It has been more than six months since the Narendra Modi Government presented its maiden budget. Budget 2015 will be its first full-fledged budget and is awaited with more hope than any in recent times. In the current globalized world, investments drives economic development and the Prime Minister has hit the bull’s eye by launching the “Make in India” campaign.
“Make in India”, one of the new major national programs, is designed to augment investment, foster innovation and build a best-in-class manufacturing infrastructure in India. The country is being watched closely by the world in recent times and with a major change in the Government, attempts at fostering bi-lateral trade and business relations with the largest democracies of the world. It is no surprise then that the upcoming Budget 2015 has already caught the attention of Global businesses keen to evidence intent and action.
Recently, the Government has taken policy measures to attract foreign investors, such as allowing 100% FDI in certain sectors. However, the creation of policies is not an end in itself; effective implementation of these policies is as important an aspect to enhance foreign investors’ confidence to invest in India. Effective facilitation of these measures with joint forums involving businesses and supporting de-bottlenecking of approvals and processes will be the key.
It is expected that the Budget 2015 will address key challenges pertaining to tax policies faced by investors. A major concern regarding tax policies, which needs to be addressed, is the retrospective amendments introduced to override the Supreme Court’s ruling in the Vodafone case. Such retrospective amendments, which were introduced to rebut the interpretation of courts in India, have adversely affected the confidence of foreign businesses in the fairness of Indian Tax System. Re-instilling this lost faith in the Indian economy is the need of the hour.
The upcoming budget is expected to address core cross border issues such as taxation of indirect transfer of shares, among various other issues. While taxation of such indirect transfers was introduced with the intent to tax structures that were framed to avoid taxes in India, the flipside is that even genuine offshore transactions could get taxed. Though, CBDT has taken measures and constituted a Committee to look into matters relating to “indirect transfers”, such measures are only for transactions that have occurred prior to 1 April 2012. It is with a sense of urgency, hopefully, that the upcoming Budget will lay down policies/guidelines for the effective working of such committees and measures for transactions undertaken after such cut-off date.
To add to above deterrents, the existing tax rate on royalty payments made to non-residents is a hindrance for utilization of foreign technological capabilities. Vide the Finance Act, 2013 this was increased to 25% from 10%. Considering the “Make in India” campaign and its objective to enhance skill development in the country, it is in the best interest of the general public to reduce the withholding tax rate on royalty from the existing high rate. This will encourage foreign businesses to utilize advanced technologies in their development activities in India.
In the recent past, transfer pricing (TP) has been an area of utmost focus; prone to endless litigation by tax authorities. With a view to reduce this litigation, the Advance Pricing Agreement (APA) mechanism has been introduced in India. The Finance Minister, in his last Budget, proposed to strengthen the administrative set-up for quick disposal of pending APAs. This is a welcome step and proper implementation of procedures will go a long way to enhance the benefits of the Indian APA program. The reduction in transfer pricing litigations will further encourage investments in India.
Another dispute resolving mechanism system, which is tailor-made for non-resident tax payers, is the Authority for Advance Rulings (AAR) in as much as it helps to obtain certainty of tax treatment before entering a transaction. As effective as a remedy it might prove to be, the credibility of the AAR is marred by administrative flaws. The inordinate delay in appointment of its members has stalled the effective functioning of the AAR and lead to delays on pronouncing decisions. To address these issues, it is inevitable to expand the AAR benches and strengthen its administrative set up.
Another example where a gap exists between thoughts and expectations are the General Anti-Avoidance Rules (GAAR), which is set to take effect soon. The language of the conditions that trigger GAAR is very widely worded and subjective making it amenable to differing interpretations even among Revenue Authorities. This could result in significant uncertainty on whether offshore India investment structures set up by foreign investors could be seen as investment hub and granted treaty benefits or not. Foreign investors may not be willing to subject themselves to the risk posed by GAAR.
In light of the efforts taken by the Government of India to make the country a global economic hub in the form of “Make in India” campaign etc., it would be a significant step in favour of this objective to draft a Budget that will not only bring reforms in the implementation mechanism of existing policies but also introduce policies that will facilitate smooth flow of investments into the country. These are hopes and expectations from Budget 2015.