Study on DIRECT TAX CODE

By SUMON SEN
CONTENTS
1. INTRODUCTION
1.1. Background of the study
1.2. Need of the study
1.3. Literature Review
1.4. Research Methodology
1.5. Objective of the study
1.6. Limitation Of the study
1.7. Proposed Planning
2. CONCEPTUAL FRAMEWORK / NATIONAL & INTERNATIONAL SCNERIAO
2.1 . CONCEPT INTRODUCED
2.2. DIFFERENCE BETWEEN DIRECT TA CODE AND INCOME TAX
2.3. HIGHLIGHT
2.4. SALIENT FEATURES
2.5. OLD STRUCTURE AND NEW STRUCTURE
2.6. NATIANAL AND INTERNATIONAL SCENANIO

3. PRESENTATION OF DATA ANALYSIS AND FUNDING

3.1. CASE STUDY ON GOOGLE TAX EVASION
3.2. CASE STUDY ON VADAFONE TAX AVOIDANCE
3.3. TAX INCIDENCE ON EXISTING AND PROPOSED TAXATION
3.4. LAST 5 YEARS INCOME TAX REVENUE

4. CONCLUSION AND RECOMMENDATIONS

4.1. CONCLUSION
4.2. RECOMMENDATIOM
4.3. BIBLIOGRAPHY
 ABSTRACT

A consolidated legislation for direct taxes in the country, viz., The income-tax Act,
1961 and Wealth-tax act, 1957, titled 'Direct Taxes Code Bill, 2009 was released by
the Honourable Finance Minister of India, shri Pranab Mukherjee, for the public
Debate on 12th September, 2009. Its purpose, according to the finance minister is
“to improve the efficiency and equity of our tax system by eliminating distortions in
the tax structure, introducing moderate level of taxation and expanding the tax
base”. Apparently, the code is intended to reform the two taxes and enact a unified
code. No express terms of reference were given to the body of few officers working
in the department of revenue, who were entrusted with the task of visualizing the
future tax laws of the country. Therefore, what is proposed to discuss here is
whether the enactment of the code would usher in any meaningful reforms of the
direct taxes and ensure that the same would play meaningful and positive role in
giving a boost to the country's economic development, rapid growth of GDP and
GDP tax ratio, accelerate flow of foreign exchange, project India as a strong
economy, better taxpayers-tax administration relationship, increase voluntary
compliance and tax bases and secure many similar other such objectives. The first
draft of the Direct Taxes Code was released in August, 2009 along with a Discussion
Paper for public comments. Thereafter, a Revised Discussion Paper was released in
june, 2010. Based on the comments received, a Bill named “The Direct Taxes Code,
2010” has been introduced in the parliament. The usual convention of the word
“bill” being the part of the name of the bill has been departed from. The proposed
name (i.e. short title) of the law to be enacted is again “The Direct Taxes Code,
2010”. Again the word “Act” is not part of the proposed short title as is the usual
convention in India. When enacted into a law, the code will replace both the
income-tax act, 1961 (“the act”) and the wealth tax act, 1957(“the 1957 act”).
CHAPTER 1
INTRODUCTION
1.1Background of the study

In a move to establish a more efficient, effective and equitable direct tax system, the
Direct Taxes Code or DTC has been drafted to replace the existing Indian Income Tax Act of
1961. It aims to consolidate and amend all laws relating to the direct taxes in order to
facilitate voluntary compliance and increase the tax-GDP ratio. With its 319 Sections and
22 Schedules, the DTC aims to replace the old Income Tax Act and provide a more stable,
efficient and overall better code for taxation incorporating the best taxation principles and
proven international practices.
The first draft bill of DTC was released by GOI for public comments along with a discussion
paper on 12 August 2009 (DTC 2009) and based on the feedback from various stake
holders, a Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced
in the Indian Parliament in August 2010 and a Standing Committee on Finance (SCF) was
specifically formed for the purpose which, after having a broad-based consultation with
various stakeholders, submitted its report to the Indian Parliament on 9 March 2012.

The DTC 2013 is presently a draft version which can be implemented only after it is presented
before the Indian Parliament where. The fate of the DTC 2013 continues to be is uncertain.
Nevertheless, DTC 2013 provides an opportunity to assess the impact of the proposals on
current structures and business model transaction
1.2 NEED FOR DTC

 IT Act, 1961 is almost 48 years old, without much change.

 Difficulty in understanding tax laws.
 Burst of litigation, swamping tribunals and courts.
 Too many sections, sub‐sections, provisos and explanations.
 Head spin for the general tax payer to decipher the act.
 Gives a more stable, efficient, overall better code for transactions.
1.3 Litreature Review

Structure of the existing Income Tax Act 1961, the Wealth Tax Act, 1957 and the proposed
Direct Taxes Code Bill, 2010 is as follows-

 The Income Tax Act 1961

lays down the frame work or the basis of charge and the computation of total income of a
person. It also stipulates the manner in which it is to brought to tax, defining in detail the
exemptions, deductions, rebates and reliefs. The Act defines Income Tax Authorities, their
jurisdiction and powers. It also lays down the manner of enforcement of the Act by such
authorities through an integrated process of assessment’s, collection and recovery, appeals and
revisions, penalties and prosecutions. The Act has been amended annually through the Finance
Act. Income Tax Act, 1961 comprises of
I. 23 Chapters
II. 656 Section
III. 14 Schedules

 Wealth Tax Act, 1957

Wealth tax, in India, is levied under Wealth-tax Act: 1957. Wealth tax is a tax on the benefits’
derived from property ownership. The tax is to be paid year after year on the same property on
its market value, whether or not such property yields any income Similar to income tax the
liability to pay wealth tax also depends upon the residential status of the assessee. The Wealth
Tax Act, 1957 comprises of
I. 8 Chapters
II. 47 Sections

 Proposed Direct tax Code bill,2010

The Direct Taxes Code Bill, 2010 consolidates and integrates all direct tax laws and replaces
both the Income-tax Act, 1961 and the Wealth-tax Act, 1957 by a single legislation The
provisions applicable to a taxpayers are in the main clauses while complex computations and
exceptions have been placed in Schedules. The proposed DTC Bill, 2010 comprises of
I. 22 chapters
II. 319Clauses
III. 22 Schedule
1.4 Research Methodology

Research Methodology is a systematic approach in management research to achieve

defined objectives It helps a researcher to guide during the course of research works
Rules& techniques stated in Methodology save time and labour of the researcher.

Collection of Data:-
There are two Sources of study-
1. Primary Data-
The primary data are those which are collected afresh and for the first time, and
thus happen to be original in character. Here the Primary data is collected by means
of preparing a questionnaire and getting it filled by a large sample space. These
questionnaires will help in drawing conclusions about the case.
2. Secondary Data-
Secondary data means data that are already available i.e. they refer to the data
which have already been collected and analyzed by someone else. Secondary data
may either be published data or unpublished data. Here the Secondary data
collected through various websites, books and records.

So, in this “Direct Tax Code” secondary data is used for sampling the whole project,
as we work on the data which is already available to us, which is the secondary data.
1.5 Objectives of the Study

 To understand challenges confronting by Direct Tax Code.

 To overcome the challenges of the study.
 To know the different aspects of Direct Tax Code.
 To know the drawbacks of Existing Tax Structure.
1.6 Limitation of the Study

 PROPOSED PLANNING- The Direct Tax Code is still not implemented in India, so the
information gathered was limited.
 Validity of information gathered- The information gathered are not credible and reliable
as Direct Tax Code goes on amendment face and proposed to be implemented in the
year 2020.
 Time constraint
1.7 CHAPTER PLANNING
The structure of my project report are as follows:

The first chapter serves as an introduction including background, literature review (which
gives an overview of the theoretical literature on DIRECT TAX CODE), objectives, research
methodology, some limitation and chapter planning of this dissertation.
Chapter two refers to conceptual frame work which includes definition of direct tax code old
and new structure of direct tax and also includes national and international scenario.
Chapter three is basically consist of secondary data which analyses the direct tax code in In-
dia and the case study on google and Vodafone and last five years income tax revenue in In-
dia.
Finally, the last chapter present some conclusion and recommendation or suggestions for
the further study.
Bibliography or references (list of books, articles, journals, websites used in the project
work).
Annexure (questionnaires, relevant reports).
CHAPTER 2
CONCEPTUAL FRAMEWORK
2.1Concepts Introduced

• DTC 2013 proposes to introduce:

• General Anti Avoidance Rule Interest - General anti-avoidance rule (GAAR) is an anti-tax
avoidance law under Chapter X-A of the Income Tax Act, 1961 of India. It is framed by
the Department of Revenue under the Ministry of Finance. GAAR was originally pro-
posed in the Direct Tax Code 2009 and was targeted at arrangements or transactions
made specifically to avoid taxes. GAAR provisions were also present in the Direct Tax
Code 2010 and Direct Tax Code 2013. However, the Direct Tax Code did not see the
light of the day and was not implemented in India. GAAR was finally introduced in India
by then Finance Minister, Pranab Mukherjee, on 16 March 2012 during the Budget ses-
sion introduced vide Finance Act, 2012. However, It was considered controversial be-
cause it had provisions to seek taxes from past overseas deals involving local assets
retrospectively .
During the 2015 Budget presentation, Finance Minister Arun Jaitley announced that its
implementation will be delayed by 2 years. GAAR is finally applicable from assessment
year 2018-19.

1. Taxation of Controlled Foreign Companies (CFC) - • CFC Regulations typically provides for
taxation of artificially transferred
income in the year of its accrual irrespective of whether it is distributed as
dividend or not to the parent company
– Aim is to end tax deferral
2. Undistributed income earned by the foreign company included as income
of resident shareholder
– Prevention of accumulation of funds in Low Tax Jurisdiction (LTJ)
3. DTC 2010 proposal : Resident’s taxable income to include:
– Attributable income of CFC
– Wealth tax on value of shares in CFC
Subsequent actual distribution by CFC to be deductible for resident
• Place of Effective Management (POEM) rule - As the name suggests, Place of Effective
Management means “place where key management and commercial decisions that are
necessary for the conduct of the business of the entity as a whole are, in substance made”.
It is introduced in the budget 2015 by Arun Jaitley (Finance Minister), but due to lack of guiding
principles, its applicability is deferred from A/Y 2016-17 to A/Y 2018-19.

While determining the residential status of a company sec 6(3) comes into force and it says that:

Company:

Resident if: Indian Company or,

Place of Effective Management in that year is in India

By introducing such provision India is taxing the:-

1. Global Income of its residents

2. The company is treated as tax resident if it has Place of Effective management in India

3. Place of Effective Management, at ANY TIME of the year situated in India, will make com-
pany tax resident in India.

• Expanded source rules for taxation of royalty, fees for technical

services (FTS) and interest.

• Best judgment assessment under section 144 of ITA, a best judgment assessment
is allowed in cases where there is a failure to file a return or failure to comply
with the terms of certain notices etc. Under the DTC, in addition to the existing
requirements, a best judgment assessment can also be made if the assessee fails
to follow regularly the prescribed method of accounting or if the Assessing
Officer is not satisfied with the correctness or completeness of the accounts of
the assessee.
• Under DTC income has been proposed to be classified into two broad groups:
Income from Ordinary Sources and Income from Special Sources
• In corporate tax rate, the tax rate of foreign company in ITA is 40 % whereas
in DTC the tax rate of foreign company is 30 %.
• The capital gains chapter applies to investment assets. All security transactions of
Foreign Institutional Investors (FIIs) are classified as investment assets. Also, in
respect of assets acquired prior to 1 April 2000, appreciation in value until 1 April
2000 is excluded from the taxable net. DTC 2013 continues to provide tax
neutrality to transactions of amalgamation and demerger subject to compliance
of specified conditions. DTC 2013 has modified the definition of business
reorganization (BR) to accommodate BRs involving NRs as well,4 subject to
compliance of other prescribed conditions.

• Levy of Branch Profit Tax

Under DTC 2013, every foreign company, in addition to income tax
payable, is liable to pay branch profit tax at the rate of 15 per cent in
respect if branch profits of a financial year. As compared to the
provisions of the Income Tax Act, DTC 2013 reduces corporate income
tax rate for foreign companies from 40 per cent to 30 percent, which
is line with the tax rate of domestic companies. However, branch
profit tax is levied additionally. Branch profit tax is levied on income
attributable, directly or indirectly, to the Permanent Establishment
(PE) or an immovable property situated in India as reduced by the
amount of income tax payable on such attributable income. Branch
profit tax is applicable irrespective of the tax treaty.
2.2 DIFFERENCE BETWEEN INCOME TAX ACT 1961 AND DIRECT TAX
CODE.

1. INCOME TAX ACT, 1961-

• COMPOSITION:
This Act has two legislature i.e. Income Tax Act, 1961 & Wealth Tax Act, 1957.
• RESIDENTIAL STATUS:
It is applicable to three kinds of residential status i.e. ‘Residential’, ‘Non Resident’ and ‘Resident
but not Ordinarily Resident.
• FILLING YEAR:
There are ‘previous year’ and ‘assessment year’.

• TAX SLAB:
Individual tax rates in Income Tax Law (ITL) are as follows10%- from Rs.2,50,000 to
Rs.5,00,00020%- from Rs.5,00,001 to Rs.10,00,00030%- from Rs.10,00,001 and above
• MAT APPLICABILITY:
MAT rate is 18.5%. MAT credit can be availed for 10 years
•TAX INCENTIVES:
Tax incentives were based on location or on export turnover up to a specified period. Further
capital investment were not allowed to amortized.

2. DIRECT TAX CODE

• COMPOSITION:
Single Code was drafted for the Income Tax Act, 1961 & Wealth Tax Act, 1957.
• RESIDENTIAL STATUS:
In “Resident but not ordinarily resident” has been done away with.
• FILLING YEAR:
To eliminate confusion only ‘Financial Year’ will prevail.
• TAX SLAB:
Individual tax rates proposed in Direct tax code (DTC).10%- from Rs.300000 to
Rs.10,00,00020%- from Rs.1000001 to Rs.200000030%- from Rs.2000001 and above
• MAT APPLICABILITY:
MAT rate is 20 %. Credit for MAT is proposed for 15 years.
• TAX INCENTIVES:
Export and Area/profit based exemption to be discontinued without affecting currently
enjoying such incentive. Under the DTC, all capital investment and revenue expenditure (except
land, goodwill and financial instruments) allowed to be amortized indefinitely and the period of
such amortization will be called as ‘Tax Holiday’.
2.3 HIGHLIGHTS OF DIRECT TAX CODE

• Proposal to levy dividend distribution tax at 15%.

• Exemption for investment in approved funds proposed at Rs.150,000
annually, against Rs.120,000 currently.
• Proposed bill has 319 sections and 22 schedules.
• Mutual Funds/ULIP dropped from 80C deductions, income to be subject to
tax @ 5%.
• Fringe benefit tax to be charged to the employee rather than the employer.
• Political contribution of up to 5% of gross total income eligible for deductions.
2.4 Salient Features

• Single Code for direct taxes

• Use of simple language
• Reducing the scope for litigation
• Flexibility
• Ensure that the law can be reflected in a Form
• Consolidation of provisions
• Elimination of regulatory functions
• Providing stability
 2.5.Comparision Between Old and New structure-

OLD STRUCTURE:

Source 1 Source 2 Source 3

Head 1

Head 3- Profit
Head 2- Income and gains of Head 4- Capital
from house business or gains
property professions

Gross
Head 1- Head 5- Income
Total
Salaries from other
Income
sources

Gross Gross Gross

Total Total Total
Income Income Income
NEW STRUCTURE

Ordinary Special
Sources Sources Sources Sources
2 3

Special
Head – Income
from Sources
Sources Sources
employment Head 1
1 4

Special
Head 2 – Income Sources
from house
property

Head 3-
Head 3 – Income Income from
from Business business
Head 2- Income Head 4-
from House Capital gains
Property
Head 4 – Income
from Capital
Gains Gross
Total
Income Head 5-
Head 1- Income
Income from
from
Head 5 – Income Residuary
Employment
from residuary sources
sources
 New Structure Continued-

Current income Brought forward Gross total

from Ordinary unabsorbed income from
Sources losses ordinary sources

Gross total Incentives under Total income

income from subchapter 1 of from Ordinary
ordinary sources chapter 3 sources

Total income of
Total income Total income
the tax payer
from ordinary from special
sources sources
2.6.NATIONAL AND INTERNATIONAL SCENARIO

NATIONAL SCENARIO
The fate of one of the key reforms of UPA government, the Direct Taxes Code, which seeks to
replace the 50-year-old archaic income-tax law, now lie in the hands of the Prime Minister's Of-
fice. The newly drafted bill will be taken up by the Union Cabinet only after a green signal from
the PMO.

The DTC BI seeks to replace the Income-tax Act of 1961 with a completely new law. The cur-
rent DTC Bill has undergone a substantial makeover from its original form conceived by finance
minister P Chidambaram with most of its radical provisions seeing substantial dilution.

The latest version of the Bill, which includes: suggestions for the parliamentary standing com-
mittee on finance, has also met with reservations. The Union Cabinet was on June 22, but the
Cabinet was returned by the PMO as it required some of the crucial reworked proposals. There
were concerns that the timing was not right to tax the rich at higher rates in the current environ-
ment of downbeat sentiment and declining growth .

The Rill had proposed to tax incomes in excess of Rs 10 crore at 35% rate against current rate of
30 % Chidambaram had in Budget 2013-14 imposed 3 surcharge of 10% on those with taxable
income in excess of Rs1 crore, pegging the number of such taxpayers at 42,800. Speaking at
CLL tax conference, revenue secretary Sumit Bose said the finance ministry was working on the
Bill and was keen to introduce it in the winter session beginning December 5. "We are working
on the DTC Bill and want to bring it as soon as possible," Bose old reporters on the sidelines of
the conference on Wednesday.

The Bill proposes to keep exemption limit at Rs 2 lakh for individual tax unchanged and it pro-
poses to levy to 10% tax on dividend income of more than Rs 1 crore. The Bill also proposes to
tax wealth in excess of Rs 50 crore at the rate of 0.25% . On whether there is a scope for lower-
ing the rate of corporate tax, the official said it is not possible in India
A revamp of India's direct tax system may not be reality at least 2020 as the panel on Direct Tax
Code DTC) will take three four months to submit the draft to the new law.

The government is in the process of appointing a new convenor as Arbind Modi, who heading
the six member task force, as well as the member of the apex policy making body Central Board
of Direct Taxes (CBDT retired on September 30.

Akhiles Ranjan, Member, CBDT is likely to be the panel or direct tax code, a top government
official told Money control.

After the report is submitted, the draft will be for public consumption, which will again take an-
other six month, the official said
Whie the Narendra-Modi led government will complete a five-year tenure in May, 2019, the
decision to take the overhaul of the direct tax system will depend on the new government that
comes to power.
The discussion on reforms pertaining to taxation started more than a year back September
2017. when the Prime Minister Narendra Modified that said more than half a century old In-
come- Tax Act needs to be drafted and a new DTC needs to be introduced in consonance with
economic needs of the country.
Acting upon, the finance ministry on November 22 last year constituted a task force comprising
six members, as well as the Chief Economic adviser (CEM) Arvind Sutramanian, as a perma-
nent special invitee in the task force.
Subramanian is currently not a part of the commitee as he resigned from his post of CEA last
month to return to acadecmic rescerch in the US. Besides, the government is yet to appoint
NEW CEA.
Girish Ahuja, practicing chartered accountant and nan-official director, State Bank of India, Raj.
Menani, chairman and regional managing partner of E&Y, Mukesh Patel practicing tax advocate
in Ahmedabad, Mansi Kedia, consultant, ICRIER, and G.C. Srivastava, retired bureaucrat are al-
so part of the team.
The panel was supposed to submit the draft report on may i, but sought the extension of three
months that got over in August. With Arbind Modi's retirement, the work related to the report
was put on hold.
The erstwhile UPA government had finalised DTC and had been introduced to the Bill in the Parliament
in 2010 however, the Bill lapsed with the dissolution of the 15th lok Sabha It's aim at simplifying tax Ieg-
islation, widening the tax base, while removing a number af exemptions.

The ask force is in the process af drafting direct tax legislation keeping in mind, tax system prevalent in
various countries, international best practices, economic needs of the country, among others. Some of
the provisions of th DTC such is general Anti-Avoidance rule (CAAR) and Place of Effective Management
(POeM) has been used to be implemented.
CHAPTER 3
DATA ANNALYSIS
AND INTERPRETATION
3.1Case Study On Google Tax Evasion

Google India contested the claim, coming out with a barrage of arguments in six appeals
pertaining to the assessment years 2007-08 to 2012-13. All the appeals were dismissed
on Tuesday by the Income-Tax Appellate Tribunal (ITAT) which said, “…the intention of
the assesse (Google India) as well as of the GIL (Google Ireland) is clear and conspicuous
that they wanted to avoid the payment of taxes in India. That is why, despite the duty of
the assesse to deduct the tax at the time of payment to GIL, no tax was deducted nor
any permission was sought for paying the amount (sic).”
Google India now stares at a tax demand on Rs 1,457 crore — the total amount that it had
remitted to Google Ireland during the period under review. The key element of the relationship

between Google India and Google Ireland is the ‘Ad words’ programme — a product through
which an advertiser is able to publish advertisements on the Google website.
Google India, a subsidiary of Google International LLC, US, is an authorised distributor of
the Ad words programme to Indian advertisers by Google Ireland.
Google India had explained that Google Ireland had not transferred the intellectual
property rights to the Indian arm; that it was only a distributor of advertising space and
had no access or control over the infrastructure or the process involved in running the
Ad words programme with the platform running on servers located outside India.

But according to the tax tribunal, since Google India has used the information and
patented technology from Google Ireland, the remittance to the foreign entity is royalty
which, under law, is to be taxed in the contracting state (India).

The ruling could emerge as a benchmark for MNCs (such as Google Ireland) which may
not have a permanent establishment or physical presence in India but nonetheless
come under the glare of local tax authorities due to income generated in India.

“…the argument of the assesse (Google India) that it was only using customer data, IPR
etc, for rendering the services relating to ITeS (Information Technology-enabled
Services) is incorrect…in our view amount was being paid by the assesse to Google
Ireland for the use of patent invention, model, design, secret formula, process, etc.
Further, the payer is required to maintain books of account and deduct TDS (tax
deducted at source) for both resident as well as non-resident. No separate treatment
had been envisaged under the Act, for the payer paying to a non-resident,” said the
Bengaluru bench of ITAT.

Google India had argued that the amount payable by it was not in the nature of ‘royalty’
under the law and the India-Ireland double taxation avoidance agreement (DTAA). But
the tribunal was not impressed.

“If we go by literal meaning of double taxation avoidance agreement, then unscrupulous

persons may misuse the provision and avoid payment of taxes,” said the order.
3.2.Case Study on Vodafone

*VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UNION OF INDIA

(BOMBAY HIGH COURT)*

Hutchison Essar Limited (HEL) is an Indian Company which is the joint venture of
Hutchison Group and Essar Group. HEL is carrying on the business of providing
telecommunication services in India. Hutchison Telecommunication International
Limited (HTIL) is a foreign company, registered in Hong Kong. This foreign company has
a wholly owned subsidiary company CGP Investments Ltd. (CGP) which is also a foreign
company registered in Cayman Islands, Mauritius. The Company CGP holds 51.95%
shares in HEL and through its foreign subsidiary companies, CGP also holds 15.0596
shares in HEL. Essar Group holds 33% shares in HEL.
A company Vodafone International Holdings B.V. (Foreign Company registered in
Netherland with a view to acquire the controlling interest in HEL purchased the 100%
shares in CGP from HTIL. The agreement of sale of shares of CGP took place outside
India.
Mainly two issues arise on sale of CGP shares by HTIL to Vodafone. Firstly, if HTIL by
reason of instant transaction, had earned income liable for capital gains tax in India as
this income was earned towards sale consideration of its business / economic interests
in India as a group in favour of the Vodafone. Secondly, whether, on the basis of the
Vodafone to such transaction, Vodafone was liable to deduct tax at source under
section 195 from the sale consideration paid to HTIL.
The Income tax department issued to show cause notice under section 201 to Vodafone
as to why it should not be treated as an assesse in default for not deducting TDS under
section 195 on the payment made to HTIL which is taxable in India in hands of HTIL as
capital gains. Vodafone filed to writ petition in Bombay High Court challenging the legal
validity of the show cause notice
*The Bombay High Court held as under:
1. The transfer of shares of CGP by HTIL to vodafone amounts to transfer of control
interest in Indian Company HEL to Vodafone . The dominant purpose of sale of shares of
CGP was to transfer the controlling interest of Indian Company*
 2.Vodafone has acquired a source of income in India, till by reason this transaction has
earned capital gains taxable in India as the income was consideration of transfer to
Vodafone of its Indian business/ economic interests as a group income in India.
3.In the instant case, the subject matter of transfer as contracted between not actually
the shares of a Cayman Island Company, but the assets the parties is in India
4. Vodafone was therefore liable to deduct TDS on the payment m therefore show cause
notice under section 201 is a valid notice.
BOMBAY HIGH COURT DISMISSED THE WRIT PETITION of Vo argument of Vodafone that
what was transferred was only shares company i.e, CGP, and therefore, the shares in
CGP was rejected.
The very purpose of entering into agreements between the two foreign companies is to
acquire the controlling interest which one foreign company held in the Indian company
being the dominant purpose of the transaction, the transaction would certainly
municipal laws of India, including the Indian Income Tax Act.
It was held that Income of HTIL was deemed to have accrued or arisen in India and it
squarely fell within the ambit of section 9 and hence, chargeable to Income head capital
gains.

(VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UNION OF INDIA

(SUPREME COURT)

Vodafone petition Supreme Court reversed the Bombay High Court decision. Supreme Court
held that Assessing Officer in India had no jurisdiction to transact the transaction which took
place outside India and what was transferred was the shares of foreign company namely CGP of
Ceyman's Island and not the Indian business.
Supreme Court reversed the Bombay High Court judgment in the case of Vodafone
International Holdings B.V. and held that capital gains arising to Hutchison, Hong Kong, from
sale of shares of CCP located in Cayman's Island, is taxable in India.
The Finance Act, 2012 has retrospectively amended the definition of:

 Transfer under section 2 (47)

 Capital asset under section 2 (14)

 Deemed accrual of income under section 9

 to affirm the judgment of Bombay High Court in the case of Vodafone International
Holdings B, V, and to nullify the Supreme Court judgments in the said case.

 Do not have the rights of control management of CGP at anytime from1-1-2016 to have
the right of co to 31-12-2016.

 their voting power does not exceed 5% any time from 1-1 -2016 to 31-12-2016

PROPORTIONAL TAXATION OF GAINS FROM INDIRECT TRANSFERS

In a case where all in the transfer or assets owned, by a company or, as the outside India of a
share of , or interest in, such company or entity, deemed to accrue or t of the income as
reasonably explanation 5, are not located in India, the income of the non-resident transferor,
from arise in India under this clause, shall be only Such pair to assets located in India and
determined in such manner as may be prescribed. (Method of calculation has not yet been
prescribed)
Clause (b) of Explanation 7 to section 9 provides as under-
 In case all the assets owned, by a company, as the case may be, an entity referred to in
the Explanation 5, India is not located in India
 The income of the non-resident transferor,
 from transfer outside India of a share of, or interest in, such company or entity
 Deemed to accrue or arise in India under this clause
 Shall be only Such part of the income is reasonably attributable to assets located in India
and determined in such manner as may be prescribed.

Suppose CGP investment balance sheet is under:

Liabilities Amount Assets Amount

Share Capital 10,000 Investment in Indian Company 7,000

Investment in Dubai Company 3,000

Total 10,000 Total 10,000

Case 1- Suppose Hutchison Hong Kong, holds the shares of 10,000 crores acquired at face
value. Now, Hutchison transfers these shares to Vodafone for 60,000 crores outside India.
Now Capital Gains arising to Hutchison Hong Kong is 60,000 crores 10,000 crores- 50,000
crores.
As per clause (b) of Explanation 7 to section 9 the capital gain taxable shall be
50,000 crore x 7,000 crore / 10,000 crores 35,000 crores

CGP INVESTMENT

Liabilities Amount Assets Amount

Share Capital 10,000 Investment in Indian Company 7,000

Investment in Dubai Company 8,000

Total 10,000 Total 10,000

 Case 2-
CGP INVESTMENT

Liabilities Amount Assets Amount

Share Capitals 10,000 Investment in Indian Company 1,000

Investment in Dubai Company 9,000

Total 10,000 Total 10,000

In Case 1, the shares of CGP do not derive its value from assets located in India since:
(i) (ii) Although the assets of CGP invested in Indian assets exceed 10 crores but
(ii) 50% of assets of CGP i.e. 5,000 crores are not invested in assets in India.
Therefore, no capital gains shall arise in India if shares of capital are transferred outside
India to another non-resident.
In Case -2, the shares of CGP derive their values from assets located in India since
(i) Assets of CGP invested in Indian assets exceeds 10 crores; and
(ii) Investment in Indian assets i,e. CGP i.e., 5000 crores.
Therefore, capital gain shall arise in non-resident. However, proportional capital gains shall
be taxable as per Explanation 7 section 9.
India if share of CGP are transferred outside Initiate for another BUSINESS RESTRUCTURING
LE. AMALGAMATION AND EXEMPTION OF CAPITAL GAINS ON DEMERGER transactions shall
not be regarded as transfer and hence not Section 47 provides that following capital gains
shall arise.
3.3.The tax incidence on assessee under existing and Direct Tax Code
which is the proposed tax structure
Existing Tax Structure

Amount Taxability

Taxable salary 8,00,000 Taxable

House rent allowance 4,00,000 Tax free if paying rent

Other tax-free allowance 2,00,000 Tax Free

Interest Income 30,000 Taxable

Capital gains 50,000 Taxed at lower rates

Income from Insurance 20,000 Tax free
TOTAL 15,00,000

Less tax saving investments -1,50,000

Less home loan or rent paid -2,00,000

Net taxable income 8,80,000

SLABS AND TAX INCOME TAX PAYABLE

Basic exemption 2,50,000 0
5% slab 2,50,000 12,875
20% slab 3,80,000 78,280
Total 8,80,000 91,155
 Under DTC
Amount Taxability
Taxable salary 8,00,000 Taxable
House rent allowance 4,00,000 Taxable
Other tax-free allowances 2,00,000 Taxable
Interest income 30,000 Taxable
Capital gains 50,000 Taxable
Income from Insurance 20,000 Taxable
Total 15,00,000
Less tax-saving investments -3,00,000
Net taxable income 12,00,000

SLABS AND TAX INCOME TAX PAYABLE

Basic exemption 5,00,000 0

10% slab 5,00,000 50,000

20% slab 2,00,000 40,000

TOTAL 12,00,000 90,000

The DTC had proposed a basic exemption of 1.6lakh in 2009.

Our calculation has assumed a basic exemption limit of 5lakh.
 3.4.LAST 5 YEAR INCOME TAX OF INDIA REVENUE EARNED

Years REVENUE

2014-15 7701.29 14000

12000

10000
2015-16 9040.59
8000
REVENUE
6000 Years
2016-17 10534.65 4000

2000

2017-18 11633.86 0
1 2 3 4 5 6 7 8 9 10 11

2018-19 11305.76
In lakh crore
CHAPTER 4 CONCLUSION &
RECOMMENDATIONS
4.1. CONCLUSION

The revised provisions in DTC 2013 are aligned with the

Income Tax Law provisions or are a response to the
recommendations of the SCF. Provisions such as lowering the
threshold to 20% for trigger of indirect transfer, and making
the active test (a condition for the trigger of CFC provisions)
stringent, could cause concerns. It is important to note that
DTC 2013 is presently a draft version which can be
implemented only after it is presented before the Indian
Parliament and is thereafter approved after debate. The code
will make the tax laws much more efficient and more
assesse friendly.
4.2. RECOMMENDATION

In order to implement the DTC, the government should immediately

review the Direct Taxes Code 2009 version, released to the public in
August, 2009. The review would ordinarily take less time than
conceptualising and drafting amendments to the prevailing Income Tax
Act, 1961. The Direct Taxes Code (2009 version) should be introduced as
part of the Budget 2014 as of money bill so as to ensure its speedy
passage within seventy five days of its introduction. Since the provisions of
this version have already been debated and analysed by the public at
great length and by the Standing Committee on Finance in detail, it would
not be difficult to execute the Code. There should be no amendments to
the Income Tax Act, 1961 in the Budget 2014 and all direct tax proposals
should be reflected in the Direct Taxes Code.
4.3. Bibliography

Websites-

 https://www.ey.com/in/en/services/tax/ey-direct-taxes-code

 https://www.taxmann.com/direct-tax-code.aspx
 https://www.incometaxindia.gov.in/Pages/about-us/history-of-
direct-taxation.aspx
 http://www.academia.edu/12167725/VODAFONE_V_S_INCOME
_TAX_AUTHORITY_OF_INDIA_A_PANDORA_S_BOX
 https://www.google.com/amp/s/m.economictimes.com/tech/i
nternet/google-loses-6-year-battle-must-pay-tax-on-
remittances-made-to-google-
ireland/amp_articleshow/61211492.cms
 Annexure- IA
Supervisor's Certificate
This is to certify that Mr. SUMON SEN a student
of B.Com. Honours in Accounting & Finance in
Business of THE BHAWANIPUR EDUCATION SOCIETY COLLEGE (Name of the College)
under the University of Calcutta has worked
under my supervision and guidance for hi s Project Work and prepared a Project Report
with the
title A STUDY ON DIRECT TAX CODE
which his submitting, is his genuine and original work to the best of my knowledge.

Signature
Place: Name:
Date: Designation:
Name of the College
 Annexure- IB
Student's Declaration
I hereby declare that the Project Work with the title (in block letters) STUDY ON DIRECT
TAX CODE
submitted by me for the partial fulfilment of the degree of B.Com. Honours in
Accounting &
Finance in Business under the University of
Calcutta is my original work and has not been submitted earlier to any other University
/Institution for the fulfilment of the requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been
incorporated in this
report from any earlier work done by others or by me. However, extracts of any
literature which
has been used for this report has been duly acknowledged providing details of such
literature in
the references.
Signature
Name: SUMON SEN
Address: 98/1 bedia para lane kolkata -77
Registration No.

Place:
Date: