Budget 2016: international tax reforms — a positive sign or sigh!

Unveiling the Budget 2016–17, Mr. Arun Jaitley, the Finance Minister, stated that the Budget proposals were built on the agenda of “Transforming India” with “nine distinct pillars”, including tax reforms, promoting ease of doing business and ensuring fiscal discipline.


The Finance Minister affirmed that amid the global headwinds, the Indian economy has held its ground firmly. Undoubtedly, the international community, especially those looking at India as a preferred investment destination, will agree that India is surely moving toward attracting foreign investments.

In 2015, there were exceptional changes to the global tax landscape — Base Erosion and Profit Shifting (BEPS) discussion drafts turned into final recommendations, changing the cross-border tax landscape ever so significantly. Indian Revenues actively participated in the Organisation for Economic Co-operation and Development (“OECD”), BEPS project. Being the first Union Budget after release of the final reports by the OECD, BEPS, which has been the talk of the town, was likely to influence tax policy changes in the Budget.

Some of the proposals in the Budget were inspired by the BEPS reports, i.e., new Transfer Pricing (TP) documentation and Country by Country Reporting (CbCR), equalization levy and concessional taxation regime for income from patents, are an indication that India is seeking global integration and coordination on tax policy matters.

The introduction of new TP documentation and CbCR is a step toward aligning Indian TP guidelines with the BEPS Report on Action 13. CbCR represents a new era of looking at TP from both the taxpayer and tax authority perspective. For the first time, TP will become a 360 degree approach, distinguished from the current one-sided approach. This will require taxpayers to articulate consistent TP positions and provide tax administrations with useful information to assess TP risks, determine where audit resources can most effectively be deployed and, in the event audits are called for, provide information to commence and target audit enquiries.

Taking a cue from countries that have introduced the “patent or innovation box” regimes for reduced rates of tax to spur innovation and manufacturing, the Budget proposes a reduced tax rate of 10% on gross royalty income from exploitation of a patent developed and registered in India by an Indian resident. If designed and implemented properly, this will be a considerable incentive for intellectual property development in India.

The BEPS concerns arising from the digital economy had been a key area of focus for India. The Government, with a view to address concern on Digital Economy, has sought to introduce “equalisation levy” of 6% on revenues of non-resident online advertisers. It is pertinent to note that the BEPS report on Action 1, considered “equalisation levy” as an additional option to address broader tax challenges raised by the digital economy, and did not recommend this as an option at this stage. The Final Report provided that countries could introduce this in the domestic laws as an additional safeguard against BEPS, provided existing treaty obligations are respected. Hence, the proposal probably deserves more industry wide consultation.

The Government acknowledged that there is a need to accelerate the positive momentum and investment climate in the country. The new residency criteria for foreign companies introduced in the last Finance Act, i.e., Place of Effective Management (POEM) and the release of draft guidelines to determine the POEM raised a few unanswered questions in the industry. Indian companies with foreign subsidiaries have got a reprieve from the Government in the budget with the deferral of POEM by one year given that clarity is still awaited on rules and interpretation.

In his speech the Finance Minister re-affirmed that General Anti-Avoidance Rules (GAAR) will be implemented by 1 April 2017. The basic criticism against GAAR in India (though it provides certain checks through procedural steps on tax authorities for implementing GAAR) is that the provisions as drafted are very complex. The wide powers to re-characterise transactions and determine the tax consequences, will add to the uncertainty and costs in doing business in India, which is not in line with the intention of the Government.

The proposal to do away with the increased rate of withholding taxes for non-residents in the absence of PAN is a step in the right direction. Furthermore, the clarification on non-applicability of MAT retrospectively, on FIIs and FPIs not having a place of business in India, in line with the recommendations of the Committee headed by Justice A.P Shah has also attempted to end the controversy. The proposal to deny the right of filing an appeal by tax authorities against the DRP order is also a welcome step considering the Government’s intention to curb litigation.

Lately a few themes have become evident from the Finance Minister’s speech in the context of tax legislation and administration, which is indeed commendable. These are an attempt at simplification/rationalization, ease of doing business, promoting socio-economic growth, etc. One cannot take away the fact that the amendments proposed surely focus on the commitment of this Government to provide rationalization, stability and consistency in tax policies.

Overall, the amendments proposed indicate a positive policy direction that is likely to have a big impact on investor confidence, if implemented efficiently.

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