DTC proposals may shake foreign investors

The Direct Tax Code (DTC) Bill, tabled before the Indian parliament, introduces the “place of effective management” criterion to determine the tax residence of a company. The corporate tax rate remains at 30% while foreign companies would be subject to an additional branch profit tax of 15%. Minimum alternate tax (MAT) has been set at 20% when coupled with surcharge and education cess, levied on book profits. Dividend distributions tax is to remain constant at 15%. The maximum marginal rate for individual taxation remains at 30% with slight variations in the tax slabs. Long-term capital gains on the sale on the stock exchange of shares held for more than a year would continue to be tax exempt, but would attract securities transaction tax. Short-term capital gains on the sale of shares held for less than a year would be taxed at ordinary rates subject to a 50% exemption.

Units in a special economic zone (SEZ) that commence operations before 31 March 2014 would receive tax deductions in relation to export profits. A tax holiday would be available to SEZ developers for projects notified before 12 March 2012. Venture capital funds would continue to remain pass-through entities with respect to income from investments in venture capital undertakings in specified sectors, taxed at the level of the investors on a receipt basis. Mutual funds would retain their tax-exempt status although a 5% tax on distributions made to unit holders must be paid.

Mergers between foreign companies with underlying Indian subsidiaries may be taxed in India. The present tax-free status of corporate mergers has been confined to those that are sanctioned under the Indian Companies Act, 1956. All income earned by foreign institutional investors from the sale of Indian portfolio investments would be treated as capital gains income. The tax net would be extended to offshore share acquisitions where the target foreign company holds direct or indirect assets in India that are more than 50% of the fair market value of all assets held by the company at any time within 12 months preceding the transfer.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.