Revised Discussion Paper on the Direct Taxes Code June 2010


I Minimum Alternate Tax (MAT) - Gross assets vis-a-vis book profit.
II Tax treatment of savings -- Exempt Exempt Tax II (EET) vis-a-vis Exempt Exempt Exempt (EEE) basis
III Taxation of income from employment - Retirement benefits and perquisites.
IV Taxation of income from house property.
V Taxation of capital gains
VI Taxation of non-profit organisations
VII Special Economic Zone -- Taxation of existing units
VIII Concept of Residence in the case of a company incorporated outside India
IX Double Taxation Avoidance Agreement (DTAA) vis-a-vis domestic law
X Wealth Tax
XI General Anti Avoidance Rule


1. The draft Direct Taxes Code (DTC) along with a Discussion Paper was released in August, 2009 for public comments. Since then, a number of valuable inputs on the proposals outlined in these documents have been received from a large number of organisations and individuals. These inputs have been examined and the major issues on which various stakeholders have given their views have been identified. This Revised Discussion Paper addresses these major issues. There are a number of other issues which have been raised in the public feedback, which, though not part of this Discussion Paper, will be considered while finalising the Bill for introduction in Parliament. The issues which this Revised Discussion Paper addresses are:

i. Minimum Alternate Tax (MAT) - Gross assets vis-a-vis book profit.

ii. Tax treatment of savings - Exempt Exempt Tax (EET) vis-a-vis Exempt Exempt Exempt (EEE) basis.

iii. Taxation of income from employment - Retirement benefits and perquisites.

iv. Taxation of income from house property.

v. Taxation of capital gains

vi. Taxation of non-profit organisations

vii. Special Economic Zones -- Taxation of existing units

viii. Concept of Residence in the case of a company incorporated outside India.

ix. Double Taxation Avoidance Agreement (DTAA) vis-a-vis domestic law.

x. Wealth Tax.

xi. General Anti Avoidance Rule (GAAR).

Paragraph 1 in each Chapter describes the proposals in the DTC and Discussion Paper, paragraph 2 highlights the issues and concerns raised and paragraph 3 details the revised proposals in response to these concerns.

2. It had been stated in the first Discussion Paper that the Government would consider calibrating the rates of tax in the light of the response and comments received on the scope of the tax base discussed in the Discussion Paper.

The proposals in this Revised Discussion Paper would lead to a reduction in the tax base proposed in the DTC. The indicative tax slabs and tax rates and monetary limits for exemptions and deductions proposed in the DTC will, therefore, be calibrated accordingly while finalising the legislation.

3. This Revised Discussion Paper is available on the following websites: and

Responses to the Revised Discussion Paper should be sent online through the link provided at these websites or at the following e-mail address: Responses are solicited upto 30th June, 2010.



1. Chapter XIII of the Discussion Paper on the DTC deals with Minimum Alternate Tax (MAT). As stated in the Discussion Paper, a company would ordinarily be liable to tax in respect of its total income. However, owing to tax incentives, the liability on total income, in many cases, has been found to be extremely low or even zero. Internationally, a variety of economic bases and methods are used to calculate presumptive income so as to overcome the problem of excessive tax incentives. These presumptions could be based on net wealth, value of assets used in business or gross receipts of the enterprise.

1.1 The DTC has proposed a Minimum Alternate Tax (MAT) on companies calculated with reference to the "value of gross assets". The economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets, hence it provides an incentive for efficiency.

1.2 It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies. The MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.

2. The following major issues have been raised regarding the proposed MAT on gross assets:

(i) Computation of MAT with reference to gross value of assets will require all companies to pay tax even if they are loss making companies or operating in a cyclical downturn. An asset based MAT does not have a proximate linkage with a particular year''s income or turnover. An asset based MAT on loss making companies would result in significant hardship since they would not have the resources to pay the tax. While one ''incentive for efficiency'' argument could be that such companies could shut down or restructure their businesses, such an argument would not be valid for businesses where losses may be inherent over long periods of the business cycle. Income tax should be on real income and any method for presuming income should also be reasonable enough to come closer to the real income.

(ii) The return on assets is one of the indicators for evaluating the performance of companies. However, it is not reasonable to apply this for newly set up infrastructure companies which have long gestation periods. Since the proposed MAT regime does not provide any exemption for gestation period, investment costs in new businesses will be higher on account of the MAT when compared to old businesses which already have a depreciated asset base. Similarly, for companies undergoing major expansion resulting in the value of assets being much higher, the MAT may be much greater than the income tax liability.

(iii) In the case of corporates under liquidation, a levy of a presumptive asset tax till the time the company is dissolved is not reasonable.

(iv) Assuming the same net income as a percentage of gross assets for all taxpayers is not practical as this would vary depending on the industry concerned, the degree of integration of the particular enterprise, and the type of product or service provided.

(v) The inclusion of ''capital works in progress'' which is not used in the business and does not contribute in revenue generation would distort the asset based tax. Taxation should be based on net worth and not on gross assets.

(vi) The asset based MAT does not cover situations where there are multiple tiers of subsidiaries for handling separate businesses or investments. There would be a cascading effect of the asset based MAT in such cases.

(vii) The proposed MAT does not allow for any carry forward which would result in a corporate paying more overall tax in a low profit year without there being any relief against above average profits earned in a subsequent year.

(viii) The DTC proposes ''investment linked'' incentives to specified sectors for investment. The application of asset based MAT on companies operating in such sectors contradicts this policy.

3. Some of the issues raised by stakeholders (such as MAT credit) can be addressed by making appropriate changes in the proposed scheme of the asset based MAT. However, there may be practical difficulties and unintended consequences, particularly in the case of loss making companies and companies having a long gestation period. It is, therefore, proposed to compute MAT with reference to book profit.



1. Chapter-XII of the Discussion Paper on the Direct Taxes Code (DTC) deals with tax incentives for savings. It proposes the ''Exempt-Exempt-Taxation'' (EET) method of taxation for savings. Under this method, the contributions towards certain savings are deductible from income (this represents the first 'E' under the EET method), the accumulation/accretions are exempt (free from any tax incidence) till such time as they remain invested (this represents the second ''E'' under the EET method) and all withdrawals at any time are subject to tax at the applicable marginal rate of tax (this represents the ''T'' under the EET method).

1.1 Based on the EET principle, the Code provides for deduction in respect of aggregate contributions upto a limit of three hundred thousand rupees (both by the employee and the employer) to any account maintained with any permitted savings intermediary, during the financial year. This account will have to be maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government. The permitted savings intermediaries will be approved provident funds, approved superannuation funds, life insurer and New Pension System Trust. The accretions to the deposits will remain untaxed till such time as they are allowed to accumulate in the account. Any withdrawal made, or amount received, under whatever circumstances, from this account will be included in the income of the assessee under the head 'income from residuary sources', in the year of such withdrawal or receipt. It will accordingly be subject to tax at the applicable personal marginal rate of tax.

1.2 Taxation on EET basis is proposed to be...

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