CORPORATE TAX PROPOSALS Sriram Seshadri Rates of Tax for
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CORPORATE TAX PROPOSALS Sriram Seshadri. Rates of Tax for AY 08-09 The Corporate Taxes have not been changed. However, the companies and firms that have a turnover of less than Rs. 1 Crore, have been exempted from surcharge. In addition to that there would be additional levy of 1% on account of Secondary & Higher Education Cess apart from the Education Cess @ 2%. This levy is across the board irrespective of the levels of income of the firms or companies. This is also applicable for TDS rates and dividend tax rates. It should also be noted that the FBT rates are still to be increased by the surcharge and also the education cess, even for companies with a total income of less than Rs.1 Crore. The definition of total income as is available under the IT Act should be applicable herein as well. When tax is payable under MAT, section 115JB deems the book profit as the total income. Therefore, if book profits are less than Rs. 1 Crore, then surcharge shall not apply to such a company. This means that incomes taxable at flat rates such as Long Term Capital Gains will also not be increased by surcharge if the total income of the company or firm does not exceed Rs. 1 Crore. It should also be noted that the surcharge for a foreign company remains unchanged at 2.5%, however, the limit of Rs. 1 Crore, is made applicable. But practically this is impossible and too risky for the Indian company to even try to find out or estimate and the Indian companies may end up deducting tax at source on the foreign remittances with the surcharge. However, where DTAA rates are applicable, surcharge would not be applicable thereon and the issue does not arise in those cases. Chart of Rates Rate Domestic Company with total income < Rs.1Crore 100,00,000 30.9% 30,90,000 Domestic Other than Company with Domestic total income > Company Rs.1Crore 200,00,000 200,00,000 33.99% 42.23% 67,98,000 84,46,000 Taxable Income Tax, Surcharge & Cess Tax Payable Balance before distribution Dividend Tax rate Dividend Tax Balance in hand Effective Rate 69,10,000 16.995% 11,74,355 57,35,645 42.64% 132,02,000 16.995% 22,43,680 109,58,320 45.21% 115,54,000 Nil Nil 115,54,000 42.23% It may be seen from the chart above that for the non-residents seeking to do business in India, it is more taxing to have an Indian subsidiary and would be tax effective to operate through a branch in India. Income deemed to accrue or arise in India Section 9 provides for situations where income is deemed to accrue or arise in India. The Finance Act, 1976 brought about a source rule by inserting clauses (v), (vi), and (vii) for income from interest, royalty or fees for technical services. This fixed the territorial nexus to the payer of the income. The Supreme Court had, in the case of Ishikawajima Harima Heavy Industries – 288 ITR 208, upset this position. The Apex court held that there must be sufficient territorial nexus between such income and the territory of India and the test of residence of the recipient of such services is sufficient nexus. It held that where any sum is payable to a non-resident by a resident, the deeming sweep of the said section cannot bring to tax, any income of a non-resident received outside India from Indian concerns for services rendered outside India. It held that the services must be rendered in India and utilized for the purpose of business in India for bringing the income of the non-resident to tax in India. For section 9(1)(vii) to be applicable, it is necessary that the services are not only utilized within India, but also be rendered in India or have such a "live link" with India that the entire income becomes taxable in India. Therefore, unless the services are rendered in India and utilized in India, the income cannot be taxed in India. This was a landmark decision and had the effect of taking lots of transactions out of the taxing net and the withholding obligations of the recipients of income would fall. The Finance Bill seeks to insert an explanation after sub-section (2) with retrospective effect from 1st June 1976. The explanation states that for the removal of doubts it is here by declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi), and (vii) of sub section (1), such income shall be included in the total income of the Non-resident, whether or not the non-resident has a residence or a place of business or business connection in India. The intention of this amendment is to overrule the decision of the Supreme Court and dissipate the requirement of stronger territorial nexus for taxation in terms of the residence or place of business or business connection of the non-resident in India. But the amendment is not clear enough in terms of the language used, but the memorandum explaining the changes proposed, makes the intent of the legislation clear that the source rule is to be established by the residential status of the payer of income and the utilization of the service in India and the service rendered outside India will also be taxed in India. Definition of India The definition of the term ‘India’ in section 2(25A) is sought to be expanded to mean the territory of India as referred to in Article 1 of the Constitution. It is defined to include its Territorial Waters, Seabed And Subsoil, Continental Shelf, Exclusive Economic Zone or any other Maritime Zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the airspace above its territory and territorial waters. Prior to this, the Central Government had issued a notification in GSR 304(E) dt. 31-3-1983 – 142 ITR (st.) 11, by exercising its powers u/s 6(6)(a) and 7(7)(a) of the Territorial waters, Continental Shelf, Exclusive Economic Zone and Other Zones Act 1976, whereby the scope of Income Tax Act, 1961 was extended to continental shelf, exclusive economic zone of India with effect from 1.4.1983 for the following activities, namely a) The prospecting for or extraction or production of mineral oils in the continental shelf of India or the exclusive economic zone of India; b) The provisions of any services or facilities or supply of any ship, aircraft of machinery or plant (whether by way of sale or hire) in connection with any activities referred to in clause (a); c) The rendering of services as an employee of any person engaged in any of the activities referred to in clause (a) or clause (b). Now, these amendments have the effect of importing the notification to the statute and provide a legal sanctity. However, the interesting addition is the airspace. While the territorial water is 12 nautical miles extending in to the ocean, airspace does not seem to be a defined measure in terms of distance above the ground. With the technology explosion and commercial activities happening in the space, the issue of taxation of these activities would be quickly in to the litigation space in the years to come. These amendments will take effect retrospectively from 25th August 1976. Venture Capital Fund from Specified Business Sec 10(23FB) exempts any income of a venture capital company or fund set up to raise funds for investment in a venture capital undertaking. It is proposed to exempt only the income of a venture capital company or venture capital fund from investment in a venture capital undertaking engaged in certain specified businesses or industries such as in the business of nanotechnology, information technology relating to hardware and software development, seed research and development, bio-technology, research and development of new chemical entities in the pharmaceutical sector, production of bio-fuels, or building and operating composite hotel-cum-convention centre with seating capacity of more than 3000, or engaged in the dairy industry or poultry industry. This amendment will take effect from 1st April, 2008 and apply from AY 2008-2009 onwards. Special Economic Zone Sections 10AA of the Income-tax Act provides for deduction in a phased out manner for 15 fifteen years who sets up a unit in the special economic zone and derived profits & and gains from the export made in eligible business from the year in which such business was commenced on or after the 1st day of April, 2006. In order to promote new industry and new investment and not to facilitate migration of existing industries to avail of tax concessions, it is proposed to substitute sub-section (4) of section 10AA so as to provide that section 10AA is applicable to any undertaking, being the unit, which fulfils all the conditions specified therein. This amendment will take effect retrospectively from 10th February 2006. Strengthening the provisions of section 40A(3) The existing provisions of sub-section (3) of section 40A provide for disallowance of 20% per cent of the expenditure incurred, payment in respect of which is made in a sum exceeding Rs.20,000/-, otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft. It is proposed to amend sub-section (3) of section 40A to provide for 100% disallowance of payments, which are made in violation of its provisions. However, the disallowance is exempted if it is covered by situation mentioned under Rule 6DD of the IT Rules 1962. This amendment will take effect from 1st April, 2008 and will apply from assessment year 2008-2009. Infrastructure Facility – 80 IA Section 80-IA, provides for a 10 year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones. It is proposed to clarify that the provisions of section 80-IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the said section. Where an assessee makes the investment and also executes the development work, such assessee will be eligible for tax benefit but a person who enters into a contract with another person for executing works contract, will not be eligible for the tax benefit under section 80-IA. This amendment will take retrospective effect from 1st April 2000 and will apply to assessment year 2000-2001 onwards. Section 80-IA provides that where any undertaking of an Indian company which is entitled to the deduction under the said section is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. It is proposed to insert a new sub-section (12A) in section 80-IA so as to provide that the provisions of sub-section (12) shall not apply to any undertaking or enterprise, which is transferred in a scheme of amalgamation or demerger after 31.3.2007. This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years. Tax on Distributed Profit It is proposed to increase the rate of such tax from 12.5% to 15% with effect from 1st April, 2007 on distributed profits by a domestic company by way of dividends which are covered by section 115O. It is proposed to amend the said sub-section (2) of section 115R so as to provide that where the income is distributed by the specified company or a Mutual Fund to its unit holders out of a money market mutual fund or a liquid fund, such fund shall be liable to pay additional income-tax on such distributed income at the rate of 25%. It is proposed to provide definitions of “money market mutual fund” and “liquid fund” in the Explanation after section 115T. These amendments will take effect from 1st April, 2007. Earlier no such classification exists and all income distributed out of Mutual fund units were taxed at 12.5% in the case of individuals and 20% in other cases. Changes in Minimum Alternate Taxation In computing the MAT tax, book profit is reduced by the net income from the units eligible for deduction u/s 10A and 10B. It is proposed that the references to section 10A and 10B be removed from clause (f) and clause (ii) of explanation to section 115JB. This has the effect of subjecting the incomes of units deriving income from section 10A and section 10B to Minimum Alternate Taxation. With this amendment, if a company is already under MAT regime, the tax payable under MAT will increase and additional tax credit will be available for being set off for a period of 7 years u/s 115JAA(3). For other companies, such as IT and ITES companies, this will be a new tax payable and they would have to get in to the system of advance tax payments as well. These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years. It may be noted that the SEZ are not impacted by the change in MAT provisions, as the bill seeks to omit the references to section 10A / B units only and not units in SEZ guided by section 10AA. Expansion of scope TDS on Contracts The existing provisions of section 194C do not provide for deduction of tax at source on payments made by an individual or a Hindu undivided family to a contractor, while it provides for the deduction of tax at source, by the contractor to the sub-contractor. The amendment seeks to make it mandatory for such individual or a Hindu undivided family, who are subject to tax audit during the preceding financial year to deduct tax at source for the payments to the contractors as well. But, this obligation is not applicable for payments for personal purposes. This amendment will take effect from 1st day of June, 2007. TDS on Commission or Brokerage It is proposed that tax shall not be deducted on payments of commission or brokerage payable by BSNL or MTNL to their public call office franchisees. It is also proposed that existing TDS rate of 5% on commission be increased to 10%. These amendments will take effect from 1st June 2007. TDS for Rent on Machinery or Plant or Equipment Taxation Laws (Amendment) Act, 2006 which came into force from 13th July, 2006 defined rent to include payments for the hire of machinery, plant and equipment. It is felt that the existing rates of 15% and 20% are high and it is proposed to reduce the same to 10% for amounts payable by way of rent for the use of any machinery or plant or equipment. This amendment will take effect from 1st day of June 2007. TDS for Professional or Technical Fees The amendment proposes to increase the rate of TDS from 5% to 10% for fees for professional services or fees for technical services or royalty or any sum referred to in clause (va) of section 28. This amendment will take effect from 1st June, 2007. FBT on ESOP Chapter XII-H was introduced in Finance Act 2005 w.e.f 01-04-2006 to levy a additional income tax called Fringe Benefit Tax. The bill proposes to tax, Employees’ Stock Option Plan (ESOP) as fringe benefits provided by the employer to the employee. Section 115WB(1)(d) is proposed to be introduced to include any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), within the ambit of “fringe benefits”. It is also proposed to define the expressions “specified security” and “sweat equity shares” for the purposes of the proposed clause (d). Thus, the stock options are taxable only at the time of exercise of the option and consequent allotment of shares. This is the timing of taxation in the hands of the employer. FBT will be payable on the difference between the fair market value of the specified security or sweat equity shares, on the date of exercise of the option by the employee as reduced by the amount actually paid by, or recovered from the employee. The Board may prescribe methods by which Fair Market Value would be determined. ESOP will not be taxed as Perquisite in the hands of the employee. When the employee finally sells the vested shares, it would be taxed, as capital gains and the cost of acquisition will be the value adopted for taxation of FBT in the hands of the employer. This casts the moral obligation on the employer to provide the inputs regarding the value adopted for paying FBT. If one were to imagine a company headquartered at Bangalore such as Infosys and employees – thousands of them – across the country, how would these employees know the basis of taxation of ESOP in the hands of the company, to determine their cost of acquisition? This also leads to the issue of, if and when the value in the hands of the company for the FBT is varied in assessment or in appeal, what would be the status of the cost of acquisition of the shares in the hands of the employees? Would it also be varied? Where is the mechanism for the same? There are foreign companies, which have branch office in India and the employees in India have ESOPs. It has been clarified that the foreign companies are also subject to FBT. But this is not a security in India. This is a foreign listed security. Whether this can be brought to tax in India? Take cases where Indian companies employees are deputed abroad and they are also provided with the ESOP. ESOPs vest in them when they are abroad as a consideration for the services rendered abroad, which is not taxable in India. It appears that even these are subject to FBT. Relaxations of FBT It is proposed to exclude from the ambit of Fringe Benefit Tax certain expenditure on advertisement from sales promotion including publicity. Therefore it is proposed to amend clause (v) and to substitute clause (vii) of the proviso to clause (D) of sub-section (2) of section 115WB so as to provide that the expenditure on display of products and on distribution of samples of any item either free of cost or at concessional rate to any person including doctors, shall not be included in ‘sales promotion including publicity’ for valuation of fringe benefits. Under the existing provisions contained in section 115WC, the method of computation of the value of fringe benefits referred to in section 115WB has been provided. These amendments will take effect from 1st April, 2008 and will apply from assessment year 2008-2009. Reference Made to Transfer Pricing Officer during Assessment It is proposed that the transfer pricing assessment will have an extended time of additional twelve months. It is further proposed to provide that the Transfer Pricing Officer shall determine the Arm’s length price at least two months before the expiry of new statutory time limit for making the assessment or reassessment. Previously, there was an issue of whether or not the AO should take the order of the TPO as it stands, or should he apply his mind and frame the assessment order. It has now been proposed that the TPO ‘s order should be taken as it is by the AO. The decision of the Delhi High Court in the case of Sony India will be relevant in this context. These amendments will take effect from 1st June, 2007 and shall also be applicable in cases where a reference to the Transfer Pricing Officer was made prior to 1.7.2007 but the Transfer Pricing Officer did not pass the order under sub- section (3) of section 92CA before the said date.