From a global economic standpoint, 2016 has begun on a muted note, with recessionary trends visible worldwide. However, the Indian economy represents a lone silver lining. The credit for the same should go to various investment-friendly initiatives taken by the government. From a taxation standpoint, a look at the reforms measures indicates the government’s resolve to institute a non-adversarial and predictable tax regime. With Budget 2016 round the corner, it would be worth having a look at some of the key expectations on the tax front.
The government, in the last Budget, laid down a roadmap for reduction of corporate tax rates to 25%, with a simultaneous phasing out of various exemptions/deductions. In this regard, the Central Board of Direct Taxes (CBDT) has released the draft proposal for public comments. While it would be interesting to keep an eye on the manner in which the said policy is implemented, it is hoped that the reduction in corporate tax rates coincides with gradual phasing out of exemptions/deductions and some clarity is provided that the reduced tax rate will be all-inclusive (including surcharge and cess). This would also provide a fillip to Make-in-India.
The concept of Place of Effective Management (PoEM) was introduced by Budget 2015, and recently, draft guidelines for determination of PoEM of a foreign company were released for public comments. The said guidelines can spawn significant litigation and create uncertainty. Given that the final guidelines are still to be issued, one may be justified in expecting that the applicability of PoEM will be deferred to provide sufficient time to all stakeholders to familiarise themselves on its nuances and potential implications.
The government provided much-needed clarity on indirect transfer provisions (applicable retrospectively from 1961) in its previous Budget. However, the amendments/clarifications introduced were made prospective, i.e. applicable from April 1, 2015. This lacuna can give rise to protracted litigation for past years, unless necessary changes are made in the upcoming Budget.
The Income Tax Simplification Committee (ITSC) formulated by the government has released its first set of recommendations (a draft report), which focuses, inter alia, on the following:
Rationalising the provisions of disallowance of expenditure incurred in relation to exempt income;
Provisions to ensure timely payment of refunds due to taxpayers and grant of additional interest for delays;
Clarity regarding characterisation of surplus arising on sale of securities between capital gains and business income;
Rationalising the withholding tax provisions including the simplification of procedures to grant credit of taxes withheld; and
Provisions which enable making of fresh claims during assessment proceedings.
Keeping the objective of promoting simplicity and reducing unwarranted litigation, we expect that the government will amend the tax legislation to codify, amongst others, these recommendations in the upcoming Budget.
On March 31, 2015, CBDT introduced 10 Income Computation and Disclosure Standards (ICDS), dealing with various aspects of computation of taxable income, which are effective from April 1, 2015. The current ICDS provisions may, at best, bring about timing difference on recognition of revenue/expenditure, but have the potential to create unwarranted ambiguity/complexities and spawn litigation. Given this, the implementation of ICDS should be deferred in the Budget, which will also be in line with the recommendations of ITSC.
The government may provide various tax incentives for Make-in-India and Digital India initiatives. Given the roadmap released for phasing out exemptions/deductions, it would be interesting to see how the government strikes a balance between this overall policy objective and expectations with regard to these new initiatives.
In order to provide a boost to declining exports, it is hoped that the Minimum Alternate Tax (MAT) exemption to Special Economic Zone (SEZ) developers and units and Dividend Distribution Tax (DDT) exemption to SEZ developers—which were withdrawn by Finance Act 2011—are restored.
The government has also released an action plan for Start-up India. It proposes to provide several tax breaks to start-ups as well as their investors. Reducing regulatory requirements (as has been proposed) and simplifying the conditions to avail of proposed tax breaks deserve to be considered.
Another task is settlement of legacy dispute on indirect transfers with Vodafone, etc. Institutionalising a roadmap to resolve such disputes would go a long way in assuaging investor concerns.
India has been an active participant in the Base Erosion and Profit Shifting (BEPS) project and it is expected that some of the BEPS recommendations—particularly the introduction of country-by-country reporting norms—would be introduced. Also, given the current deadlock on the Goods & Services Tax (GST) Bill, the government should come out with a fresh roadmap for the implementation of GST.
India continues to make the right noises so far as it tax regime is concerned. While there ought not to be any doubt on the intentions of the government, it certainly needs to up the ante and ensure that intentions transform into policies. The upcoming Budget provides one such opportunity. Achhe Din are indeed within our grasp, it is up to the government to seize the initiative.
(Anand Jain, senior tax professional, EY India, contributed to the article)
The author is tax partner, EY India. Views are personal