Déjà vu as India’s Direct Tax Proposals enter Round 3

After a year of intense debate and deliberation, the Direct Taxes Code (''DTC'') has finally been tabled before the Indian Parliament. Once enacted, it will replace the existing income tax and wealth tax law in India and would be effective from April 1, 2012.

In Round 1, the Government sent shivers across the global investing community by introducing a number of radical proposals as part of the first draft of the DTC released in August 2009.

However, compelled by widespread criticism, Round 2 saw the Government release a revised discussion paper in June 2010 which adopted a more pragmatic stance vis-à-vis several controversial proposals.

As the debate finally enters Round 3, one gets an uncanny sense of déjà vu considering that the latest version of the DTC largely resembles the existing tax regime in India- something like an Income Tax (Amended and Restated) Act of 1961 ! Further, many of the not-so-good aspects of the earlier DTC draft continue to remain unaddressed.

In this hotline, we provide insights into the impact of the DTC bill proposals on the international business community and focus on those aspects that are of special concern to cross-border investments and M&As.

Status quo prevails over 'radical change'

In the DTC Bill, corporate tax rates continue to remain at 30%, while foreign companies would be subject to an additional branch profit tax of 15%, thereby raising their effective tax rate to 40.5%. This is an increase from the standard corporate tax rate of 25% proposed in the first DTC draft. The rate of minimum alternate tax (''MAT'') has been set at 20% which is similar to the existing rate when coupled with surcharge and education cess. MAT would also continue to be levied on book profits rather than on gross assets as was initially proposed. Tax on dividend distributions also remains constant at the rate of 15%. The maximum marginal rate for individual taxation also continues to remain at 30% with slight variations in the tax slabs.