India Direct Tax Code: Relief from Double Taxation
The DTC reinstates the current well established principle – the provisions of domestic law or Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the tax payer should prevail, thereby bringing a major relief to tax payers.
However this principle will not be applicable in certain conditions including:
- When the General Anti Avoidance Rule is invoked.
- When Controlled Foreign Corporation provisions are invoked.
- When branch profits tax is levied.
Indian companies are increasingly setting up International Holding Companies (IHC) for overseas investments to get commercial and fiscal benefits (e.g. tax exemption for dividend income). In line with this rationale the DTC has the CFC provisions to avoid such tax evasions. Some of the significant aspects of the CFC provisions are - CFC provisions are attracted when a foreign company is controlled by Indian resident tax payers. Control has been defined where one or more persons resident in India, individually or collectively, directly or indirectly, hold shares carrying not less than 50% of the voting power or capital of the company. An additional condition is that the entity is a resident of a country with lower level of taxation, i.e. the amount of tax payable in foreign country is less than 50% of the corresponding tax payable under the DTC.
India Direct Tax Code: General Anti-Avoidance Rule (GAAR)
The Direct Tax Code has introduced a General Anti-Avoidance Rule (GAAR), in line with the proposals of the discussion papers, to deal with instances where a taxpayer enters into an arrangement to obtain a tax benefit and
- The arrangement is in a manner not normally employed for genuine business purposes.
- The arrangement is not at arm’s length.
- The arrangement abuses the Direct Tax Code.
- The arrangement lacks commercial substance.
Despite the protests, the Indian government has not changed GAAR but clarified that not every arrangement that would mitigate tax liability would be classified as an avoidance agreement and it has proposed that the Central Board of Direct Taxes will issue guidelines to provide for such circumstances and thresholds under which GAAR could be invoked. In addition, the government also clarified that the Dispute Resolution Panel would be made available when the GAAR is invoked against a taxpayer.
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