TAX NEWS - June 2010

DTC diluted; tax rate cut chances fade

The revised draft of the new direct tax code dilutes proposals present in the earlier version. While this will significantly crimp the government's ability to lower tax rates, it is likely to make companies and a few other categories of taxpayers happy.

Foreign institutional investors, in particular, have reason to cheer because the revised version of the tax code allows them to continue to benefit from double tax avoidance agreements.

Tax rates haven't been specified in the proposals. These will be set only in the actual legislation, which is to be introduced in Parliament in the next session.

The earlier version of the code had said its provisions would override these agreements. Many FIIs are registered in tax havens that have signed such agreements with India.

The direct tax code was the result of India's attempt to introduce some stability in its tax regime. Tax rates tend to change every year with Section B of the Union Budget typically dealing with such changes, although the extent of these has come down in recent years.

The code was also expected to simplify the tax regime and address problems posed by a multiplicity of tax rates and various exemptions.

Those attempts, evident in the first draft of the code released in August 2009, were not received well by most categories of taxpayers (other than individual taxpayers). The revised version released Tuesday was. "Overall it has a positive tone; it is a better revised version," said Mukesh Butani, partner at tax advisory BMR Advisors.