The Income-tax Act, 1961A is the bear downing Statute for levying of Tax on Incomes in India.A It provides for levy, disposal, aggregation and recovery of Income Tax. Income Tax Act applies to whole of India Including the State of Jammu and Kashmir. It came into force from 1st April 1962. When it was passed by parliament, many people hailed it as a simple and revenue enhancement remunerator friendly piece of statute law. But with the procedure of clip it has become a complicated piece of statute laws. The ground is that during its being of more than 50 old ages it has been amended more than 5000 times. It is besides capable to many unfavorable judgments. This is because the Act has lost its original construction due to the infinite amendments made to it every twelvemonth. On the complexness of the Indian Income Tax Act, 1961, the celebrated revenue enhancement expert N. A. Palkhiwala one time wrote:
“ Today, the Income Tax Act, 1961, is a national shame. There is no other case in Indian law of an Act mutilated by more than 3300 amendments in less than thirty old ages. Simple commissariats like Section 11 to 13 ( which trade with freedom of the income in charitable trusts ) have suffered no less than 50 amendments.
The calamity of India is the calamity of waste of national clip, energy and adult male power. Tens of 1000000s of man-hours, crammed with intelligence and cognition of revenue enhancement gatherers, revenue enhancement remunerators and revenue enhancement advisers are squandered every twelvemonth in coping with the torrential batch of mindless amendments. The hectic activity achieves no more good than a febrility[ 1 ]. ”
But this is shortly to alter. Recently theA Government of IndiaA has brought out a bill of exchange legislative act called the “ Direct Taxes Code ” intended to replace the Income Tax Act, 1961 and theA Wealth TaxA Act, 1957.
For more than 10 old ages, the Government has been earnestly on the occupation of revamping the revenue enhancement jurisprudence. The Income-tax Act, 1961 had stood the trial of clip. It was considered antediluvian and excessively complicated to understand. The thought of simplifying the revenue enhancement jurisprudence has been prosecuting the attending of consecutive revenue enhancement reformists. The Draft Code proposed a figure of alterations in the manner income is taxed under the Income Tax Act, 1961. The Discussion Paper released with the Draft Code states the undermentioned grounds for presenting the Draft Code: Simplify revenue enhancement statute law to do it easier to follow with ;
1. Widening of the revenue enhancement base by ( a ) removing freedoms, ( B ) cut downing ambiguities in the jurisprudence, and ( degree Celsius ) forestalling revenue enhancement equivocation which leads to eroding of the revenue enhancement base ;
2. Remove tax write-offs and freedoms as these cut down efficiency and falsify economic behavior.
To implement these rules, a figure of alterations were made to the bing revenue enhancement rates, available tax write-offs and freedoms, and revenue enhancement disposal in the Draft Code. The Revised Discussion Paper released by the Ministry responded to a figure of issues raised with regard to the Draft Code. It stated that some commissariats in the Draft Code would be changed to turn to major issues. The Bill consequently rolls back some commissariats of the Draft Code, as discussed in the revised Discussion Paper[ 2 ].
The measure seeks to replace the current Income Tax Act with new systems, taking freedoms and doing the revenue enhancement disposal more efficient. The parliamentary standing commission on finance postponed the acceptance of its study on the measure that would hold paved its transition in Parliament. Many members felt that the DTC measure should take into history the recent SC judgement and do suited amendments to the revenue enhancement jurisprudence to guarantee that corporates pay revenue enhancements even if they strike amalgamation and acquisition trades in abroad revenue enhancement oasiss[ 3 ].
After taking the advice of several commissions and experts including Kelkar Committee Report, Standing Committee on finance the Government has now come up with the DTC Bill, introduced in the Parliament on August 30, 2010 and referred to the Select Committee for vetting. All safeguards were taken like opening up the argument on a bill of exchange DTC, a revised treatment paper and now the concluding DTC Bill.[ 4 ]
The proposed Direct revenue enhancements Code, which will replace the antediluvian Income Tax Act, 1961, is bulkier than the bing jurisprudence, as the new statute law besides seeks to replace the current Wealth Tax Act. While proposed Direct Tax Code has 319 subdivisions and 22 agendas, there are 298 subdivisions and 14 agendas in bing Act. Direct Tax Code has 20 Chapters divided into nine parts[ 5 ].
2 Redefining Business Reorganization
The Direct Tax Code has introduced the construct of ‘business reorganisation ‘ in revenue enhancement jurisprudence, thereby consolidating the commissariats applicable to assorted types of reorganisations ‘ under a individual umbrella. The term concern reorganisation is now defined to intend the reorganisation of two or more occupants, affecting an merger or demerger.
Clause 314 ( 41 ) of the DTC Bill 2010 gives an thorough definition of BusinessA reorganization.A It will means reorganizationA of concern of two or more occupants affecting an merger, a amalgamation under a strategy sanctioned and brought into force by the Cardinal Government under the Banking Regulation Act, 1949 or aA demerger[ 6 ].
The definition restricts merger andA demergerA merely to reorganizationA between occupants. This is intended to be a new proviso hitherto non found in the jurisprudence. The definition of merger in Section 2 ( 1B ) in the Income Tax Act, 1961 is loosely reflected in the definition in Clause 3 ( 14 ) ( 15 ) of the Direct Tax Code Bill. The Direct Tax Code goes a measure further and chooses to specify mixing company and amalgamated company in Clause 314. There has ever been a relentless demand that every signifier of businessA reorganizationA should be made revenue enhancement impersonal. After all, the object behind suchA reorganizationA is non to cut down or extenuate revenue enhancements. The thought is to better the efficiency of concern. It was Finance Act, 1999 which foremost introduced steps in the income-tax jurisprudence streamlining the commissariats for sing the after-effects of merger, A demerger, transition of proprietorship or partnership into company, and so on.
In position of the above, additions originating from reorganisation affecting a foreign company may non be eligible for revenue enhancement neutrality unless such company is regarded as occupant under the expanded definition. This seems to be a divergent move since the Companies Bill, 2009, proposes to allow amalgamation of a foreign company with an Indian company and vice-versa. The significance of the term ‘amalgamation ‘ has been expanded to include amalgamation of all types of co-operative societies and sequence of exclusive proprietary concerns, association of individuals, organic structure of persons and houses by a company[ 7 ].
Rigorous conditions were laid down with respect to transport forward of unabsorbed depreciation and unabsorbed losingss in instance of merger andA demerger. Section 72A of the Income Tax Act insisted that the coalesced company should be engaged in the concern in which the accrued losingss occurred or depreciation remained unabsorbed for three or more old ages. It should besides hold held continuously as on the day of the month of merger at least three-quarterss of the book value of fixed assets held by it two old ages prior to the day of the month of merger. The Direct Taxes Code ( DTC ) omits these conditions.
The term ‘amalgamation ‘ has been defined so as to supply for merger of companies, co-operative societies, unincorporated organic structures and proprietary concerns. The term ‘demerger ‘ has besides been defined in the Code. Further, the ‘amalgamating ‘ entity and, in the instance of a demerger, the ‘demerged ‘ entity are referred to as ‘predecessor ‘ in a concern reorganisation. Similarly, the ‘amalgamated ‘ entity and the ‘resulting ‘ entity are referred to as ‘successor ‘ in concern reorganisation.
2.1.1 Amalgamation of companies
Amalgamation of companies[ 8 ]will intend a amalgamation of one or more companies with another company ( coalesced company ) or amalgamation of two or more companies to organize one company ( coalesced company ) topic to the undermentioned conditions: –
All the assets and liabilities of the mixing company or companies instantly before the merger shall go the belongings of the coalesced company.
( B ) Shareholders keeping 70 five per cent or more ( in value ) of the portions in the amalgamating company ( other than portions already held by the coalesced company or by its campaigner ) shall go stockholders of the amalgamated company by virtuousness of the merger.
The strategy of merger shall be in conformity with the commissariats of the Companies Act. Earlier this proviso was non at that place so it ‘s one of the good betterments over the Income Tax Act, 1961.
A The amalgamating and coalesced companies shall be entitled to the following benefits in the instance of concern reorganisation through merger: –
( a ) The transportation of investing assets in merger will non be considered as a transportation for the intents of capital additions in the custodies of the mixing company, if the coalesced company is an Indian company.
( B ) The transportation of investing assets ( including portions held in an Indian company ) by a foreign company to another foreign company in a strategy of merger will non be considered as a transportation for the intents of capital additions in the custodies of the mixing company provided the strategy of merger satisfies the conditions applicable to mergers contained in the Code.
( degree Celsius ) The exchange of portions in an amalgamating company for portions in the coalesced company will non be considered as a transportation for the intents of capital additions in the custodies of the stockholders of the mixing company, if the coalesced company is an Indian company.
( vitamin D ) The accrued losingss of an mixing company shall be deemed to be the loss of the coalesced company in the twelvemonth in which the merger is effected capable to fulfilment of specified conditions.
The aforesaid benefits shall be available to all companies irrespective of the nature of their concern[ 9 ].Apart from flatly saying that the revenue enhancement benefits reserved for concern reorganisation are available merely if the two or more companies involved in the exercising are occupants, intending Indian companies, the Direct Taxes Code Bill, 2010 ( the DTC ) gives a no-holds-barred support for mergers and demergers.[ 10 ]
2.1.2 Amalgamation of Co-operative Societies
Amalgamation of co-operative societies[ 11 ]shall intend a amalgamation of one or more co- operative societies with another co-operative society ( amalgamated co-operative society ) or amalgamation of two or more co-operative societies to organize one co-operative society ( amalgamated co-operative society ) topic to the undermentioned conditions: –
( a ) All the assets and liabilities of the mixing co-operative society instantly before the merger shall go the belongings of the coalesced co-operative society.
( B ) Shareholders keeping 70 five per cent or more ( in value ) of the portions in the mixing co-operative society ( other than portions already held by the coalesced co-operative society or by its campaigner ) shall go stockholders of the coalesced co-operative society by virtuousness of the merger.
( degree Celsius ) The members keeping 75 per cent or more vote rights in the mixing co-operative shall go members of the coalesced co- secret agent.
The amalgamating and amalgamated co-operative societies shall be entitled to the following benefits in the instance of concern reorganisation through merger: –
The transportation of investing assets in merger will non be considered as a transportation for the intents of capital additions in the custodies of the mixing co- operative society.
The exchange of portions in an amalgamating co-operative society for portions in the coalesced co-operative society will non be considered as a transportation for the intents of capital additions in the custodies of the stockholders of the mixing co-operative society.
The accrued losingss of an mixing co-operative society shall be deemed to be the loss of the coalesced co-operative society in the twelvemonth in which the merger is effected capable to fulfilment of specified conditions.
A The aforesaid benefits shall be available to all co-operative societies irrespective of the nature of their concern.
2.1.3 Amalgamation of Sole Proprietary Concern
Under the Code, a exclusive proprietary concern may be amalgamated with a company topic to the undermentioned conditions: –
( a ) All the assets and liabilities of the exclusive proprietary concern instantly before the merger shall go the assets and liabilities of the company.
( B ) The shareholding of the exclusive owner in the company shall be non less than 50 per cent of the entire value of the portions in the company.
( degree Celsius ) The exclusive owner shall non have any consideration or benefit, straight or indirectly, in any signifier or mode other than by manner of allocation of portions in the company.
On merger of a exclusive proprietary concern with a company, the following benefits shall be available:
( a ) The transportation of investing assets in an merger will non be considered as a transportation for the intents of capital additions in the custodies of the owner, if the company is an Indian company.
( B ) The accrued losingss of the exclusive proprietorship concern shall be deemed to be the loss of the company in the twelvemonth in which the merger is effected, capable to fulfilment of specified conditions.
2.1.4 Amalgamation of Unincorporated Body
Unincorporated organic structure means a house, an association of individuals or a organic structure of persons[ 12 ]; Under the Code, an unincorporated organic structure may be amalgamated with a company topic to the undermentioned conditions[ 13 ]:
( a ) All the assets and liabilities of the unincorporated organic structure instantly before the transition shall go the assets and liabilities of the company.
( B ) The sum of the shareholding of the participants of the unincorporated organic structure in the company shall be non less than 50 per cent of the entire value of the portions in the company.
( degree Celsius ) The shareholding of the participants of the unincorporated organic structure in the company shall, as respects each other, be in the same proportion in which their capital histories stood, as respects each other, in the books of the house on the day of the month of succession/amalgamation.
( vitamin D ) The participants of the unincorporated organic structure shall non have any consideration or benefit, straight or indirectly, in any signifier or mode other than by manner of allocation of portions in the company.
On merger of an unincorporated organic structure with a company, the following benefits shall be available:
( a ) The transportation of investing assets in the merger will non be considered as a transportation for the intents of capital additions in the custodies of the unincorporated organic structure, if the company is an Indian company.
( B ) The accrued loss of the unincorporated organic structure shall be deemed to be the loss of the company in the twelvemonth in which the merger is effected, capable to the fulfilment of specified conditions.
3. Tax Neutrality
Direct Tax Code Bill exempts additions originating on the transportation of investing assets in the custodies of transferor entities and their shareholders/participants. Therefore, the position of transportation of concern capital assets on history of concern reorganisation is non clear. In all signifiers of concern reorganisation losingss of the predecessor can be set-off by the replacement topic to conformity with the trial of continuity of concern. These conditions are now applicable besides to a demerger. The welcome alteration is that losingss in instances of all types of concern reorganisations are now eligible and non restricted to companies holding industrial project, hotels, ships, which was required under the bing commissariats. Besides the losingss will be allowed to be carried frontward indefinitely without imitation. Besides the pre-amalgamation conditions sing transporting on the concern for three old ages or more and keeping 75 % of fixed assets, have been removed.[ 14 ]
4. Exemption from Capital Gains Tax
Clause 47 of the Code provides that certain transportations of investing assets will non be considered as a transportation and no capital additions revenue enhancement will be collectible. This subdivision is on the same lines as bing subdivision 47 of Income Tax Act, 1961. However, it is important to observe that clause ( xiii ) of bing subdivision 47 of Income Tax Act, 1961 which provides for freedom from revenue enhancement when a partnership house is converted into a company, capable to certain conditions, is absent in Clause 47 of the Code. This will intend that if the Code is enacted without this clause in subdivision 47, a partnership house which is converted into company after 1-4-2012 will non be entitled to claim this freedom. It may besides be noted that Clause 47 ( 1 ) ( J ) of the Code provides for freedom from revenue enhancement when a non-listed company converts itself into an LLP, on the same lines as provided in subdivision 47 ( xiii B ) of Income Tax Act. Again, 47 ( 1 ) ( n ) of the Code provides for freedom from revenue enhancement when a sole proprietary concern is converted into a limited company. This proviso is similar to subdivision 47 ( xiv ) of Income Tax Act[ 15 ]
5 Definition of Slump Sale
Slump sale has been defined in the Clause 314 ( 234 ) of Direct Tax Code Bill, 2010 to intend the sale of any project or division of a businessA for a lump-sum consideration without values being assigned to the single assets and liabilities in such sale, other than the assignment of values to the assets or liabilities for the exclusive intent of payment of cast responsibility, enrollment fees or other similar revenue enhancements or fees.
The definition of investing plus besides includes any project or division of a concern. Clause 53 ( 5 ) provides that if there is any slump sale of any project or division of a concern, the cost of acquisition of such plus will be the ‘net worth ‘ of such project or division. If such project or division is sold after the terminal of one twelvemonth from the terminal of the fiscal twelvemonth in which it was acquired or established, the benefit of indexation u/s.51 and 52 of the Code will be available. Net worth of such project or division will be worked out as may be prescribed by the CBDT u/s.314 ( 166 ) . The term ‘Slump sale ‘ is defined in subdivision 314 ( 234 ) on the same lines as subdivision 2 ( 42C ) of Income Tax Act[ 16 ].
6 Additions on Slump Sale to be taxed as Capital Additions
Slump saleA has been excluded from theA businessA income and is retained under the definition of transportation as opposed to the commissariats of the earlier bill of exchange of Direct Tax Code Bill issued in August 2009.
7 Certain Provisions Introduced in the Earlier Draft of the Direct Tax Code Continue Without any Change
BusinessA reorganisations affecting one of the parties as a non-resident would non be eligible to the revenue enhancement freedom. Consequently, cross boundary line amalgamations and demergers would hold revenue enhancement deductions.
In instance of merger of foreign companies, 75 per centum of the value of stockholders would hold to go on keeping portions in the coalesced company to availing freedom from capital additions as opposed to 25 % stockholders under the Income Tax Act, 1961.
Direct Tax Code provides for issue ofA aˆzequity sharesA to stockholders of the demerged company.
Under Direct Tax Code carry frontward of losingss of the demerged unit would be available upon satisfaction of theA concern continuity trial as opposed to free carry forward of losingss under the Income Tax Act.
In instance ofA aˆzslump sale the revenue enhancement liability would depend the definition ofA aˆznet worthA which has non been prescribed so far.
There is no specific definition for the term undertakingA for slack saleA intent.[ 17 ]
8 Anti- maltreatment commissariats
8.1 General anti-avoidance regulations
The features of the originally proposed regulations have been retained. Additionally it is proposed that an agreement would be presumed for obtaining a revenue enhancement benefit. The commissariats would be applicable as per the guidelines to be framed by the Cardinal Government. Further the definition of missing commercial substance has been amended to clear up that obtaining revenue enhancement benefit can non be the lone standards for pertinence of GAAR. The proposed anti-avoidance steps could good ensue in a higher revenue enhancement load for foreign histrions. As such the DTC risks a negative impact on foreign concern investing, at least in the short term. That said, general uncertainness and drawn-out cases are common characteristics of the revenue enhancement jurisprudence as it stands, and multinationals would welcome a decrease in these jobs. The new regulations have the potency to stop the uncertainnesss in revenue enhancement Torahs that have led to judicial proceeding proceedings in the yesteryear[ 18 ].
8.2 Controlled foreign company ( CFC ) regulations
As indicated in the revised treatment bill of exchange, CFC regulations have been incorporated to supply for the revenue enhancement of income attributable to a CFC to be taxed in the custodies of the occupant. A foreign company would be considered as a CFC which
for the intents of revenue enhancement is a occupant of a state or district with a lower rate of revenue enhancement
the portions of the company are non traded on any stock exchange
one or more individuals separately or jointly exercising control over the company
it is non engaged in any active trade or concern
The specified income exceeds INR 2.5 million.
Rules refering to the calculation of the income attributable to the CFC which would be required to be added to the income of the occupant have been provided[ 19 ].
9 Direct Taxes Code Bill, 2010 – Simplification of Tax Laws
It secures simpleness by reassigning a figure of subdivisions to agendas and hard parts of subdivisions to definition clause 284, where the figure of definitions has increased from 80 to 318. Besides, there are about 50 definitions in Chapter IV and IX, besides under the heading ‘interpretation ‘ .
To undertake tax-evaders, the Code proposes to supply for deemed privacies, GAAR and revenue enhancement charitable establishments at 15 per cent. There are many such arbitrary proposals.
The work of giving the state a new revenue enhancement codification should hold been given to a Commission headed by a posing or retired Judge of the Supreme Court with members from other subjects such as comptrollers, economic experts, etc. Besides, the Code, drafted without audience with the vertex organic structure of the Income Tax section, that is, the CBDT, may non happen credence by the section[ 20 ].
There is no uncertainty that the direct revenue enhancements codification now before the Parliament is changing the financial scenario for companies, both domestic and foreign. Before the Bill is enacted into jurisprudence many of import issues have to be thrashed out. Our revenue enhancement jurisprudence will hold to maintain in measure with international tendencies.
The Direct Taxes Code Bill, 2009 was a modern piece of statute law based on religion in the assessee, which reduced both sops and revenue enhancement rates, but had controversial characteristics in taxing nest eggs and minimal alternate revenue enhancement ( MAT ) . The revised DTC Bill, 2010 is nil but a revenue enhancement officer ‘s delectation, which will engender torment and corruptness. It keeps the present high revenue enhancement rates, takes off inducements to substructure in existent footings and gives brushing powers to the revenue enhancement governments to turn over any dealing, including even revenue enhancement promoted constructs of amalgamations and demergers. Such broad powers negate a government of crystalline ordinances and cut down India ‘s fight for planetary investings. The measure proposes to phase out profit-linked inducements and switchover to investment-linked 1s to promote investing in productive activities alternatively of the 1 that gave them revenue enhancement benefits. Most significantly, pilotage through the revenue enhancement Torahs will be much easier. Alternatively of a overplus of Torahs Income Tax Act, 1961, wealth revenue enhancement Act, dividend distribution revenue enhancement Act there will now be one Act.