The government, to deliver on its promise of improving India’s ‘Ease of Doing Business’ ranking, has already taken initial steps towards establishing a non-adversarial and stable tax regime.
Some of the key initiatives taken by the government in the past 12 months relate to reducing disputes with taxpayers, providing clarifications by way of circulars (non-applicability of MAT to foreign companies in certain cases), accepting favourable tax rulings (non-taxability of capital contributions by companies such as Vodafone, Shell, etc), increasing thresholds for departmental appeals and so on.
The industry is looking at more such steps and believes that the Government will consider making announcements on the following key areas:
Roadmap for phaseout of deductions and corresponding reduction of tax rates:
The finance minister in his Union Budget speech, 2015, indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with the corresponding phasing out of exemptions and deductions. While the draft phasing out the plan of CBDT released in November 2015, provides for phasing out of weighted deductions and introduction of a sunset clause for exemptions (with effect from 1 April 2017), it does not specify how and to what extent the corresponding reduction in corporate tax rates will unfold. It is expected that Union Budget 2016 will specify how the corporate tax rate would be brought down from 30% to 25% over the period of the remaining three years i.e. from 2016 to 2019.
It is also expected that there will be a corresponding roadmap for the phase-out and eventual elimination of MAT, which was introduced in view of the grant of incentives.
Tax incentives for employment generation:
Currently, an additional deduction of 30% of the wages of new workmen is available for companies engaged in manufacturing activity. In order to make the incentive more effective and widen the base of the eligible companies, given the socio-economic impact of the incentive, the industry expects that benefit to be extended to the services sector as well. This is also necessary to increase jobs across various sectors of the economy.
Attribution of profits to permanent establishments:
Currently, the law on the matter of attribution of profits to the permanent establishments of foreign companies in India is ambiguous leading to uncertainty and prolonged litigation. With a view to simplify the tax laws and reduce tax disputes, the industry expects the finance minister to provide comprehensive guidelines covering common situations and a range of attribution percentages.
Benefit of investment allowance in new plant and machinery
The government has progressively provided an investment allowance to taxpayers for investment in new plant and machinery. However, interpretational issues of the law have increased the potential for tax disputes. For instance, where acquisition and installation of new machinery is in different financial years, there is ambiguity on how the allowance will be available. With ‘Make in India’ being the prime focus of the government, it is expected that the finance minister in the Union Budget will provide clarity on this such that the taxpayers will be able to claim the investment allowance in the true sense and spirit in which it was introduced.
Base erosion and profit shifting (BEPS) announcements:
The government is expected to introduce certain provisions in the Union Budget to align them with the OECD BEPS recommendations. Rules on country by country reporting (CbCR) and for limiting the interest deductions for corporates are most likely to find place in the Budget. While providing a cap on the interest payable by corporates has been a recommendation by the OECD, the government should carefully evaluate the impact on the industry before introducing these provisions. Given the focus of the Government on investment in the infrastructure sector and the capital intensive nature of such projects, introducing a limit on the interest allowability may actually prove detrimental in the long run.
Deferment of place of effective management (POEM) provisions
The government amended the test of residency for foreign companies in the Union Budget 2015. As per the amended provisions which were applicable from 1 April 2015, a foreign company shall be treated as a resident of India, if its POEM in a given year is in India. In December 2015, CBDT further issued draft guidelines for determination of POEM of foreign companies in India and invited public comments on the same. Given that the CBDT is still finalising the rules for determination of POEM for foreign companies, it is expected that the POEM provisions will be deferred by a year.
Simplification of the income-tax law
In October 2015, the government has set up a 10 member committee headed by Justice R V Easwer with the objective to simplify the provisions of the Income Tax Act. Some of the major recommendations of the committee that are expected to be brought in the Union Budget 2016 are:
No higher withholding tax rate for non-residents furnishing tax identification number of foreign jurisdictions instead of PAN; fresh claims to be permitted during assessment proceedings by filing revised return of income; deferment of income computation and disclosure standards; rationalising the withholding tax rates for residents by reducing it from 10% in most cases to 5%; inclusion of above recommendations are eagerly expected by the taxpayers in the Union Budget as it will significantly help in making tax compliance and collection more rational.
The Budget is expected to be growth oriented, wherein buoyancy of revenues will automatically result in higher collection by the Government. This should atleast partly help address the fiscal deficit and direct the economy in the right direction of sustainable growth.
The writer is a tax partner with EY India