Budget 2017 - Would the Budget redouble efforts to drive investments?
The Financial Express
Partner & National Tax Leader, EY India
Setting new trends - be it the end of colonial hangover of the budget announcement on last day of February or demonetisation - Budget 2017 incites anxiety and expectation. Continuing the momentum to achieve digitised economy, will the Government provide more incentives for cash less transaction and introduce cash transaction tax on cash withdrawals or will the budget offset demonetisation pain, is to be awaited.
Companies look forward for the implementation of the announcement of 2015 Union Budget on phased reduction of the corporate tax rates while the sunset of weighted deductions has been implemented.
Rapid movement in the year 2016 be it the gearing up for Ind-AS, ICDS and OECD – G20 BEPS, India is ready with the instruments, needs to set the tone with clarity and move forward.
Focusing on BEPS, the 2016 Union 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 qualify 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 of to achieve the objective of incentivising innovation.
Another significant step taken to tax digital economy transactions is the equalization levy. Equalization levy, not being a part of the India’s income tax law, the non- resident may not be able to get treaty protection and credit for this levy in the home country. Introducing creditability to the non-resident for the equalization levy may alleviate concerns of double taxation. Further, provisions should be introduced on the credit mechanism of equalisation levy if the non-resident is assessed by the Tax authorities as a Permanent Establishment.
Requirement of Country by Country reporting (CBCR) in line with the BEPS action plan w.e.f FY 2016-17, the maintenance of the information would require time and resources to compile. However, ambiguity prevails on the information to be maintained by the Companies and the threshold for maintenance of such information.
GAAR provisions would be effective from financial year 2017-18. Factoring 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 entered into by India with other countries which outweighs the intent and object behind introduction of anti-abuse provisions in DTAA. 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. Will GAAR be applicable to an arrangement which is covered under the BEPS Action?. Further, it would be important to distinguish between tax mitigation and tax avoidance to circumvent bringing genuine arrangements made for business considerations under the radar of GAAR.
With the Phase I implementation of IND-AS kick started in FY 2016-17, uncertainty prevails on the tax treatment, especially under the provisions of Minimum Alternate Tax (MAT) upon moving into fair value based accounting from the present historical cost accounting which has unlocked substantial value in the balance sheet of several companies. 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. 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 by Committee is against the well-established canon of taxation of real income. Also, additional income computation and disclosure standards would be required to clarify the tax treatment under normal provisions on the items recognised in the financial statements on account of IND-AS adoption 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 many other factors, removing the uncertainty in implementation of tax laws would help immensely in improving the position in the index. Transfer pricing has been an issue of never ending litigation in India due to approaches of the 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 methodologies / approaches 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. Also, the provisions of domestic transfer pricing may be done away with in cases where no tax arbitrage exists in transaction between two related parties to avoid compliance and litigation cost for genuine business transactions.
Would the upcoming budget redouble efforts to drive investments into India and set a tone to global standards along with providing succour to the common man?
(Views expressed are personal)