Taxpayers are expecting the government to lower the corporate tax rates as well as individual tax rates, which will also foster increased compliance at all levels
The emphasis of the National Democratic Alliance (NDA) government has always been on economic growth and inclusive development. Towards this, key business initiatives undertaken include Make in India, digitization of economy, ease of doing business, curbing black money and reducing tax litigation.
The NDA government had committed itself to lower the corporate tax rates in a phase-wise manner but do away with multiple tax incentives. The government also announced various schemes to declare black money and reduce tax litigation. To encourage Make in India and digitization, lower corporate tax rates have been made available to new manufacturing units and new start-ups. A patent box regime has been introduced to boost local research and development. Tax incentives have been provided for employment generation.
In a significant step to ease tax compliance, constructive guidelines have been issued for selection of cases for transfer pricing audits, resulting in a significant drop in the number of cases being selected every year for transfer pricing scrutiny. The Central Board of Direct Taxes also came out with a circular for staying tax demand raised in assessment by depositing 15% or a lower portion of the demand raised while preferring the first appeal. On transfer pricing, it would be apt if the tax department can consider moving towards multi-year audits from the current single-year audits, and the frequency of audits determined by risk assessment and compliance behaviour of the taxpayers and the availability of resources for audit.
In the context of international taxation, the requirement of mandatory quoting of Permanent Account Number by non-residents for availing of tax treaty rate at the withholding tax stage has been substituted by submission of basic details such as Tax Residency Certificate and other documents. To curb treaty shopping, tax treaties with Mauritius, Singapore and Cyprus have been renegotiated. They all provide for grandfathering of investments made till 31 March 2017. For investments made thereafter, the protocols with respect to tax treaties with Mauritius and Singapore provide further benefits and only 50% of capital gains tax will apply for investment made in the next two fiscal years starting 1 April 2017. A Limitation of Benefit clause has also been introduced in the tax treaty with Mauritius, which is in line with the tax treaty with Singapore. India is set to operationalize General Anti-Avoidance Rules from 1 April 2017 and they can override tax treaties totally or partially to fight tax avoidance and tax evasion.
The government has been successful in resolving transfer pricing related disputes in many ways. By now, it has signed approximately 120 bilateral as well unilateral advance pricing agreements (APAs). The government has resolved more than 100 cases under the Mutual Agreement Procedure (MAP) with the US, one of India’s major trade and investment partners. Further, the first ever bilateral APA involving India and the US has also been agreed upon. This resolution of several MAP cases and bilateral APAs not only create a conducive atmosphere but also demonstrate the government’s efforts towards dispute resolution.
In line with global best practices, the Authority for Advance Rulings (AAR) was established in India with the stated objectives of providing time-bound advance rulings in the cases of non-residents so that they could obtain certainty with respect to their income-tax liability in India, avoid protracted disputes with the tax department and be able to plan their affairs upfront. The benefit of obtaining advance rulings has also been extended to Indian resident taxpayers as well (beyond a certain threshold). In light of the increased current and envisaged caseload, it would be apt if the government can set up additional benches of AAR.
The government is also actively implementing the Organisation for Economic Co-operation and Development’s (OECD’s) BEPS (base erosion and profit shifting) action plans by introducing various measures. India is one of the first to tax digital economy through introduction of equalization levy. On transfer pricing front, a country-by-country reporting mechanism has been introduced.
The multilateral instrument (MLI) of BEPS Action 15 is a key part of OECD’s effort towards implementation of the recommended measures. The instrument will implement tax treaty related BEPS measures into existing bilateral or regional tax treaties. It would be interesting to wait and watch the Indian government’s approach and way forward on adopting MLI.
The goods and services tax (GST) is considered to be the biggest tax reform in India’s indirect tax structure since the economy began to be opened up 25 years ago and is expected to be implemented in the first half of 2017. GST will not only change the entire indirect tax landscape but could also help in boosting economic growth in the long run and reduction in tax leakages. A robust IT infrastructure is required to be in place in order to implement the law successfully.
With the end of demonetisation, declared increase in tax collections and increase in taxpayers’ base on the anvil, the taxpayers are expecting the government to lower the corporate tax rates as well as individual tax rates, which will also foster increased compliance at all levels.
The above developments clearly show that the ever-changing Indian tax landscape witnessed unprecedented changes in recent times and further significant changes are on the anvil in 2017 and onwards. These continuing changes will help India regain any lost ground and place it back on the path to prosperity.
Girish Vanvari is partner and head of tax at KPMG in India.
The views expressed are personal.
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