Kautilya’s Arthashashtra proposed very simple canons of taxation — gain as much tax revenue as possible, promote economic growth and development, ensure that resources are used efficiently and levy taxes that are fair and just.

The Direct Tax Code, 2009 (DTC) intends to achieve most of these canons by proposing brand new levies. On release a couple of months back, suggestions were called for and a request was made not to compare it section-by-section with the present Income-Tax Act, 1961.

Specific areas

Suggestions must have obviously poured in such large numbers that we are now expecting a second (probably final) version soon. The Finance Ministry has promised to look into seven specific areas where the objections were the most vehement:

Shifting the base for computation of Minimum Alternative Tax (MAT) from book profits to assets;

Capital gains taxation in the case of non-residents;

Double taxation avoidance agreements;

General Anti-Avoidance Rules (GAAR);

Taxation of foreign companies;

Taxation of charitable institutions; and

The shift to EET system for taxation of savings.

As most of the proposals in the DTC were freshly-minted and a bit radical, it was obvious that some proposals would face objections. The salaried class, who were a wee bit disappointed at losing a goldmine of a benefit — interest and principal payments on housing loans — can take some comfort in the fact that a relook at these provisions is imminent.

Minimum Alternative Tax

The proposals for MAT turned existing concepts of presumptive tax on its head — a tax at 0.25 per cent of the net block of fixed assets plus value of capital work-in-progress, book value of all other assets (the value-date being the end of the financial year) as reduced by the debit balance in the profit and loss account.

Manufacturing industries are capital intensive compared to services companies, so choosing an asset-based taxation measure does not meet the ‘fair and just’ canon of taxation. All entities intend making profits while the same cannot be said of investing in fixed assets.

With International Financial Reporting Standards (IFRS) looming over the horizon, the value of assets in an entity’s balance-sheet could vary dramatically. One of the biggest challenges to IFRS-compliant entities in India would be to get the buy-in of the tax department on the valuation changes on their balance-sheet.

Non-Profit organisations

If assets were the benchmark for MAT companies, surplus was the mantra for non-profit organisations. With no major changes in the definition of charitable activities, the Code uses the term permitted welfare activities. The tax is proposed to be levied at 15 per cent of gross receipts minus outgoings both of which have been defined and a cash system of accounting is being advocated.

Corpus funds are an eligible deduction which could give a glimmer of hope for some to park their receipts as corpus funds to postpone the tax. Without touching the proposed structure, the tax rate could be reduced or there could be a graded system of taxing non-profits with a basic threshold limit.

With the Goods and Service Tax (GST) mostly in dual form and staggered across States intended next year, and DTC certainly being implemented, tax practitioners can certainly look forward to recession-free years ahead.

Article by Mr. Mohan R. Lavi