GAAR may be further deferred in the Budget to attract investment
Setting new trends—be it the end of the colonial hangover of the Budget announcement on the last day of February or demonetisation—the Union Budget 2017 incites anxiety and expectation. Continuing the momentum to achieve digitised economy, will the government provide more incentives for cash-less transactions and introduce cash transaction tax, or will the Budget offset demonetisation pain .
Companies look forward to implementation of phased reduction of corporate tax rates announced in 2015 Budget, while the sunset of weighted deductions has been implemented.
With rapid movements in 2016—Ind-AS, ICDS and OECD-G20 BEPS—India is ready with the instruments.
Focusing on BEPS, the 2016 Budget introduced patent box regime based on the nexus approach, increased transparency through country-by-country reporting, and introduction of equalisation levy. Preferential tax rate of 10% was announced for the income earned by an Indian resident being the true and first inventor of a patent registered in India to encourage innovation. However, clarity on whether income earned from overseas for a patent registered in India, as also in foreign country qualifies for concessional rate of tax, extended benefit from self-exploitation of patents by manufacture and sale of articles basis the nexus approach, etc, is still awaited.
Contemplation on whether “India’s patent box is at par with global standards” is needed to achieve the objective of incentivising innovation.
Another significant step taken to tax digital economy transactions is the equalisation levy. Because this levy is not a part of India’s income-tax law, non-resident may not be able to get treaty protection and credit for equalisation levy in the home country. Introducing creditability to the non-resident for the equalisation levy may alleviate these concerns. Further, provisions should be introduced on the credit mechanism, if the non-resident is assessed by the tax authorities as a permanent establishment.
Requirement of CbCR in line with the BEPS Action Plan with effect from FY17 would require time and resources. There is still ambiguity on the information to be maintained by the companies and the threshold for maintenance.
General anti-avoidance rule (GAAR) provisions would be effective from FY18. Factoring in the current economic environment and the urge of the government to attract foreign investment, GAAR may be further deferred. GAAR, in its current form, has left a lot of ambiguity and uncertainty in its practical application. It is said to override the provisions of the tax treaties. In order to achieve tax certainty, clarification is sought on non-application of GAAR wherever specific anti-avoidance regulations (SAAR) are specified either in the Act, such as transfer pricing provisions, or in tax treaties, such as limitation of benefit clause. Further, it is important to distinguish between tax mitigation and tax avoidance to circumvent bringing genuine arrangements under the radar of GAAR.
With the phase-1 implementation of Ind-AS kick-started in FY17, uncertainty prevails on the tax treatment, especially under the provisions of minimum alternate tax (MAT). The provisions of MAT would have to be amended to incorporate the changes on account of first-time adoption of Ind-AS and on the subsequent accounting of fair value changes. The Lohia Committee, formed to recommend framework for computation of book profits for the levy of MAT, has suggested for several items like investment and financial instruments that the profit due to fair value adoption should be considered over a three-year period for MAT computation. The recommendation is against the well-established canon of taxation of real income. Also, additional income computation and disclosure standards would be required to clarify tax treatment under normal provisions on the items recognised in the financial statements to mitigate ambiguity and litigation.
India has improved on the ease of doing business index; however, at a ranking of 130, there is still a long way to go. Among other factors, removing the uncertainty in implementation of tax laws would help. Transfer pricing has been an issue of never-ending litigation in India, due to the approach of field officers and lack of guidance on several litigated matters. Accordingly, in line with the OECD principles and recommendations in the BEPS Action Plan, guidance should be issued on the methodology for evaluating the arm’s-length standard on contentious issues like marketing intangibles, manufacturing intangibles, intra-group management services, inter-corporate loans and guarantee fees, etc. The provisions of domestic transfer pricing should be done away with in cases where no tax arbitrage exists in transaction between two related parties.
Will the Budget redouble efforts to drive investments into India along with providing succour to the common man?
The author is partner & national tax leader, EY India. Views are personal