Term Paper on Tax Management

Topics: Tax, Taxation, Taxation in the United States Pages: 9 (2890 words) Published: May 14, 2013
A Term Paper Report

Submitted by
Sharath Kumar
4th MBA: F2/’C’ Section

Submitted to

Prof. GVM Sharma
Associate Professor
Department of MBA
PES IT, Bangalore

(2011-13 Batch)
The Government of India had released the draft Direct Tax Code (‘DTC’) along with a Discussion Paper in August 2009 for public comments. Various stakeholders have provided their feedback and the Government subsequently released a Revised Discussion Paper in June 2010 addressing some of the key concerns on the DTC. The DTC would replace the existing direct tax legislation constituted by the Income Tax Act, 1961 and the Wealth Tax Act, 1957 with effect from April 1, 2011. It aims to simplify the language with an intention to remove uncertainty in interpretation of the tax law and mitigate undue litigation. While most of the provisions in the DTC meet these objectives, there are certain provisions relating to Minimum Alternate Tax (‘MAT’), General Anti-Avoidance Rules (‘GAAR’) and Determination of Residential Status of Foreign Corporate, which could have adverse and undesirable consequences. This term paper provides an overview of the key proposals in the DTC and their impact on both domestic and international businesses in India. Introduction

The compatibility and conduciveness of a taxation system plays an important lubricating role in the overall growth and direction of an economy. Tax laws are often seen not as a mere framework for the government to collect revenues, but as an effective tool to direct and propel the economy to higher levels, more so in a developing economy like Indian economy. The government of India proposed several changes in the tax system from time to time. The new Direct Tax Code (DTC) seeks to bring about a paradigm shift in the direct tax system. The objective of the new code is to improve the efficiency and equity of Indian tax system. The proposed DTC has several features in its favour. First, in naming it, the direct tax code and not the Income tax (IT) Act. Second, there has been a conscious effort to do away with exemptions – so that effective rates of taxation reflect the charges on incomes that are transparently defined. This is a major shift away from area – based exemptions from choosing winners and losers in industry and indeed in removing distortions that have crept in the way of development initiatives. What the code seems to be saying is that while particular classes of individuals – such as women and senior citizens – deserve differential treatment, there is no room for distortion on the basis of geographical region or industry segment. This is again a sign of a maturing economy that believes in market forces rather than on state – sponsored growth initiatives. Discussion

Tax Rates
Under the existing provisions, the tax rate applicable to domestic companies is 30 per cent (plus surcharge and education cess). Additionally, domestic companies are required to pay a tax of 15 per cent in respect of dividend distributed to the shareholders. On the other hand, foreign companies are subject to a 40 per cent tax (plus surcharge and education cess), with no obligation to pay tax on remittance of such profits to their head office overseas. The DTC has proposed to bring harmony in the tax structures applicable to Indian and foreign companies by introducing a unified rate of tax at 25 per cent in respect of both entities. However, Distribution tax at 15 per cent would continue in respect of domestic companies and a new levy, namely Branch Profit Tax (‘BPT’) is proposed on branch profits earned by foreign companies. This proposal would bring parity in tax rates and also reduce the effective tax liability in respect of both domestic as well as foreign companies. Minimum Alternate Tax

Presently, companies are...
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