On August 19, 2019, task force headed by Akhilesh Ranjan, Member, Central Board of Direct Taxes (CBDT) submitted its report to Finance Minister Nirmala Sitharaman. This is a significant development as the report seeks to replace 57-year old Income Tax Act, 1961 which has undergone innumerable incremental changes over time. The report has not yet been released in public. Based on our primary research, the key recommendations of the task force are as follows:
- Common Corporate Tax Rate for Foreign & Domestic Companies: Reduction in corporate tax rate for all domestic and foreign companies to 25% from 30% for large domestic companies and 40% for foreign companies. The government has already exceeded the timeline for this and it would be interesting to see if this suggestion would now only be implemented once the new Code is enacted.
- Tax on Branch Profits: This concept features in the report. It had found a mention in the previous version of the Direct Tax Code in 2013. As per the concept, foreign companies will have to shell out branch profits tax on the amount repatriated to their foreign headquarters, in addition to the corporate tax. This reflects the emerging view on taxing a share of global profits that is not covered today through the existing concept of Permanent Establishment.
- Elimination of Dividend Distribution Tax (DDT) for companies: The new law may eliminate DDT for companies and instead tax dividends in the hands of shareholders. Considering that the government has just introduced a buyback tax to remove ‘tax arbitrage’ between shares buyback and dividend distribution, it reflects that the taxation regime is in a state of flux, at a bare minimum, on deciding in whose hands the such taxes are to be levied – company or investors/ shareholders.
- Transfer Pricing (TP) Assessments De-linking: TP assessments under the new income tax regime is proposed to be carried out by a separate functional unit for a block of 4 years, as is prevalent in some other countries. While there may be fewer TP audits based on risk profile of the Multi National Enterprise (MNE), they are likely to be more intense. This has been one of NASSCOM’s recommendation to the Government.
- Establishment of Litigation Management Unit: A separate Litigation Management Unit is proposed to be established to manage tax litigation process, right from deciding in which cases the appeals ought to be filed, to devising the strategy to defend a case. In essence, the officer who drafts the assessment order, will not be the one filing appeals.
- Settlement Through ‘Mediation’: Taxpayers will be able to opt for a negotiated settlement before a Collegium of Commissioners once they receive the draft order. This is likely to reduce tax litigations that have clogged the Tribunals and Courts and where the life-cycle of a tax litigation from assessments to CIT(A) to Tribunal and then the Courts can take anywhere between 15-20 years or even more. This appears to be a welcome initiative.
- Change in Tax assessment process: While codifying e-assessments, the concept of “Assessing Officer” is proposed to be done away with and the same should be replaced by “Assessment Units.” Further, importance has been given to “Functional Units” that will consist of IRS officers with Sectoral/Industry knowledge and expertise. The new law also envisages a Separate Technical Unit of IRS officers to assist the Functional/Assessment Units. Assessments will be done on an anonymous & faceless basis and scrutiny cases will be centrally & randomly allotted by the system. We will wait for more details to understand what this means.
- Public Ruling Option for Taxpayers: Taxpayers will have the option of approaching CBDT for clarification on any important point of law, that shall not be case or fact specific. A formal process on this line is welcome.
- Tax on Individuals: Tax relief for taxpayers earning up-to Rs. 45 – 55 lacs per annum is expected. We are not sure if this is going to be anything significant – given the fiscal space available with the government.
- Other Highlights:
- Re-drafting of key-definitions has been done to bring in more clarity and reduce litigation.
- Ease of compliance for taxpayers in general and small businesses in particular.
- Slew of incentives have been proposed for the start-ups.
- No proposal to levy “Inheritance Tax”
- Use of Artificial Intelligence in tax compliance and administration process
Attempt has been made to word the draft law in a simple, lucid manner and keeping the Provisos and Explanations that dominate the 1961 Act, at a bare minimum in the new law. The report is accompanied a draft of new income tax law by containing 300 sections, as against 700 sections in the current law (including sub-sections in various Chapters).
Once the report is available, we will be in a position to comment in detail. Do let us know your views and anything different you may be hearing.