Budget 2018: It remains to be seen if FM Arun Jaitley would follow the US government’s lead and quicken his move to reduce top line tax rate of 30% applicable to Indian companies and try to neutralise any potential impact of US tax proposals on investments into India.
Budget 2018: With the Union Budget around the corner, various sections of the society have expressed their expectations from the budget. The fact that this is the last full budget of the current government may play a role in the announcements which are being planned by it and the government might be keen on bringing sweeping changes which look to making an impact to the Indian economy. The question is: Will the Union Budget trump the recently-announced proposals to the tax policy in the United States? While only time will tell this, it may be interesting to compare and assess where does the Indian tax policy stand as far as some US tax policy-related proposals are concerned, how well does India compare and where can India follow the US government’s lead.
In its recent announcements, the United States government has announced some significant changes to the tax policies in the United States, including a reduction in the corporate tax rate from 35% to 20%. However, this change comes with a few riders. The US government also proposes to limit interest deductions to 30% of the EBITDA and also remove certain other deductions available to taxpayers. Additionally, it is proposed that profits in offshore subsidiaries of US companies would also be subject to tax at varying rates without them being repatriated to the US. The US government also seeks to introduce participation exemption in relation to dividends received from 10% owned foreign subsidiaries and a portion of gains from sale of such 10% owned foreign subsidiaries would also be exempt from tax. Further, there is also a proposal to delete the ‘alternate minimum tax’ which is similar to the concept of minimum alternate tax payable by certain Indian companies.
Generally, any changes to government policies in the United States has a ripple effect in other countries. However, the economic effects of the proposals of the US government are being debated within various quarters in the US. There have been a few instances in the past where governments had reduced the tax rates expecting such reductions to increase investments and infrastructure building in the US. Those rate cuts, however, failed to have the desired impact. One would have to wait and watch the impact of the present proposals on the global economy.
Watch Video: Budget 2018: FM Arun Jaitley May Tweak Income Tax Basic Exemption Limit
Some experts expect that various countries would announce proposals to negate the impact of US tax proposals on their economies. In focus is the Indian Union Budget which is due to be announced on the 1st February.
During the budget speech of 2015, the present Indian government had already announced its intention to bring down the corporate tax rates to 25% over a period of time. The number of deductions, exemptions and tax holidays available to taxpayers were also proposed to be reduced in a phased manner along with the reduction in tax rates. In line with this announcement, the government has introduced the benefits of lower tax rates of 25%/ 29% for certain companies in the previous two budgets for years 2016 and 2017. As an example, the newly-established manufacturing companies which do not claim certain specified deductions are now eligible to a 25% corporate tax rate. However, as of now, the general corporate tax rate has been maintained at 30%. It remains to be seen if the government would follow the US government’s lead and quicken its move to reduce top line tax rate of 30% applicable to Indian companies and try to neutralise any potential impact of US tax proposals on investments into India.
As regards restricting interest deductions, thin capitalisation norms were introduced in the last budget which restrict interest deduction to 30% of the EBITDA in certain cases and thus, this is already a part of Indian tax law. However, as against the US proposals which permit carry forward of disallowed interest for 5 years, India has allowed carry forward of the disallowed interest amounts for a period of 8 years. Further, dividends received from foreign subsidiaries of Indian companies are currently taxable in the hands of the Indian company at a concessional tax rate of 15% which, like the US tax proposals, could be potentially further reduced to promote repatriation of profits into India.
In terms of some other aspects which may contribute to India’s attractiveness as an investment-friendly jurisdiction, the government may consider reducing the effective tax rate on dividends received from Indian companies and thus, making upstreaming of profits to shareholders tax efficient. Currently, in addition to corporate tax, Indian companies are also required to pay a dividend distribution tax of approx. 20% on dividends paid to its shareholders. Such dividend distribution tax is generally not available as a credit against foreign taxes to shareholders in their home countries. Accordingly, the government may analyse the impact of replacing the dividend distribution tax of 20% with a lower rate of withholding tax on dividends paid to non-resident investors. This would enable them to claim a credit of such taxes against their tax liability in their home countries, thereby reducing the cost of investments into India.
Another aspect which the Indian government may look at is reduction in the minimum alternate tax rate of 18.5% and clarifying certain open issues which have arisen due to introduction of the new accounting standards (IND AS).
All in all, while the major proposals of the US government may not have a major impact on the Indian Budget, the Indian government may seek to introduce some changes in the Indian law to promote foreign investment in general.
(The authors of this article are Ritu Shaktawat, Associate Partner and Surajkumar Shetty, Principal Associate, in the Direct Tax team at Khaitan & Co. These are personal views of the authors and do not represent the views of the firm.)