Direct Tax Code and impact on non-residents

The draft Direct Tax Code (DTC) released by the Finance Ministry in August 2009 posed certain challenges for taxation of non-residents. In order to clarify the concerns and issues raised by taxpayers, the Central Board of Direct Taxes (CBDT) released a revised discussion paper on 15 June.

Treaty override and GAAR

The discussion paper clarifies that non-residents would not be able to enforce treaty provisions where General Anti Avoidance Rules (GAAR) are invoked by the tax department. When GAAR is not invoked it is proposed that either the provisions of the DTC or the tax treaty, whichever is more beneficial to the taxpayer, will be applicable.

The DTC provisions would also prevail when branch profits are to be taxed or when the tax officer invokes the Controlled Foreign Corporation (CFC) provisions.

Pranay Bhatia is a partner at Economic Laws Practice where Vidushi Maheshwari is an associate. Economic Laws Practice is a full-service law firm headquartered in Mumbai and has offices in New Delhi, Pune and Ahmedabad.