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Budget preview: India wants stable tax regime

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Taxpayers are often nervous in the lead-up to budgetary announcements, and recent Indian Finance Bills have done nothing to ease those nerves by including legislation to retroactively alter the tax law. With Thursday’s budget speech looming, taxpayers and their advisers are demanding that certainty and stability are the two focal points this time around.

“The industry is looking forward to an antidote to the confusion caused by the controversial amendments to India’s income tax legislation through Finance Act 2012 regarding retrospective taxation of transfer of underlying assets in India and the general anti-avoidance rules (GAAR),” said Amit Singhania, of Amarchand & Mangaldas.

In a January 14 press release, the Ministry of Finance communicated its acceptance of several of the recommendations of the Parthasarathi Shome-led Expert Committee tasked with reviewing GAAR proposals.

“Accordingly, Finance Act 2013 may give effect to these recommendations,” said Singhania. “However, the government’s take on the retrospective amendment made in relation to the transfer of underlying assets and the Vodafone dispute still remains unclear.”

Sanjay Sanghvi, of Khaitan & Co, agreed that this will be a focus area, saying the most prominent expectation from a corporate tax viewpoint is for a “clear roadmap on the taxability in India of an indirect transfer of Indian assets in offshore transactions, particularly in light of very pragmatic and positive recommendations from Dr Shome’s committee”.

While certainty regarding GAAR and Vodafone-style transactions are sure to be dominant themes, other provisions are expected, and Sanghvi believes the minimum alternate tax (MAT) rate may be reduced, alongside changes for power generating companies in the infrastructure space.

“Power generation companies are expecting an extension of the sunset clause for claiming tax holiday under Section 801A which currently provides that the tax holiday will be available to a power generating company only if it commences generation and distribution of power by March 31 2013,” said Sanghvi. “Given the importance of the power sector for the economy, it is quite likely the government will extend this timeline by one or two years.”

In terms of the likelihood of enactment, Sanghvi believes the above measures are “very likely to find a place in a Budget which will set the tone for the direction of the Indian economy from here on”.

In another effort to incentivise investment, Singhania believes the budget may also extend the tax incentives on long-term capital gains and interest income earned on foreign debt.

Government incentivising investment

The Indian government has changed its approach to foreign investment since the negative reaction to its retroactive amendment to the tax code following the Vodafone court loss, and last week a government release said it was considering amicable settlement with Vodafone regarding the long-running dispute.

“The government has taken some very positive and pragmatic steps to restore the confidence of the international investment community and Indian corporates and resident taxpayers,” said Sanghvi, who referenced the work of the expert committees as evidence that the government is committed to removing uncertainty and unpredictability in the tax laws and to provide a stable and robust tax regime.

However, Singhania is refusing to draw conclusions regarding the government’s stance until after Thursday’s budget.

“Though expert committees have been constituted to review the controversial amendments introduced by Finance Act 2012 and press statements seem to indicate the government is considering accepting their recommendations, no law has been passed in this direction. This budget will decide whether the government’s commitment to restoring certainty in India’s income tax law is sincere,” said Singhania.

In future, Singhania said, the government should avoid imposing tax liabilities retrospectively. Effective functioning of the Authority for Advance Rulings and implementation of advance pricing agreements are two avenues which could offer taxpayers significant certainty regarding their tax positions, he added.

Tax on super-rich

There are also rumours of individual tax changes, which could impact corporate taxation by making certain avoidance schemes relatively more attractive.

“It has been suggested that the government is debating the introduction of a super-rich tax and an inheritance tax. Such measures may incentivise round-tripping and tax avoidance structures,” said Singhania.

A tax on the super-rich could also affect companies’ ability to attract talented individuals to India, particularly considering the competitive individual rates offered elsewhere in the region.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) sent a questionnaire to 85 chief executive officers based on rumours of the super-rich tax, with 61% of respondents saying its introduction would be “ill-advised” and “act as a disincentive on wealth and value creation”.

“The industry expects the Finance Minister to give us a growth-oriented budget which promotes investment and revival of the economic sentiment. The so-called super rich tax will not yield much,” said Rajkumar Dhoot, ASSOCHAM president. “Besides, the best way to remove social and economic inequalities is to keep growing at 9-10% for a decade.”


International Tax review will be hosting a web seminar on the Indian Budget on Thursday February 28 at 2pm GMT (7.30pm India time).

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