KPMG DTC Impact Infra

TAX
Direct Tax Code Bill 2010 – Impact on

Infrastructure sector
KPMG IN INDIA
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Background
In an attempt to simplify the direct tax provisions, the Government

released the Direct Taxes Code Bill, 2009 (DTC Bill 2009) in August
2009 for public comments. The provisions of the DTC Bill 2009,
especially the one relating to MAT on gross assets, would have been a
big dampener for the industries that are capital intensive. Several
representations were made by various stakeholders as well as Industry
forums on the proposals made in the DTC to remove the inconsistency
as well as unintended hardship. The Government appreciated the
sentiments and made a historical move of issuing a Revised discussion
paper in June 2010.
As a logical step post the Discussion Paper, the Government has now
presented the Direct Taxes Code Bill, 2010 (‘DTC’) before the
Parliament. The provisions of DTC are intended to come into effect
from April 1, 2012 onwards. An analysis of the proposals in the DTC
that are likely to impact the various infrastructure sector are set out in
this document.
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Contents
Key proposals and their impact on
Power 04
Shipping 06
Oil and Gas 11
Special Economic Zones (SEZs) 22
Real Estate 25
Corporate tax proposition 28
Conclusion 37
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Key proposals and their impact -

Power
Tax holiday to Power sector undertakings
Current Situation:
Under the existing provisions of the Income-tax Act, 1961 (the Act),
profit based deduction is available to undertaking set up for (Power
sector undertaking) --
• generation or generation and distribution of power, if it begins to

generate power before March 31, 2011
• Reconstruction or revival of a power generating plant, if it

begins to generate or transmit or distribute power before March
31, 2011.
DTC Proposals:
DTC has proposed to bring a paradigm shift in granting tax incentives to

undertakings engaged in business of generation, transmission or
distribution of power. The new scheme has proposed to substitute the
profit-linked incentives prevalent under the existing provisions of the
Act with the expenditure / investment based deductions. Further, it has
provided for grandfathering of tax holiday available to power units for
the unexpired period.
Undertakings eligible for profit based deduction in Assessment Year

2012-13
• Undertakings eligible for profit linked incentives under the Act for
the assessment year beginning on April 1, 2012 would be
grandfathered under DTC
• While computing deduction, capital expenditure as well as

expenditure incurred prior to commencement of business shall not
be allowed
• Conditions specified under section 80IA for availing Tax Holiday

shall continue to be applicable.
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Undertaking set up in the DTC regime
• Profits shall be gross earning as reduced by business expenditure in

accordance with Schedule XIII of DTC
• Capital expenditure and expenditure incurred prior to

commencement of business shall be allowable as business
expenditure, except expenditure incurred on acquisition of any land
including long term lease, goodwill or financial instrument.
Our Comments:
• Under the Act, undertaking which commences generation of power

on or before Mach 31, 2011 shall be eligible for profit linked
incentives. The DTC grandfathers those undertakings which are
eligible to claim the exemption under Act as on Assessment year
2012-13
Accordingly, an issue arises as to whether an undertaking which
commences generation of power during the period April 1, 2011 to
March 31, 2012 will be eligible for profit linked incentives and thus
grandfathed under DTC. Though the intention seems to provide the
benefit to undertakings commencing generation of power even
beyond March 31, 2011, the same can be implemented only on
amendment in the Act. In view of this, this issue needs to be
suitably represented before the Ministry in the forthcoming budget
• It has been provided that the profit linked deduction under DTC shall
be computed as per the provisions of the DTC, but no capital
expenditure would be allowed. Accordingly, there is an ambiguity as
to whether depreciation on the WDV carried forward from the Act
would be allowable under DTC and thus would need to be
adequately addressed
• The proposal to allow power companies to offset losses against

profits of other infrastructure projects or corporate income would be
a welcome measure.
As such, continuation of these tax incentives to new power

undertakings under the DTC, though under a restrictive grandfathering
clause, is still a positive step. The grandfathering provisions would
provide some relief to the existing and new power undertakings.
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Key proposals and their impact –

Shipping
Foreign shipping companies

Increase in percentage of deemed income under presumptive
taxation and shift to taxation on actual profits
Current Situation:
Under the existing provisions of the Act, an amount equal to 7.5

percent of the prescribed freight income is deemed to be the profits
and gains of a foreign shipping company engaged in shipping business.
The effective rate of taxation comes to 3.17 percent of freight collection
(including applicable surcharge and education cess).
DTC Proposals:
The presumptive percentage of income has now been raised from 7.5
percent to 10 percent of the transportation charges. Further, the
amount of income determined above shall be further increased by the
excess of the amount of income actually earned from the business over
the amount specified above (i.e. 10 percent of transportation charges).
Our Comments:
The presumptive basis of taxing shipping profits of foreign shipping

companies was introduced mainly due to difficulty faced by foreign
shipping companies in computing their Indian profits due to their
worldwide operations. However, the above proposal seems to suggest
shift in taxing the foreign shipping companies from presumptive basis
to actual basis. The above development brings in an uncertainty as to
whether it intends the foreign shipping companies to prepare books of
accounts and compute their Indian shipping profits, which would defeat
the very basis of presumptive taxation.
Inclusion of Slot charter, Space Charter and Joint Charter under

the Shipping Business
Current Situation:
The existing provisions of section 44B / 172 are silent on whether

income derived from slot charter / joint charter arrangements would be
treated as shipping profits.
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DTC Proposal:
The scope of the shipping profits (termed as transportation charges)

specifically includes the arrangement under slot charter, space charter
and joint charter as constituting business of operations of ship.
Our Comments:
This is a positive development settling the ambiguity on whether the

aforesaid arrangements are part of shipping operations. However, it will
interesting to examine the tax department approach going forward
assessments / litigation wherein they are denying the Treaty Benefits to
the foreign shipping companies in respect of slot charter arrangements.
Scope of transportation charges
Current Situation:
The scope of freight income includes export freight (wherever received)

and import freight received in India. Further, the charter hire charges
especially bareboat charter are not treated as shipping profits.
DTC Proposals:
DTC have settled the ambiguity created by earlier DTC draft under the
definition of ‘transportation charges’ which suggested import freight
received outside India would be taxable in India. However, an
unintended anomaly is created under Clause 5 of DTC, whereby, it
seems to cover import freight received outside India as income deemed
to accrue in India. Further, the charter hire charges (both bareboat and
time charter) in relation to carriage of goods, passengers, etc. are now
included within the ambit of transportation charges.
Our Comments:
The clarity on taxability of import freight and inclusion of charter hire

charges in transportation charges is a positive development. However,
further clarity is expected to remove the above anomaly in respect of
import freight received outside India under Clause 5 of DTC.
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Indian shipping companies - Tonnage Tax Companies
Earning from pooling arrangements
Current Situation:
Under the existing provisions of Tonnage Tax Scheme (‘TTS’) in the

Income-tax Act 1961 (‘the Act’), the shipping contracts in respect of
earning from pooling arrangements are specifically covered under the
definition of ‘core activities’ of a tonnage tax company.
DTC Proposal:
Interestingly, under the DTC, the definition of ‘core shipping activities’

does not include earnings from pooling arrangements.
Our Comments:
The pooling arrangements are very common and integral part of the
shipping activities. In fact, profits from such pooling arrangements
forms part of shipping profits in almost all the Tax Treaties which India
has entered into with other countries. Exclusion of pooling
arrangements from ‘core shipping activities’ would thus imply that
profits from such arrangements may be subject to tax as per normal
provisions of the Act instead of preferential tax treatment enjoyed
under the existing TTS. This could hurt tonnage tax companies by way
of bringing in uncertainty / creating interpretation issues.
Non-shipping receipts taxable on gross basis
Current Situation:
Presently, the non-shipping receipts of tonnage tax companies are

computed as per the normal provisions of the Act, i.e., on net basis.
DTC Proposal:
Under the DTC, shipping profits of tonnage tax company to include total
tonnage income and other receipts on ‘gross basis’ (e.g. write back of
loan, recovery of bad-debts, reimbursement of expenses, etc.).
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Our Comments:
The language employed in explaining shipping profits seems to suggest

that no deduction of expenses would be allowed against other receipts
(i.e. non-shipping receipts) of tonnage tax companies. This is a negative
development and against the cardinal principle of taxing only the ‘net
income’. This move could adversely impact the tonnage tax companies
which are subject to lower taxation under TTS.
No MAT on book profits from core shipping activities
Current Situation:
As per section 115VO of the Act, no MAT is payable on book profits

derived from core and incidental shipping activities of tonnage tax
companies.
DTC Proposal:
Similar no MAT benefit has been extended to book profits derived from
core shipping activities of tonnage tax companies.
Our Comments:
This is a positive development and comes as a relief to tonnage tax

companies, especially, considering the fact that MAT relief was not
extended to tonnage tax companies under the earlier DTC draft.
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Chartering of qualifying ship on bareboat charter terms
Current Scenario:
The ship chartered out on a bareboat charter-cum-demise terms or on a

bareboat charter terms for a period exceeding three years is not treated
as operation of ship for the purpose of TTS.
DTC Proposal:
Under the DTC, only ship chartered out on a bareboat charter-cum-

demise terms would not be treated as operation of ships under TTS.
Further, the scope of permissible incidental activities has been widened
to include activity relating to chartering out on bareboat charter terms
without any time limit.
Our Comments:
This is a positive development of removing the time limit of three years

for availing the benefit of TTS in respect of charter hire charges on
bareboat charter. Consequently, such arrangements would be subject
to preferential tax treatment available under TTS to tonnage tax
companies.
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Key proposals and their impact – Oil

and Gas
Tax holiday to Oil and gas sector undertakings
Current Situation:
profit based deduction is available for a period of seven years to an Oil
and Gas undertaking (being all blocks licensed under a single production
sharing contract) -
• which begins commercial production of ‘mineral oil’ on or after April

1, 1997
• is engaged in commercial production of ‘natural gas’ on or after 1

April 2009 from the blocks licensed under NELP-VIII and CBM-IV.
DTC Proposals:

undertakings engaged in business of mineral oil or natural gas. The new
scheme has proposed to substitute the profit-linked incentives
prevalent under the existing provisions of the Act with expenditure /
investment based deductions. Further, it has provided for
grandfathering of tax holiday available to oil and gas undertakings.
Undertakings eligible for profit based deduction in Assessment Year

2012-13
• Undertakings producing ‘mineral oil’ eligible for profit linked

incentives under the Act as on assessment year beginning April 1,
2012 would be grandfathered under DTC for the unexpired period
• Undertakings producing ‘natural gas’ from blocks licensed under

NELP VIII and CBM IV rounds eligible for profit linked incentives
under the Act as on assessment year beginning April 1, 2012,
would be grandfathered under DTC for the unexpired period
• While computing deduction, capital expenditure as well as

expenditure incurred prior to commencement of business shall not
be allowed.
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Undertaking set up in the DTC regime
• Undertakings producing ‘natural gas’ from blocks licensed under

NELP VIII and CBM IV rounds are eligible for profit-linked incentives
under the DTC
• profits shall be gross earning as reduced by business expenditure in

accordance with Schedule XI of DTC
• capital expenditure and expenditure incurred prior to

including long term lease, goodwill or financial instrument.
Our Comments:
• Under the DTC, the terms ‘mineral oil’ and ‘natural gas’ have been
defined separately, where as under the Act (except under section
80-IB), the term ‘mineral oil’ has been defined to include ‘natural
gas’
The DTC grandfathers undertakings producing of ‘mineral oil’

eligible to claim tax holiday under Act as on Assessment year 2012-
13. Thus, undertakings producing ‘natural gas’, other than NELP VIII
and CBM IV undertakings, and claiming tax holiday under the Act
may not be eligible to claim benefit of the grandfathering provisions
under the DTC
• It has been provided that the profit linked deduction under DTC shall
be computed as per the provisions of the DTC, but no capital
expenditure would be allowed. Accordingly, there is an ambiguity as
to whether depreciation on the WDV carried forward from the Act
would be allowable under DTC and thus need to be adequately
addressed
• The proposal to allow oil and gas companies to offset losses against
profits of other infrastructure projects or corporate income would be
a welcome measure.
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As such, continuation of these tax incentives to new oil and gas
undertakings under the DTC, though under a restrictive grandfathering
clause, is a positive step.
Definition of ‘mineral oil’ and ‘natural gas’
Current Situation:
Under the existing Act, mineral oil has been defined to include
petroleum and natural gas (except under section 80-IB).
DTC Proposals:
Under the DTC, the terms ‘mineral oil’ and ‘natural gas’ have been
given different meanings.
‘Mineral oil’ means crude oil, being petroleum in its natural state before
it is refined or otherwise treated but for which water and foreign
substances have been extracted.
Natural gas means any subsoil combustible gaseous fossil fuel.
Our Comments:
Existing debate on applicability of specific provisions to oil and gas

business has been put to rest by defining both ‘mineral oil’ and ‘natural
gas’ separately.
Deposits to Site Restoration Fund
Current Situation:
The Act allows deduction of amounts deposited (subject to certain

conditions) to a Site Restoration Fund Account by an assessee engaged
in the exploration and production of petroleum or natural gas in the year
in which amount is deposited.
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Where the amount is withdrawn and utilized for the purpose of meeting
expenditure towards removal of all equipments and installations,
pursuant to an abandonment plan or towards site restoration, such
expenditure is not allowed as deduction.
DTC Proposals:
Under the Direct Tax Bill 2009, no deduction was allowable with
respect to the amounts deposited or kept aside for site restoration. The
revised DTC has reinstated the deduction in respect of amounts
deposited to Site Restoration Account maintained with State Bank of
India in accordance with the Scheme as may be prescribed.
Our Comments:
Restoration of the deduction for Site Restoration is a welcome step as

this deduction is significant for companies nearing depletion of reserves
which may not have any income when the actual expense on site
restoration is incurred, unless they have other income generating
contract areas.
Allowability of capital expenditure
Current Situation:
The Act allows deduction of the following capital expenditure:
• infructuous or abortive exploration expenses for any area which is

surrendered prior to beginning of commercial production
• drilling or exploration expenditure incurred before or after

commencement of commercial production after the
commencement of such production
• expenditure incurred on depletion of mineral oil in the mining area.
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DTC Proposals:
Under the DTC, deduction will be allowed with respect to the following
expenditure:
• operating expenditure
• finance charges
• expenditure on any license charges, rental fees or other charges, if

actually paid
• capital expenditure incurred by the assessee (except expenditure

for acquisition of any land including long-term lease, goodwill or
financial instrument)
• expenditure on infructuous or abortive exploration of any area
• expenditure referred to above incurred before commencement of

the business and
• payment to Site Restoration Account maintained with the State

Bank of India.
Our Comments:
• Under the DTC, apart from operating costs and finance charges,
capital expenditure is allowed as deduction in the year in which it is
incurred irrespective of whether commercial production has
commenced. Unsuccessful exploration costs are also allowable in
the year of expense even if the contract area is not surrendered by
the assessee
• DTC allows deduction of the above expenditures even when they

are incurred before commencement of the business, as against
cumulative allowance in the year in which commercial production
commences under the existing provisions.
The allowance in the year of incurrence may however be significant

only for companies with more than one contract area which may be
able to offset expenses incurred prior to commercial production from
one area against profits from other area. Companies with a single
contract area would naturally need to await commercial production to
claim benefit of the deduction.
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Taxability in case of transfer of business or interest thereof
Current Situation:
Under the Act if the business or interest in the business is transferred,

either wholly or partly, and if the proceeds of transfer:
• are less than the expenditure incurred remaining unallowed, then a

deduction for the expenditure which is remaining unallowed, will be
allowed in the previous year in which the business is transferred
• exceeds the amount of expenditure incurred remaining unallowed,

excess of the amount over expenditure remaining unallowed will be
taxable as profits and gains in the previous year in which the
business is transferred
• are not less than the amount of expenditure incurred remaining

unallowed, no deduction for such expenditure will be allowed in the
previous year in which the business is transferred or in respect of
any subsequent year or years.
If the business is transferred pursuant to an amalgamation or a

demerger, the above provisions will apply to the amalgamated or the
resulting company.
DTC Proposals:
Gross income from the business of mineral oil and natural gas includes
the accruals or receipts from the leasing or transfer, either wholly or
partly, or of any interest in any mineral oil or natural gas right and asset
used in the business.
The successor in a reorganization of the business will be allowed

deduction in respect of the unabsorbed current loss determined in case
of the predecessor subject to certain conditions.
Our Comments:
Under the DTC all receipts from transfer of business or part there of are
taxable as business income irrespective of the amount of expenditure
incurred or claimed.
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Taxability as Association of Persons
Current Situation:
In exercise of the powers, given to the Central Government under

section 293A of the Act, the Government had issued Notification No.
GSR 117(E), dated 8-3-1996 providing that persons with whom
contracts for association or participation in exploration or production of
mineral oils has been entered by the Government —
• shall not be assessed on the income as association of persons or

body of individuals consisting of such persons but
• each of the persons referred to above be assessed in respect of his

or its share of income, as the case may be, in the same status in
which that person has entered into the agreement with the Central
Government.
DTC Proposals:
Such a consortium may be regarded as an AOP (which has not been

defined) and be taxed at a flat rate of 30 percent on combined profits,
irrespective of the residential status of each of the partners.
The Central Board of Direct Taxes is empowered to issue orders,

instructions, directions or circulars for the proper and efficient
management of the Direct Tax Code, if it considers it necessary or
expedient to do so.
Our Comments:
There is no provision in the DTC similar to the existing provisions of the

Act. In the absence of the said section and the notification issued there
under, joint venture partners engaged in exploration and production
under a single contract may be regarded as an Association of Person
(which has not been defined in the DTC) and shall be taxable at the rate
of 30 percent as applicable to an unincorporated body as against the
rate applicable to each of the JV partners in their individual capacity.
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Business of laying and operating a cross country distribution
network
Current Situation:
• Income from business of laying and operating cross country pipeline

(including storage facilities being an integral part) for distribution of
natural gas, crude or petroleum oil is taxable as business income
under the head ‘Profits and gains of business and profession’
• All revenue expenditure incurred for the purpose of the business

are allowable in computing profits from the business
• The Act provides for allowance of capital expenditure (excluding

expenditure on acquisition of any land or goodwill or financial
instrument) incurred in the business, subject to certain conditions.
DTC Proposals:
• Taxation of profits (gross income reduced by business expenditure)

from business of laying and operating a cross country natural gas or
crude or petroleum oil pipeline network for distribution, including
storage facilities being an integral part of the network has been
consolidated in the Schedule XIII of the DTC
• Allowable business expenditure includes capital expenditure (except

expenditure for acquisition of any land, goodwill or financial
instrument) incurred by the assessee, including allowable
expenditure incurred before commencement of business
• The successor in a reorganization of the business will be allowed

deduction in respect of the unabsorbed current loss determined in
case of the predecessor subject to certain conditions.
Our Comments:
Prior to the introduction of section 35AD by Finance (No. 2) Act 2009,

undertakings engaged in laying and operating cross country pipeline
were eligible for 100 percent deduction of profits. With the introduction
of section 35AD, the investment – based incentive was introduced and
profit – linked incentive withdrawn. Therefore, proposal under the DTC
is principally similar to the provisions of the Act.
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Tax Holiday for undertakings engaged in refining of mineral oil
Current Situation:
• 100 percent profits of an undertaking engaged in refining of mineral

oil are allowed as deduction for a period of seven consecutive
assessment years from the year in which refining of mineral oil
begins
• Where the undertaking is transferred in an amalgamation or a

demerger, the provisions of the section will apply to the
amalgamated or resulting company.
DTC Proposals:
No tax incentive available for refining of refining of mineral oil. However,

undertakings eligible to tax holiday under the Act as on assessment
year beginning April 1, 2012 would be grandfathered under the DTC for
the unexpired period.
Our Comments
DTC has done away with all profit– linked incentives. Further, no tax
incentive is available to refining of mineral oil. Grandfathering of tax
incentive available to undertakings under the Act is a welcome step.
Non-resident service providers to the Oil and Gas sector
Current Situation:
• Non-resident assessee engaged in the business of providing

services or facilities in connection with, or supplying plant and
machinery on hire used, or to be used in the business of exploration
or production of mineral oils are taxable on presumptive basis
• Ten percent of receipts, whether in or out of India, from such

services are deemed as profits chargeable to tax. Hence effective
tax rate, including surcharge and education cess, applicable to such
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non-residents is 4.23 percent (tax rate 40 percent + surcharge 1.5
percent + education cess 3 percent)
• Assessee has an option to claim lower profits on maintenance of

books of account and other documents and on furnishing audited
accounts
• The term ‘plant’ has been defined to include ships, aircraft, vehicles,
drilling units, scientific apparatus and equipment, used for the
purposes of the said business.
DTC Proposals:
• Under the DTC also such a non-resident assessee is taxable on

presumptive basis
• Fourteen percent of receipts of such assessee, whether in or out of

India, or directly or indirectly, from such services are deemed as
profits chargeable to tax. Hence effective tax rate applicable to such
non-residents shall be 4.2 percent (at tax rate 30 percent)
Further, if the non-resident has a permanent establishment in India,

as defined under the DTC, an additional tax of 15 percent in the
nature of Branch Profit tax is leviable. In such cases, the effective
tax rate amounts to 5.67 percent
• The presumptive income is further required to be increased by the

excess of the amount of income, if any, actually earned by the
assessee
• Receipts in the nature of fees for technical services and royalty are
not eligible for taxation on presumptive basis
• Assessee has an option to claim lower profits on maintenance of

books of account and other documents and on furnishing audited
accounts
• The term ‘plant’ has been defined to include ships, aircrafts,

vehicles, books, scientific apparatus and surgical equipment but
does not include tea bushes, livestock, buildings and furniture and
fittings.
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Our Comments
• Intent of the Government, as per the discussion paper to Direct

Taxes Code Bill 2009 was to continue the presumptive basis of
taxation for non-resident oil and gas service providers. However,
with insertion of the provision to increase the amount of income of
such assessees by the excess of the amount actually earned, the
said intent has been defeated as assesses will end up paying tax on
actual income rather than presumptive income
• Although the effective rate of tax remains the same in case the
service provider does not constitute a permanent establishment
(PE) in India, for foreign companies with PE (defined under the
DTC), the tax incidence has been increased to 5.67 percent on
account of branch profit tax from the existing 4.23 percent.
Further, although definition of the term ‘plant’ under the DTC is an

inclusive one, it does not specifically include drilling units like the
existing provisions.
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Special Economic Zones (SEZs)
Tax holiday to Developers undertaking development of an SEZ
Current Situation:
profit based deduction is available to an undertaking developing,
operating and maintaining a SEZ notified on or after April 1, 2005 under
provisions of the Special Economic Zone Act 2005.
Such undertaking is eligible for a deduction of 100 percent of the profits

and gains derived from such business for a period of 10 consecutive
years out of 15 years, beginning from the year in which the SEZ is
notified by the Central Government.
Further, incase a Developer developing such SEZ on or after April 1,

2005 transfers the operation and maintenance of such SEZ to another
Developer (i.e. Transferee Developer), the Transferee Developer
becomes entitled to deduction for the remaining period of the 10
consecutive years.
In addition to the profit based deduction, an SEZ Developer is also

currently exempt from the applicability of Minimum Alternate Tax
liability and Dividend Distribution Tax.
DTC Proposals:

SEZ Developers. The DTC has proposed to substitute the profit based
incentives prevalent under the existing provisions of the Act with the
expenditure / investment based deductions for SEZs notified on or after
April 1, 2012. It has also provided for grandfathering of existing profit
based deduction to SEZs notified on or before March 31, 2012 for the
unexpired deduction period. However, SEZ Developers irrespective of
the date of notification of their SEZs, shall no longer enjoy the
exemption from Minimum Alternate Tax liability and Dividend
Distribution Tax under the DTC. The impact of DTC for SEZs notified on
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or before March 31, 2012 and on or after April 1, 2012 have been
summarized as under:
SEZs notified on or before March 31, 2012
• Profit based deduction under section 80-IAB of the Act would be

grandfathered under DTC for the balance unexpired period out of
the prescribed 10 years
• While computing profits eligible for deduction, the methodology

prescribed under Schedule 12 of the DTC shall be applicable.
However capital expenditure as well as expenditure incurred prior to
the commencement of business shall not be allowed
• The conditions specified under section 80-IAB for availing tax

deduction shall continue to be applicable
• Minimum Alternate Tax and Dividend Distribution Tax exemptions

shall not be available once the DTC comes into force.
SEZs notified on or after April 1, 2012
• SEZ Developers shall be eligible for claiming expenditure /

investment based deduction
• Profits shall be gross earning as reduced by business expenditure in

accordance with Schedule 12 of the DTC
• Capital expenditure and expenditure incurred prior to

including long term lease, goodwill or financial instrument
• Minimum Alternate Tax and Dividend Distribution Tax exemptions

shall not be available.
Our Comments:
• Postponing of the trigger date for the applicability of investment-

based deduction is a welcome development for the SEZ
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developers. This would provide them with an appropriate window
for planning their business operations
• Investment-linked incentive could be a little attraction for low capital

intensive projects. Hence, the proposed infrastructure creation for
such projects could see a downside
• As per Schedule 12, it is stated that the cost of land, including long
term lease will not be considered as an eligible capital expenditure.
This means, that an SEZ Developer will not be able to claim a tax
relief of the land cost, which is currently possible under the
computation of income from business under the present Act. Land
cost could be a major component of the project cost. This proposal
could severely impact the large SEZs (including those promoted by
the Semi - State Government institutions), which follow a model of
leasing plots coupled with provision of basic infrastructure
• Even though it has been clearly mentioned in the DTC that an

undertaking involved in the development, operation and
maintenance of an SEZ may avail of investment based tax benefits,
there has been no clear mention as regards the deduction available
to a Transferee Developer, thus creating ambiguity as to whether
such Developers can avail of investment-based tax benefits under
DTC
• Absence of MAT exemption under the DTC would imply that SEZ
Developers would need to pay a minimum tax of 20 percent on
book profits. The MAT paid by the SEZ Developer could be carried
forward and set off against subsequent 15 years. The MAT liability,
though credit is available, may result in additional cash outflow
issue for SEZ Developers
• Denial of DDT exemption under the DTC could also create a

negative impact and may demand a re-look at the IRR projections of
SEZ projects
• From a demand perspective, postponing the grandfathering date for

the SEZ Units (from March 31, 2011 to March 31, 2014), is a
positive development and could result in continued demand, at
least, till March 31, 2014. However, removal of MAT exemption to
SEZ Units could leave very little attraction for SEZ Units.
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Real Estate
The Real Estate sector has been a key driver to India’s economic
growth trajectory. The tax incentives offered to companies operating in
this sector have provided them an edge in today’s fiercely competitive
market.
As such, continuation of these tax incentives to new SEZ units under

the DTC, though under a restrictive grandfathering clause, is still a
positive step. The grandfathering provisions would provide some relief
to the SEZ developers, not just vis-à-vis the tax benefit availed by such
developers, but also vis-à-vis the business case for setting up a unit in
SEZ, which is so integrally linked to the tax benefit bestowed on the
unit.
Lease income to be considered as income from house property
Current Situation:
Currently, lease rentals earned from letting out of property, other than
the property occupied for the purposes of any business or profession
carried, taxed under the head income from house property.
Hence, if the owner of the property himself uses the property for the
purpose of carrying on his business or profession, is not taxed as under
the head income from house property.
However the classification of lease rentals, as income from House

Property or Business income, has remained a matter of litigation where
the taxpayer is engaged in the business of leasing out properties.
DTC Proposals:
The Direct tax Bill, 2009 provided that the income from any house
property shall be computed under this head notwithstanding that the
letting, if any, of the property is in the nature of trade, commerce or
business. While DTC retains this position, income from house property
which is used as a hospital, hotel, special economic zone, convention
centre or cold storage and house property which is not ready for use
during the financial year has been excluded. Hence income from such
sources/ situation shall be taxed as business income.
25
26
Our Comments:
Under the head Income from House Property, the assessee will only be
allowed a standard deduction at the rate of 20 percent of annual value.
This is true even in case of an assessee who is letting the property in
the nature of trade, commerce or business (other than hospital, hotel,
special economic zone, convention centre or cold storage) and has
spent more than 20 percent of annual value on expenditure in relation
to earning the income. Not allowing the actual expenditure incurred for
earning the rental income in excess of 20 percent could cause
significant disadvantage to certain taxpayers.
However by way of such provision, the long lasting controversy of

treatment/ classification of lease income (i.e. as income from house
property or business income) has been resolved under DTC.
Further, property which is not ‘ready to use’ will be taxable under the
head “income from Profits and Gains of business and profession”
However the term “Ready to use” has not been defined.
Classification of Assets held for carrying on business
Current situation:
Currently, the Act does not classify the assets held for the purposes of
business as business trading asset or business capital asset.
DTC Proposals:
Under DTC, definition of capital assets have been modified and the
concept of investment asset and business capital asset has been
introduced, wherein the latter on sale would attract taxation under
business income. Investment asset does not include business assets
like self generated assets, right to manufacture and other capital asset
connected with the business. The term business asset has been
classified into business trading asset and business capital asset. Under
DTC, land connected with or used for the purposes of any business
shall not be treated as a business capital asset. In other words, such
land shall be considered as business trading asset. Hence sale of such
land shall be treated as business income.
Investment assets would continue to be taxed as capital gains.
26
27
Our Comments:
By virtue of introduction of this distinction between business assets

and investment assets, the taxation of land and property developed will
be dependent upon the manner of its classification and claim by the
developer as a business asset or an investment asset.
Deduction of payment of service tax while computing income from

house property
Current situation:
Currently, while computing the income from house property only

certain specified deductions are allowed ie municipal / local taxes paid,
statutory deduction (of 30 percent of net lease rentals) and interest on
funds borrowed.
DTC Proposals:
Under revised discussion paper, apart from municipal taxes, tax on

services was also allowed to be reduced while computing income from
house property. However the same has been removed under DTC.
Our Comments:
No deduction of service tax amount while computing income from

house property would result in higher taxable income.
Surely, the DTC 2010 has provided more favorable tax provisions than
its previous version. However, the real question is, are the relaxations
from the previous version enough to keep the interest alive for the SEZ
Developer and Units in the most discussed scheme of the Current
Indian Government. The SEZ Developer and Units would certainly look
to exemption from the applicability of MAT to provide them with
meaningful tax benefits.
27
28
Corporate tax proposition
Minimum Alternative Tax (MAT)
Current situation:
In light of the tax holiday available to the Power and Oil and Gas sector,
MAT is a key provision impacting the sector. Currently, MAT is
applicable at the rate of 18 percent (effective 19.93 percent considering
surcharge and cess) of the book-profits computed after making
specified adjustments to the net profit of the company. Further, the
companies are allowed to carry forward the MAT credit (which is the
excess of MAT tax paid over the tax computed in accordance with
normal corporate tax provisions) to future years.
DTC Proposals:
Under the Direct Tax Bill 2009, it was proposed that company shall pay
tax on its gross assets at the rate of 2 percent. (0.25 percent in case of
banking companies) if the tax liability is less than the tax on gross
assets. The revised draft of the DTC reintroduced profit based MAT
.Under the DTC, the rate has been increased from 18 percent to 20
percent of book profits.
Our Comments:
DTC Bill 2009 had proposed to levy MAT on the basis of gross assets,
which would had been a dampener for capital based industry like
power, oil and gas. However, DTC has brought back MAT to Book
Profits which is a positive step towards development of the industry.
28
29
Corporate tax provisions – Key provisions
Tax rates
Current Situation:
Currently, the domestic companies are subject to corporate tax of 30

percent (plus surcharge and education cess) on their taxable income
DTC Proposals:
While the Direct Tax Code Bill, 2009 stipulated the corporate tax rate as
25 percent, the Revised Discussion Paper had hinted that tax rates
could be reviewed and suitably calibrated considering the reduction in
the tax base due to certain tax benefits spelt out in the said paper.
The DTC now has retained the existing corporate tax rate of 30 percent.
Our Comments:
Maintaining the corporate tax rate at 30 percent is not a positive

development; in as much as other levies such as DDT of 15 percent and
branch profit tax of 15 percent make the effective tax rate quite high.
Test of Residency
Current Situation:
Under the provisions of the Act, a company is resident in India in any

previous year, if the control and management of its affairs is situated
‘wholly’ in India.
DTC Proposals:
Under DTC, it is proposed to shift the test of residence of a company

from ‘control and management’ to ‘place of effective management’ in
line with international practice.
29
30
Accordingly, a company incorporated outside India will be resident in
India, if its ‘place of effective management’ is situated in India.
Place of effective management of the company would mean:
• Place where the board of directors or its executive directors make

their decisions
• In cases where the board of directors routinely approve the

commercial and strategic decisions made by the executive directors
or officers of the company, the place where such executive
directors or officers of the company perform their functions.
Our Comments:
Although the concept of ‘place of effective management’ proposed

under DTC is in line with international practice, it is important that this
provision is administered in a fair and pragmatic manner. The new
residency definition could impact businesses where key decisions are
taken by Indian management / executives and merely adopted by the
board overseas.
Treaty Override
Current Situation:
Under the Act, the provisions of the tax treaties prevail over the
domestic law to the extent they are more beneficial to the taxpayer.
DTC Proposals:
The initial draft of the Direct Tax Code Bill, 2009 provided that in the
case of a conflict between the provisions of a treaty and the provisions
of the Code, the one that is later in point of time shall prevail. This led to
apprehensions whether the proposal would lead to treaty override and
render the existing treaties otiose. Post the Revised Discussion Paper,
the DTC seeks to restore the beneficial treatment between the Act and
the Tax Treaty except in specified cases-
30
31
• where GAAR is invoked or
• when CFC provisions are invoked or
• when Branch Profits Tax is levied.
Our Comments:
The proposals seem to be in line with international practice.
Controlled Foreign Corporation (CFC) Provisions
Current Situation:
Under the Act, there are no CFC provisions.
DTC Proposals:
The introduction of the CFC provisions has come as a major surprise for
India Inc. The CFC provisions have been brought in as an anti-avoidance
measure. Under this, passive income earned by a foreign company
controlled directly or indirectly by a resident in India, and where such
income is not distributed to the shareholders, resulting in deferral of
taxes shall be deemed to have been distributed to the shareholders in
India. The CFC provisions are broadly summarized as under:
• The total income of a Resident taxpayer to include income

attributable to a CFC which means a foreign company:
- that is a resident of a territory with lower rate of taxation (i.e.

where taxes paid are less than 50 percent of taxes on such
profits as computed under the DTC)
- whose shares are not listed on any stock exchange recognised

by such territory
- individually or collectively controlled by persons resident in India

(through capital, voting power, income, assets, dominant
influence, decisive influence, etc.)
31
32
- that is not engaged in active trade or business (i.e. it is not
engaged in commercial / industrial / financial undertakings
through employees / personnel or less than 50 percent of its
income is of the nature of dividend, interest income, income
from house property, capital gains, royalty, sale of
goods/services to related parties, income from management,
holding or investment in securities/shareholdings, any other
income under the head income from residuary sources, etc.)
- has specified income of such company exceeds INR 2.5 million.
• Tie breaker tests have been provided to determine the place of

residence of a controlled foreign company.
- Scope of passive income also covers supply of goods / services

to associated enterprises
- Specific formula prescribed for computing income attributable

to a CFC. Income attributable to the CFC to be based on
specified income. Specified income to be based on the net
profit as per the profit and loss account of the CFC, subject to
prescribed adjustments.
Our Comments:
CFC provisions are likely to bring additional complexity in the tax

legislation and could significantly impact Indian companies having
outbound investment structures. Specifically, CFC provisions could
create cash flow problems for Indian companies since they would be
subject to tax without corresponding receipt of actual dividends. This
may necessitate a review of the existing overseas investment structure
Exempt-Exempt-Taxable (EET) vs. Exempt-Exempt-Exempt (EEE)

Regime for Saving Schemes
Current Situation:
Under the Act, long-term saving schemes like Government Provident

Fund (GPF), Recognized Provident Fund (RPF), Public Provident Fund
(PPF), Life Insurance, etc. are covered under the EEE method, wherein
32
33
the contributions, accumulations / accretions thereto and the
withdrawals are exempt from tax.
DTC Proposals:
All long-term retrial savings schemes moved to EEE regime as against

EET proposed earlier. Deduction in respect of investment in approved
funds such as Provident Fund, Superannuation Fund or Pension fund
reduced to INR 100,000 from INR 300,000. Receipts under a life
insurance policy on death/maturity would be exempt from tax.
Our Comments:
The continuation of EEE regime is a welcome step as it will provide a

tax free lumpsum amount to individuals to meet their post-retirement
financial requirements.
Withholding tax provisions – Others
Current Situation:
The withholding tax rate on royalty and fees for technical services
payable to non-residents is 10 percent (excluding surcharge and
education cess).
DTC Proposals:
The withholding tax rate in respect of payment of royalties and FTS to

non-residents is proposed to be increased to 20 percent.
Our Comments:
The higher withholding tax rates would increase the overall cost of the
Indian companies in case of payments to tax residents of the country
with whom India does not have a Tax Treaty and grossing up of tax is
required in case of tax is borne Indian company.
33
34
Transfer Pricing
Current Situation:
Currently, there are no provisions under the Act in respect of Advance

Pricing Arrangement (‘APA’).
DTC Proposals:
It is proposed to introduce APA for upfront determination of pricing

methodology of an international transaction.
Our Comments:
Whilst the scheme specifying the procedure of APA has not yet been
released, the industry would expect that the same is in line with the
international practice.
Leased Assets
Current Situation:
In the absence of any specific provision under the Act, there is a lack of
clarity surrounding the treatment of assets obtained on finance lease by
Power and Oil and Gas sector undertakings. In certain cases,
companies are facing litigation from revenue authorities on the question
of whether they are eligible to claim depreciation on such assets.
DTC Proposals:
Under DTC, the lessee would be treated as the owner of assets

obtained on finance lease and therefore, eligible to claim depreciation
on the same.
34
35
Our Comments:
This is an important provision for the companies in Power and Oil and
Gas sectors and it will help to end the long drawn litigation regarding
‘ownership’ of such assets and depreciation eligibility with the Revenue
authorities.
General Anti Avoidance Rule (‘GAAR’)
Current Situation:
Under the Act, there are limited specific anti-abuse provisions.
DTC Proposals
• The Code seeks to introduce GAAR which provides sweeping

powers to the Revenue authorities. The same is applicable to
domestic as well as international arrangements.
• GAAR provisions empower the Commissioner of Income-tax

(“CIT”) to declare any arrangement as “impermissible avoidance
arrangement” provided the same has been entered into with the
objective of obtaining tax benefit and satisfies any one of the
following conditions:
– It is not at arm’s length
– It represents misuse or abuse of the provisions of the DTC
– It lacks commercial substance
– It is carried out in a manner not normally employed for bona fide

business purposes
• An arrangement would be presumed to be for obtaining tax benefit

unless the tax payer demonstrates that obtaining tax benefit was
not the main objective of the arrangement.
• CIT to determine the tax consequences on invoking GAAR by

reallocating the income or disregarding/recharacterizing the
arrangement.
35
36
• Meaning of ‘tax benefit’ widened to include any reduction in tax
bases including increase in loss
• GAAR provisions to be applicable as per the guidelines to be framed

by the Central Government
• GAAR shall override Tax Treaty provisions
• Forum of DRP available in a scenario where GAAR is invoked.
Our Comments:
The guidelines to be issued by the Central Government would need

careful examination to assess the scope and impact of these provisions.
It is an open question whether GAAR can be invoked for transactions
undertaken prior to the enactment of DTC. A suitable clarification may
be provided for this purpose
36
37
Conclusion
Power Sector
Undoubtedly, the DTC has done more good to the power industry, for
instance, relief by way of grandfathering clause and removal of MAT
based on Gross assets, there are certain provisions where further clarity
would be required. for e.g. DTC has no specific provision for
grandfathering of unutilized MAT credit available under the Act.
Shipping Sector
It’s interesting to note the path of the Direct Tax Code from the Act to
from the 2009 Bill to the 2010 one. The exclusion of pooling
arrangement from TTS and taxation of other receipts on gross basis
would have far reaching impact on the Indian shipping companies. As
regards foreign shipping companies are concerned, clarity on taxation of
import freight and inclusion of arrangements such as slot charter, joint
charters is a positive development. However, the decrease in corporate
tax is offset by increase in the presumptive tax rate to 10 percent and
shift from taxing shipping income under presumptive basis to actual
basis.
Oil and Gas Sector
It is interesting to note the path of the Direct Taxes Code from the 2009
Bill to the 2010 one. Undoubtedly, the Code in its revised form is more
simplified and aligned towards expectations of the oil and gas industry,
for instance, grandfathering of tax incentives to awardees of NELP VIII
and CBM IV rounds of bidding and reinstating of MAT based on Book
Profits.
37
38
SEZ and Real Estate

Undoubtedly, the DTC has done more good to the real estate industry,
for instance, relief by way of grandfathering clause and removal of MAT
based on Gross assets, there are certain provisions where further clarity
would be required. for e.g. DTC has no specific provision for
grandfathering of unutilized MAT credit available under the Act.
Relief given to SEZ developers by way of grandfathering clause has

been partly nullified by the proposed levy of MAT at a high rate of 20
percent.
General Comments
Introduction of GAAR and CFC signals a tough tax regime for the
corporate sector. All in all, DTC seems to be a mixed bag of goodies.
In summary, the provisions of the DTC are expected to provide fillip to

the growth of the Indian infrastructure sector which is very crucial for
the overall growth of Indian economy.
38
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KPMG DTC Impact Infra

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TAX

Direct Tax Code Bill 2010 – Impact on

In an attempt to simplify the direct tax provisions, the Government

Key proposals and their impact on

Oil and Gas 11

Special Economic Zones (SEZs) 22

Corporate tax proposition 28

Key proposals and their impact -

Tax holiday to Power sector undertakings

• generation or generation and distribution of power, if it begins to

• Reconstruction or revival of a power generating plant, if it

DTC has proposed to bring a paradigm shift in granting tax incentives to

Undertakings eligible for profit based deduction in Assessment Year

• While computing deduction, capital expenditure as well as

• Conditions specified under section 80IA for availing Tax Holiday

Undertaking set up in the DTC regime

• Profits shall be gross earning as reduced by business expenditure in

• Capital expenditure and expenditure incurred prior to

• Under the Act, undertaking which commences generation of power

• The proposal to allow power companies to offset losses against

As such, continuation of these tax incentives to new power

Key proposals and their impact –

Foreign shipping companies

Under the existing provisions of the Act, an amount equal to 7.5

The presumptive basis of taxing shipping profits of foreign shipping

Inclusion of Slot charter, Space Charter and Joint Charter under

The existing provisions of section 44B / 172 are silent on whether

The scope of the shipping profits (termed as transportation charges)

This is a positive development settling the ambiguity on whether the

Scope of transportation charges

The scope of freight income includes export freight (wherever received)

The clarity on taxability of import freight and inclusion of charter hire

Indian shipping companies - Tonnage Tax Companies

Earning from pooling arrangements

Under the existing provisions of Tonnage Tax Scheme (‘TTS’) in the

Interestingly, under the DTC, the definition of ‘core shipping activities’

Non-shipping receipts taxable on gross basis

Presently, the non-shipping receipts of tonnage tax companies are

The language employed in explaining shipping profits seems to suggest

No MAT on book profits from core shipping activities

As per section 115VO of the Act, no MAT is payable on book profits

This is a positive development and comes as a relief to tonnage tax

Chartering of qualifying ship on bareboat charter terms

The ship chartered out on a bareboat charter-cum-demise terms or on a

Under the DTC, only ship chartered out on a bareboat charter-cum-

This is a positive development of removing the time limit of three years

Key proposals and their impact – Oil

Tax holiday to Oil and gas sector undertakings

• which begins commercial production of ‘mineral oil’ on or after April

• is engaged in commercial production of ‘natural gas’ on or after 1

DTC has proposed to bring a paradigm shift in granting tax incentives to

Undertakings eligible for profit based deduction in Assessment Year

• Undertakings producing ‘mineral oil’ eligible for profit linked

• Undertakings producing ‘natural gas’ from blocks licensed under

• While computing deduction, capital expenditure as well as

• Undertakings producing ‘natural gas’ from blocks licensed under

• profits shall be gross earning as reduced by business expenditure in

• capital expenditure and expenditure incurred prior to

The DTC grandfathers undertakings producing of ‘mineral oil’

Definition of ‘mineral oil’ and ‘natural gas’

Natural gas means any subsoil combustible gaseous fossil fuel.

Existing debate on applicability of specific provisions to oil and gas

Deposits to Site Restoration Fund