There were big expectations for Budget 2016, with hopes that Jaitley would deliver solid actions to support his business-friendly message. It has proved to be an important budget for tax in India, with more than 100 amendments made to the Income Tax Act in the finance bill.
“On the tax front, the Budget furthers the tax reforms agenda of the Government with steps to reduce litigation and compliance, and promises a taxpayer-friendly environment,” said Maulik Doshi, partner at SKP.
The focus of these changes was on dealing with the number of disputes and increasing transparency, but left hopes for the Indian taxpayer in other areas unanswered.
Two big areas that the Finance Minister failed to address are the plan for the overall reduction of the corporate tax rate to 25% and plans for indirect tax reform (GST introduction), which was considered to be at the forefront of the government’s tax reform plan.
“There is disappointment in the Finance Minister for not reducing the overall corporate tax rate for all corporates, but restricting it to small corporates whose turnover is less than Rs 50 million ($731,000), which he had promised in the last Budget,” said Doshi.
It wasn’t all frustration, however. Jaitley did implement plans that deal with transfer pricing issues in India, directly addressing the growing backlog of disputes and clarifying how India will approach the implementation of BEPS.
Retrospective disputes
Tax disputes have been a growing burden on the Indian justice system, despite improvements in the advance pricing agreement (APA) process and mutual agreement procedure (MAP). The Government’s announcement in the Budget that it will not pursue retrospective tax amendments is an important step to dealing with this backlog.
“I had in my Budget speech of July, 2014 assured that this Government would not retrospectively create a fresh tax liability,” said Jaitley in his Budget speech. “I had also hoped then that the cases pending in various courts and other legal fora relating to certain retrospective amendments undertaken to the Income-tax Act, 1961, through the Finance Act, 2012 will soon reach their logical conclusion. I would like to reiterate that we are committed to provide a stable and predictable taxation regime. We will not resort to such amendments in future.”
To deal with this problem, Jaitley has introduced two measures to persuade taxpayers to reduce or withdraw disputes. These are the income declaration scheme 2016 and the direct tax dispute resolution scheme.
The income declaration scheme effectively will work as an amnesty scheme where taxpayers can voluntarily disclose past transgressions and pay 45% of the balance owed (including interest and penalties).
The direct tax and dispute resolution scheme will consist of a dispute resolution panel headed by the revenue secretary, Hasmukh Adhia. Taxpayers will be able to withdraw cases and settle the liability by paying the tax arrears but waiving the penalty.
This move will directly target areas which have created prolonged disputes, as has happened in cases such as Vodafone and Cairn India. However, even in those big cases, the new dispute panels may already be redundant.
“Considering that there is a favourable decision of the Supreme Court in the case of Vodafone, there is less of a likelihood that any penalty may be ultimately leviable by the tax office. Thus, the real quantum in the dispute is the amount of withholding tax and interest thereon,” said Vinita Chakrabarti, partner at BSR Affiliates.
“Considering the fact that the amount of withholding tax involved itself is significant, there seems to be doubt as to whether any of these taxpayers would opt to pay the withholding tax amount, to save on interest and resolve the dispute. It is likely that they may continue matter through the process of international arbitration,” she added.
Country-by-country reporting (CbCR)
While aiming to reduce disputes, the Budget also pushes for greater transparency by implementing CbCR. There is an irony in doing these at the same time as taxpayers worldwide are concerned this new reporting standard will lead to more disputes.
The Government appears to be implementing BEPS Action 13 in full, with requirements that companies exceeding $815 million must file CbC reports alongside a master file and a local file.
“It’s a welcome move that the government has not tinkered with the thresholds provided by the OECD. Retaining these thresholds implies only a handful of corporates will be affected by it,” said Doshi.
Full details are yet to be released but taxpayers will be expected to file reports from 2017, a year behind much of the international community.
Patent box
Along with CbCR, the Government has announced that it will introduce a patent box regime, another BEPS-inspired move.
This will be taxed at 10% and should encourage more R&D in the country, and set the country up to compete with the likes of the UK and Ireland, who have established patent box regimes, for international investment in the area.
“Granting of tax benefits in respect of income arising on account of exploitation of patents developed and registered in India is welcome move,” said Chakrabarti. “There is lot of research and development work which is already being carried out in India, however, since there is no tax benefits granted for exploitation of such intellectual property (IP), there was no or little incentive for registering the IPs in India.”
More to follow…
