India’s budget, released February 28, introduces several tax changes of interest to business, including a deferral of planned general antiavoidance rules (GAAR), clarification of rules on indirect transfers of Indian assets, and the introduction of proposals to cut the corporate tax rate and widen the corporate tax base.
In a move welcomed by business, the budget defers GAAR for two years and makes it applicable prospectively only to investments made on or after April 1, 2017.
The government said that GAAR would be implemented as a part of a “comprehensive regime” to deal with base erosion and profit shifting and aggressive tax avoidance following the release of OECD outputs in this area.
“If I bring in GAAR right now, with or without amendment, it will create panic in the market. This is not the stage where I can afford allowing investment to run away or investment not to come,” Finance Minister Arun Jaitley said during a question and answer session on the budget. He acknowledged that India needs to reestablish its credibility on taxation because “we have a fairly bad track record as a fairly adversarial taxation nation.”
Jaitley said that there is merit to the introduction of GAAR in India. There has been a global shift making tax avoidance no longer acceptable, he said.
Indirect transfer of Indian assets
The budget also clarifies provisions added by the Finance Act 2013 that impose a Vodafone-style tax on indirect transfers of Indian assets. Under the proposal, a transferred share or interest is deemed to derive its value “substantially” from assets located in India and is thus subject to Indian tax if the value of the Indian assets represents at least 50 percent of the fair market value of all the assets owned by the company or entity.
The proposal exempts transferors that hold less than five percent of the entity that holds the Indian assets, indirect transfers where the value of Indian assets does not exceed Rs 10 crore, and gains from share transfers associated with a foreign company mergers or demergers.
The budget also requires Indian entities to furnish information relating to offshore transactions having the effect of directly or indirectly modifying the ownership structure or control of the entity, or suffer a penalty.
The budget also promises that concerns regarding applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders will be addressed by the Central Board of Direct Taxes in a circular “which would eliminate the scope for discretionary exercise of power and provide a hassle free structure to the taxpayers.”
Lower corporate rates, increased base
The budget proposes to reduce corporate tax rates to 25 percent, phased-in over 4 years, coupled with reductions in exemptions and incentives for corporate taxpayers. The changes will not take place until the next financial year to give taxpayers time to adjust, Jaitley said.
During his budget speech, Jaitley explained that India’s headline corporate tax rate, currently set at 30 percent, is unattractively high as compared other Asian nations. At the same time, he said, tax is collected in India at only a 23 percent rate because of excessive deductions. So, under the current system “we lose out on both counts,” he said. Cutting out exemptions will also cut down on pressure from interest groups, reduce litigation, and reduce “avoidable discretion,” he explained.
GST, Direct Taxes Code
Jaitley reiterated previous government promises to roll out a GST to replace several local and central taxes. He set the implementation date of the GST as April 1, 2016. As a part of the transition, the budget increases the service tax rate from 12.36 percent to 14 percent.
He also said that it is time to scrap the Direct Taxes Code, as most provisions have been included in the Income-Tax Act.
Minimum alternative tax, PEs for fund managers
The budget provides welcome clarification that the MAT does not apply to foreign institutional investor capital gains from securities transactions. Also welcome is a provision that allows fund managers of offshore funds to operate in India without creating a permanent establishment.
Pass-through treatment is provided for Category-I and Category-II Alternative Investment Funds. Clarification is provided for real estate investment trust (REITs) and infrastructure investments trusts (InvITs) regimes.
Transfer pricing, Foreign technology transfers
Those hoping for the introduction of sweeping changes to India’s transfer pricing regime to reduce litigation were sorely disappointed. The budget’s only transfer pricing initiative was to increase the threshold of the applicability of the transfer pricing regulations for domestic transactions from Rs 5 crore to Rs 20 crore.
The budget also proposes to amend the provisions of section 115A of the Income-tax Act so as to reduce the rate of tax on royalty and fees for technical services from 25 percent to 10 percent. Jaitley said the move would support young entreprneurs that need the latest technology for their businesess.
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