Business standard news /legal digest 20-9-2010
CS A Rengarajan
DTC lens on personal assets abroad
VRISHTI BENIWAL New Delhi, 19 September
The income-tax department intends to bring individuals under the ambit of the proposed controlled-foreign companies (CFCs). The rules on CFCs, proposed under the Direct Taxes Code, are aimed at ensuring that all companies and individuals pay tax on income arising from investments overseas.
Currently, the profits of foreign companies controlled by residents are taxed in India only when it is distributed in the form of dividends to the parent. Under CFC rules, if acompany has not repatriated profits to India, its income would be deemed to have been distributed.
While provisions in the DTC Bill, which was introduced in Parliament last month, is silent on the applicability of the rules to individuals, tax department officials said that it would include individuals, companies, trusts and partnership firms. “It is not necessary that the CFC rules be triggered only when you are dealing with a resident company,” said an official, who did not wish to be identified.
To ensure that it can implement the norms properly, the government has proposed in the Bill that individuals, companies, trusts and partnership firms provide details of their investments abroad once DTC is applicable from April 2012.
This is a departure from the present norms, as there are no such provisions under the existing Income-Tax Act, resulting in cases of money laundering, a revenue department official said. The new law will give tax authorities more teeth to help prove an economic offence and trace money held abroad. The 20th Schedule of DTC, which deals with computation of income attributable to a CFC, says “a resident assessee shall furnish the details of its investment and interest in any entity outside India in such form and manner as may be prescribed”.
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What does the government want?
That individuals with investments abroad do not escape the tax net
How will the new tax code help?
The code states that they must furnish details of all their assets abroad
Why this change in regime?
The current I-T Act is silent on this, so many people avoid or evade tax
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DTC lens on personal...
CURRENTLY, TAX OFFICIALS have to rely on information available with Sebi and RBI for investments made by Indian companies abroad.
But for individuals and unorganised sector workers, there is no legal requirement to furnish details of assets held abroad.
For instance, if an individual has a bank account in the UK, he is not bound by law to declare it to the tax department in India. However, the income accrued from this account has to be declared for tax purposes. The catch here is that many residents do not repatriate money to India and invest the money in trusts abroad, which results in tax avoidance and even evasion.
“Getting information on foreign assets of small companies, trusts and especially individuals is a problem. Many people open trusts in tax havens to launder money,” said a finance ministry official.
“If CFC provisions, as proposed in DTC 2010 are introduced, companies as well as individuals may be required to furnish these details in the respective returns to be filed and therefore come under direct scrutiny by authorities without need to seek information from RBI,” said Sandeep Chufla, tax partner at consulting firm Ernst & Young.
For companies, the introduction of CFC will be a double blow. A company in a foreign location controlled by Indian residents may be taxed in India, even if it is set up in a high-tax jurisdiction, said an official. DTC defines a territory with a lower rate of taxation as a country outside India in which the amount of tax paid by a company is less than half the tax payable in India.
For instance, if corporate tax in India is 30 per cent, a company set up in a country which has over 15 per cent tax is not required to pay any tax in India. However, if that country offers any tax concessions and the actual amount paid falls below 15 per cent, CFC rules will be triggered and tax will have to be paid in India.
The corporate tax rate in Singapore is 17 per cent, but the burden can come down by 7 per cent provided it fulfils certain conditions. Similarly, the tax rate is reduced to 12.5 per cent from 25 per cent in Ireland, from 30 per cent to 5-7 per cent in Switzerland, and from 25 per cent to 10 per cent in the Netherlands.
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LEGAL DIGEST |
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The SC has stated that penalty for false representation under Section 10 of the Central Sales Tax Act comes into play only when a dealer acts “deliberately in defiance of law or is guilty of contumacious or dishonest conduct.” It is for the revenue authorities to prove the existence of such circumstances inviting penalty. All types of omissions or commissions in the use of a form submitted for assessment will not constitute ‘false representation’. There should be a guilty mind. The SC gave this interpretation in two appeals against judgments of the Allahabad HC in cases involving Sanjiv Fabrics, which imported cotton waste, and Hari Oil and General Mills, which was in the business of manufacture and sale of oil and oil cakes. The HC ruled in favour of Sanjiv Fabrics, while going against the oil mills. Thus there were cross appeals. Checking -black marketing of coal In a deterrent to black marketing in coal allotments, the SC last week upheld the power of Bharat Coking Coal Ltd, asubsidiary of Coal India Ltd, to suspend supplies to firms which were being prosecuted by CBI. According to the company’s policy, the quota should be used by the consumer unit itself. It cannot be sold to others. But some ten firms were found breaching the condition and their supplies were suspended. Earlier, the Jharkhand HC had asked the government undertaking to resume supply of coal to the firms found selling their quotas in open market. On the appeal of Coal India Ltd, the SC set aside the HC order. It allowed BCCL to take appropriate action against the allottees. Claims of dependants rejected The SC has rejected the claim of dependents of two workers for compensation from United India Insurance Co, as death of the employees was not closely connected to the insured vehicle. The two workers were loading maize onto a tractor trailer when they fell into a grocery pit and died. The Commissioner for Workmen’s Compensation found the insurance company liable to pay compensation. However, on appeal, the court ruled that the vehicle was not involved in the accident and the deaths had no proximate or direct connection with the vehicle. Bank employee’s right upheld When a bank employee is removed for misconduct, he is entitled to see the inquiry report against him before the action is taken, the SC stated while disposing of an appeal of Punjab National Bank against its former manager, K K Verma. He was relieved of his job in 1985, two years before his retirement date. The bank contended it was not mandatory to supply the inquiry report to the employee. However, the court rejected the argument and asked the bank to provide the employee the inquiry report and the order of the disciplinary authority which had differed with the inquiry report. This will enable him to challenge the bank’s action. Excise relief for units supplying goods to exporters The penultimate sale before export will be exempt from central sales tax if it is “inextricably” connected with the export of goods, a Constitution bench of the SC ruled last week. This judgment in, State of Karnataka vs Azad Coach Builders Ltd, will benefit ancillary industries catering to exporters. In this case, Azad Coach Builders was requested to build bus bodies by the exporter, Tata Engineering Locomotive Co, in accordance with the specifications provided by the foreign buyer, Lanka Ashok Leyland Ltd, Colombo. Azad built bodies on the chassis made by Telco. It claimed exemption from sales tax as it was a penultimate operation exempted from duty. The revenue authorities rejected the claim. |
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csarengarajan
Company Secretary, Chennai
email csaren...@gmail.com
mobile 093810 11200
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