the Indian taxation system. In conjunction with the release of the Draft DTC, the Indian Central Board of Direct Taxes has also released a Revised Discussion Paper (“RDP”) on the Draft DTC which clarifies the Indian Government’s position on the following taxation issues: * Capital Gains – capital gains arising from transfer of investment assets will be considered income from ordinary sources and will be taxed accordingly. Capital Gains arising from transfer of investment assets held for less than a year will be computed without any deduction or indexation benefit. Income arising to Foreign Institutional Investors from investments in India will be considered capital gains and will be taxed accordingly; * Residence – a foreign company will be considered resident in India if its place of effective management is in India; * Controlled Foreign Corporation (“CFC”) – passive income earned by a foreign company controlled by residents in India will be taxed as a dividend in the hands of the resident shareholder; * Minimum Alternate Tax (“MAT”) – MAT will be payable on book profits rather than on the gross value of assets; * General Anti Avoidance Rules (“GAAR”) – an arrangement for tax mitigation which results in tax benefits will attract application of the GAAR if it was not an arm’s length transaction, if it abuses the Direct Tax Code or if it was not for bona fide business purposes; and * Treaty Override – tax will be assessed under the domestic Indian law or the relevant tax treaty (whichever is more beneficial for the taxpayer) unless the CFC or GAAR provisions apply.