As finance minister Arun Jaitley is slated to present Union Budget 2016-17 on February 29, the industry expects him to lay a clear road map of the way exemptions would be phased out to lead to eventual reduction of corporate tax rate to 25%. Girish Vanvari, partner and head of tax at KPMG in India, discusses the Budget expectations, and how the government is increasing transparency in tax administration and mitigating tax avoidance, in an interview with Siddhartha P Saikia. Excerpts:
In the last Budget, the finance minister proposed a reduction in corporate tax from 30% to 25% over “the next four years” along with the removal of tax exemptions. Do you think the rate reduction would begin from the coming Budget?
India has one of the highest corporate tax rates in Asia of around 34.5% (including surcharge and cess). Considering the need to attract investment into India, the proposal to reduce the corporate to 25% tax rate was indeed laudable. The manner in which the proposal will be implemented is something that will be keenly watched in the coming Budget. Whether the rate cut would be 1.25% every year for the next four years or would be initiated only post the phase-out of tax exemptions (from FY18) remains to be seen.
There may not be a significant tax rate cut in the coming Budget, but one may expect the government to prescribe a marginal reduction to demonstrate the intent set out in the previous Budget. Also, a clear roadmap for the transition by detailing the manner of the exemption phase-out and the eventual reduction to a corporate tax rate of 25% is expected.
Do you think the phase-out plan for tax incentives will make the minimum alternate tax (MAT) redundant?
The objective of introduction of MAT was to bring into the tax net ‘zero-tax companies’, which in spite of having earned substantial books, did not pay any tax due to various tax concessions and incentives provided under the income tax law. Hence principally, if all incentives were phased out, the levy of MAT should also be done away with.
However practically, MAT will not be completely redundant since it will still be relevant for companies with carry-forward of losses, or in cases where there are permanent disallowances under the Income Tax Act. Further, the phasing out of tax holidays will only happen prospectively and the units set up prior to the phase-out date will still continue to avail the incentives.
Hence, the government may have to take a considered call on phasing out MAT after considering the aforesaid factors and the move may not be immediate.
Do you think India could implement POEM (Place of Effective Management) from April 1?
Considering that the final rules for POEM are yet to be finalised, it is desirable that POEM be deferred to April 1, 2017. Further, Controlled Foreign Corporation (CFC) rules, meant to avoid tax deferrals using low-tax jurisdictions, are preferable to POEM as the former have many checks and balances for tax credits, multiple SPVS etc. POEM without the checks and balances of CFC can be very dangerous, leading to uncertainty.
Government is seen trying to bringing in place several tax avoidance laws such as BEPS and GAAR, among others. How do you expect government rolling out these measures?
The world is transitioning to an environment of increased transparency and mitigating tax avoidance and India is no different.
GAAR is now a reality and finds a place in the statute to be implemented from 1st April, 2017. However, it is expected that the government comes out with clarity on manner of its implementation by prescribing certain objective criteria/ conditions which if fulfilled would not result in the triggering of GAAR. The Government would do well to address issues such as applicability of treaty benefits for foreign investors if GAAR is invoked.
It also appears some that some of the action points in BEPS especially relating to transfer pricing will find its way in the upcoming Budget.
On POEM, it is expected that the government would come out with the final guidelines after considering the various suggestions to the draft guidelines and one hopes that appropriate safe harbor rules such as for private equity investors find a place in the same.
Do you expect it would be easy in the Indian context to implement these tax avoidance laws?
Executing tax avoidance laws across the world has never been easy and India will not be any different.
There will be some amount of transitionary pain but strong intent combined with use of technology and relentless execution can get us there. For example, the disclosures under the black money law have not as per the expectations now it is the time for the authorities to chase the defaulters and prosecute them to demonstrate that it is really keen to implement the law.
Which are the sectors do you expect to get a boost in terms of tax sops in the Union Budget 2016-17?
Given the stated intent of the government to phase out tax incentives, it is not expected that the government will come out with any big bang tax incentive announcement.
The Start-up India and Make in India program could see some specific tax incentives being introduced.
The government may oblige to the wish list of the real estate and infrastructure sector by providing clarity on the taxability of Joint Development Agreement, exempting ReITs from DDT and by providing MAT exemption for SEZ developers.
It will be interesting to see how the government is able to marry the contrasts of phasing out of the tax incentives at the same time incentivising identified ‘priority’ sectors.