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Direct Taxes Code: Changing Paradigm of Tax Rules in India

The Government of India submitted the ‘Direct Taxes Code’ Bill, 2010 in the Parliament in August, 2010. The Code, expected to come into force from the next financial year i.e. 1st April 2012, is not just a regular amendment but replaces all the existing direct tax laws in India. The drafters have also worked “on a clean drafting slate”. This seems to be sufficient impetus for a deeper scrutiny of the Code for all those who derive income from India and thus would be subject to the rigours of the Code. While the changes proposed are multifold, this paper limits it coverage to focus on key changes in the international taxation front.

Corporate ‘Residence’

The Code changes the test for corporate residence from one of ‘control and management situated wholly in India’ to one of ‘place of effective management in India at any time in the year’. The term ‘place of effective management’ has been defined to mean “the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions”. This definition can turn a potential eye-sore for foreign companies and thus the boards would be careful to observe that at no point of time they take commercial or strategic decisions in India so as avoid treatment of their companies as resident in India.

Branch Profit Tax

Introducing a new levy, the Code provides for branch profits tax at the rate of fifteen percent every foreign company in respect of the any income directly or indirectly attributable to its permanent establishment or immovable property situated in India and included in the total income of the foreign company and shall be payable in advance as income tax. The foreign companies doing business in India through PE, therefore, are brought at par with the resident companies which are required to pay dividend distribution tax of fifteen percent.

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