The government recently released the draft Direct Taxes Code, 2009, for public comment. If enacted in its present form the code would bring about many radical changes in the law relating to direct taxes in India. The objectives of the code are to simplify the law relating to direct taxes and give more certainty to taxpayers; but as it stands, the draft code seems likely to do the opposite.
From an international taxation perspective, a key proposal of the code concerns the determination of fiscal residence of a company. The code proposes that even if the place of management and control of a foreign company is only partly in India, the company would be considered to be an Indian resident and thereby be taxable on its worldwide profits.
Currently, the control and management of a company has to be wholly in India for it to be deemed an Indian resident.
The code introduces a “later in time” approach with respect to treaty applicability, whereby either the code or a treaty, whichever has been enacted later in time, would prevail. If carried out, this would result in the code overriding all the treaties that India has entered into thus far. The government has clarified that it would enter into a number of protocols immediately after the implementation of the code to ensure that the present treaties remain in force after 1 April 2011. However, the concept of treaty override is in itself problematic, as it may result in violation of India’s international law obligations.
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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.
