Finance minister Arun Jaitley will present the fourth Budget of the BJP-led NDA government on February 1, 2017. It will be the last opportunity for making any big-bang announcement. On the geopolitical side, India needs to factor in the start of the Trump regime in the US, impact of Brexit, demonetisation and firming up of oil prices. On the tax front, there is an expectation of a moderate tax regime with the rollout of GAAR, BEPS and GST.
In Budget 2015, the FM had proposed to cut the corporate tax rate from 30% to 25%, over the next four years from then. Although Budget 2016 witnessed several tax exemptions and deductions being withdrawn, the FM did not give much relief at the corporate tax rate level. The tax rate in case of companies with gross receipts below Rs 5 crore in FY15 was brought down by 1% and start-up manufacturing companies could opt for a lower rate of 25%, subject to no exemptions being claimed.
Compared to various emerging economies, the corporate tax rate in India is high. South Africa, China and Russia have a corporate tax rate of 28%, 25% and 20%, respectively. Lowering the corporate tax rate at least to 28%, with a roadmap for further reduction to 25%, will provide a boost to the economy and will also make India a competitive jurisdiction. Also, moving away from distribution tax on dividend to direct tax in the hands of shareholders will be more consistent with tax regimes in other countries.
GAAR is slated to be effective from April 1, 2017. In anticipation of the onset of GAAR and the changing tax environment due to BEPS, India has already amended treaties with Mauritius, Singapore and Cyprus. There are number of issues on which clarity is still awaited. Income arising from transfer of investments made prior to April 1, 2017 has been grandfathered, though tax benefits obtained from an ‘arrangement’ entered into before April 1, 2017 are likely to attract GAAR. The administrative guidance on what type of arrangements will be covered by GAAR is still awaited. Further, it is not clear if GAAR will apply to situations covered by Specific Anti-Avoidance Rule. It would also help to clarify the interplay of GAAR and LoB provisions in the tax treaties. The India- Singapore tax treaty states that a contracting state is free to apply its domestic tax law and measures concerning prevention of tax avoidance or tax evasion. However, such a mention is absent in the renegotiated treaties with Mauritius and Cyprus.
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India was late in the game in introducing Place of Effective Management (PoEM) as the residence criteria. PoEM assumes significance for foreign companies, especially foreign subsidiaries of Indian MNCs. It has been two years since this was introduced, and there is still no clarity or guidance on how to apply this rule. It is expected that the FM may scrap PoEM and introduce the concept of ‘Controlled Foreign Company’ (CFC) as an anti-avoidance measure. This will be in line with the practice in many countries. CFC is viewed as more effective as it will allow India to tax passive income (such as interest, dividend, royalties, capital gains, etc) of foreign companies owned and controlled by Indian shareholders.
India became the first country to impose equalisation levy, based on recommendations of the Expert Committee set up to look into taxation of digital economy. In Budget 2016, it introduced 6% levy on online advertisements and related services. The committee had recommended covering many other online services including cloud computing, designing, creating, hosting or maintenance of website, etc. It is expected that the government may expand the scope of levy to include other digital services.
The government has garnered a paltry sum of R146 crore by way of ‘equalisation levy’ till December 3, 2016. While the intention may be to tax foreign companies selling digital goods and services without establishing a taxable presence in India, such levy may increase the cost of Indian consumers. It will also be counter-productive as it will discourage digital transactions whereas the government’s thrust is on moving to Digital India.
A moderate and stable tax regime, with some administrative reforms, is what India needs today. With India assuming a significant role in the evolving international tax policy framework, it will be good if it could adopt a fair and pragmatic approach in resolving tax disputes with taxpayers.
With inputs from Ankush Bhutra, manager (direct tax), BMR & Associates LLP
The author, Shefali Goradia is partner (direct tax), BMR & Associates LLP.
Views are personal