India plans to keep its tax rates low and competitive after introducing a raft of tax changes for multinational enterprises (MNEs) over the past few years. However, a number of amendments announced in the 2020 budget statement left taxpayers confused about the long-term plans of the Modi government.
Hitesh D Gajaria, partner and head of tax at KPMG India, questioned Kamlesh Varshney, India’s joint secretary (TPL) at the finance ministry, about the government’s long-term fiscal policy and the equalisation levy during ITR’s India Tax Forum.
Hitesh Gajaria: Since September, we have seen the sharp reduction in corporate tax rates and now individual taxes, but they are optional regimes. Do you think the future involves cutting down exemptions, incentives, deductions, but on an optional basis with a gradual phase out? Will the incentives needed for India to enter the $5 trillion club continue?
Kamlesh Varshney: This is what I covered initially. The direction is very clear and that we need to remove exemptions and move towards a lower tax regime.
For corporate taxation, there has been grandfathering after 2015 as we have been removing sector-based, area-based and profit-based exemptions. Therefore, somebody who has already made an investment still has between seven to 15 years available to use those exemptions and deductions.
So, when, in 2019, we decided to the reduce corporate tax rate, it was very important that we provided an option. It was not possible to say ‘sorry, you have already made the investment, and you were eligible to get a particular exemption for those 10 or 15 years, but you can't get them now’. That probably would not have been a good signal to investors.
Therefore, the government correctly decided to give an option that if you want to continue availing those exemptions and deductions, you continue to pay tax at the existing rate. But, as we go along, these exemptions and deductions will automatically be phased out because they have already been grandfathered.
However, some exemptions will continue to exist. If you have noticed for employment generation, [an incentive] has been allowed even for companies that are going for 15% or 22% taxation. So, that probably will remain. Therefore, it is not right to say that all exemptions and deductions will go away – there will always be some exemptions/deductions, which are essential.
Now, what is essential is examining whether a particular exemption deduction has really served its purpose. The 2015 report identified which deductions have not really worked.
Now, let us take the example of R&D. Our experience has been that in spite of our R&D deductions for so many years, it is not really achieving the purpose.
How many patents have we developed in India, which India owns? Are we a great R&D destination where we own and carry out the research? So, instead, can we directly create a research platform, which is funded by the government from its budget allocation instead of providing a tax incentive? So, these are the possible policy options, which the government may consider more useful.
Now, if providing an exemption/deduction to income tax is less useful than directly funding those research platforms, then probably such exemptions will not continue. So, that is how we plan which one is essential and which is not.
HG: If we are going to move to this simple rate with very few exemptions, is there really a need to continue with the minimum alternate tax? The history was that people were paying dividends, but not paying any corporate tax, taking advantage of huge incentives and deductions, but now with the incentives themselves going away, is there really a rationale for continuing with MAT?
KV: Yes, and absolutely no rationale and that is why in the new concessional corporate tax regime there is no MAT. The MAT only applies if you take an exemption or deduction. So, once you stop taking an exemption/deduction, the MAT will automatically go away.
HG: One individual tax matter that keeps coming up in every budget is this whole issue of inheritance tax or estate duty. India today, perhaps, is that heaven where people can come and die in peace, and that the government will not take away a part of their estate. Any thoughts on that?
KV: So far, there is no consideration for inheritance tax. I won't say die in peace, but live in peace.
HG: On the taxation of the digital economy, if those companies who the government was trying to tax through the equalisation levy have managed to pass some of the burden to the consumer, then it is the Indian consumer and the Indian diaspora that has actually really suffered, is it not?
KV: I think my personal view is that the tax should be taxed on the actual MNE, who is providing those services. All parts of the digital taxation incident should be on the foreign player, because if the incidence is passed on to the Indian player, then it doesn't really serve the purpose.
We already have indirect tax for taxes on our Indian consumers who pay indirect taxes. So, if we are trying to impose direct taxes on digital taxation, it should be on the MNEs and therefore any solution that we work out must ensure that the incidence of taxation is on the MNEs.
HG: On transfer pricing, can the safe harbour provisions be made more rational because, frankly, the experience of practitioners at least has been that very rarely have people actually embraced the safe harbour rules.
One of the reasons perhaps for renewals of an advance pricing agreement (APA), is people are very apprehensive of what happens at the ground level. So can you throw some light on whether the government is rethinking something around the safe harbour rules?
KV: Yes, we have a safe harbour committee and hope it will submit its report before March 31, so we are able to notify the next round of numbers for safe harbour.
The Indian government also wants less burden on APAs and so that some of the APA burden is shifted to safe harbour. One more things we are trying to do, although I don't know what the committee will recommend, is to have profit attribution in the safe harbour in this round.
We can potentially start with at least some kind of profit attribution in a particular sector because we do believe that, through safe harbour, some of the profit attribution issues must be taken care of. If not in this round, maybe in the next round.
I have been working in the field and foreign MNEs have been approaching me. They really have a concern about secondment issues where the decision has gone in the revenue departments favour in Morgan Stanley, but the issue is how much we need to attribute.
So, if there could be some kind of a clarity that if there is a secondment, then how much needs to be attributed, then probably that will help a bit. But, I don't know whether it is going to happen in this round or the next round, but these are the things which are going on.
Kamlesh Varshney also spoke about the impact of the BEPS project on Indian tax revenues, , dispute resolution, the vivad se vishwas scheme, tax treaty benefits, the Multilateral Instrument and the problems and concerns raised about the Authority for Advance Rulings and faceless assessments.
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