India is moving at a rapid pace on the path of economic growth and Indian tax landscape has witnessed multifarious changes in the recent past. Indian Government has been steadily working toward widening the tax base, addressing the menace of the parallel economy, improving the ease of doing business and strengthening the anti-abuse provisions. Past year was marked by some major reforms for multinationals viz. “One nation One Tax” – Goods and Services Tax (‘GST’), adoption of new laws incorporating the OECD/G20 base erosion profit shifting (BEPS) plan agenda, issuance of a series of circulars on controversial topics such as the general anti-avoidance rule (GAAR) & definition of Indian tax residence and widening the scope of Business Connection. Globally, the tax rates are already moving lower toward 20%. In this direction, this year’s Budget proposal to reduce the corporate tax rate to 25% for companies with turnover less than INR 250 crore will provide considerable relief for a large number of companies and enable them to make new investments.
India’s new Indirect tax law – GST
GST, which has replaced the erstwhile indirect tax structure of India, is more of a business reform than a mere tax reform. As expected, policy change of such scale, scope and complexity, encountered challenges of policy, law and information technology systems. The Government expeditiously responded to rationalize and reduce rates and simplify compliance burdens, signifying the spirit of co-operative federalism.
Litigation by exception
Given the long litigation process in India, tax certainty is high on the agenda of foreign MNCs setting up operations in India. In the spirit of making India’s tax environment non-adversarial and in order to minimize litigation government has started the movement to bring in efficiency and speed in the disposal of matters under litigation. Indian litigation landscape has completely overhauled in the recent past.
The government is working towards a ‘litigation-by- exception’ tax regime, and has taken some landmark steps towards reducing tax litigation. Two specific examples of this approach are the introduction of Limited Scrutiny Assessment (Revenue Audit) and a substantial modification in the criteria for the initiation of transfer pricing assessment. As the name suggests, under a Limited Scrutiny Assessment, the scope of the Tax Authorities’ enquiry is limited to the ‘reason for selection’ of scrutiny and does not involve calling for extremely detailed information and making fishing enquiries about different items in the financial statements. Similarly, the criteria for initiating a transfer pricing assessment were revised with a specific focus on a risk based approach as against a blanket monetary threshold approach. Under the revised criteria, only those cases which have apparent transfer pricing risks identified by a computer system or where transfer pricing adjustments of more than INR 100 million have been made in the past, will be selected for a transfer pricing scrutiny in isolation.
Another encouraging trend is a substantial reduction in the number of cases being selected for scrutiny. The tax departments have also made suitable changes to the monetary limits below which appeals shall not be filed by the tax authorities. Further, the government has now proposed to reduce the time limit for completing scrutiny assessments to 12 months in a phased manner. This approach has not only reduced the taxpayers’ burden particularly for those who are involved in assessment proceedings all the year round, thus entailing substantial time and costs, but this approach has also allowed the tax officials to conduct a more qualitative scrutiny of items of greater impact.
Changing International Tax Landscape
In the last few years, media reports revealed that the effective tax rates of some MNCs are lower than 1% of their revenues. These reports sparked-off public protests and led to a surge of anger within the taxpayer community, who compared their own effective tax rates with those paid by the supposedly highly-profitable MNCs. It also made the common man wonder how this was achieved. The answer to this question was the sophisticated tax planning practices of MNCs, of reducing their tax base by shifting profits to other countries especially tax havens i.e. Base Erosion and Profit Shifting (BEPS). This was being done within the existing legal framework by taking advantage of loopholes / gaps / mismatches in the tax rules of different countries. Since the BEPS Project aims to link tax with value creation, developing countries stand to gain from it. India has been one of the front-runners in the BEPS initiative.
Indian tax authorities’ position on certain tax matters, for which they were criticised in the past (for being narrow-minded and revenue- focused), now find place under the BEPS Action Plans.
India has already introduced certain provisions in its domestic tax law to deal with concerns highlighted under the BEPS Action Plan. The imposition of Equalisation Levy, Country-by- Country reporting and Master File requirements under the transfer pricing provisions have their origins in the BEPS Project. The 2018 Budget also continued with the Government’s focus on implementing anti-BEPS measures in India. The Budget has proposed a new nexus test by way of “significant economic presence” for taxing the digital economy. The proposed amendment seeks to cover factors based on “interaction with a specified number of users” and “systematic and continuous soliciting” of a non- resident’s business activities. With regard to the user factor based on “interaction with specified number of users”, more detailed metrics would need to be developed in consultation with businesses for the purpose of using this factor, such as how to identify a unique “user” or what level of engagement is required for a user to be considered.
Green Governance leading to tax simplification
There has been an increased use of technology by the tax authorities and taxpayers alike. Technology will have significant impact on the Indian tax environment and how Indian taxpayers can use it to simplify their tax procedures. Filing of tax returns, receiving queries from tax authorities and submitting responses have now moved towards the electronic mode of communication. The use of technology will further increase in the years to come, making almost the entire interaction through the electronic means. For instance, queries raised by the Tax Authorities and the submissions made during a scrutiny assessment (revenue audit) proceedings may soon be carried out online.
In a departure from the age-old procedure of face to face tax assessment, Central Board of Direct Taxes has notified the ‘Centralized Communication Scheme, 2018’, for centralized issuance of notices, under which all notices requiring an assessee to furnish any information or document shall be issued by the Centralized Communication Centre (CCC), under a digital signature, by sending an e-mail or by placing a copy in the registered account on the portal followed by an intimation via SMS. For the purpose of furnishing information/documents in response to the notices, the CCC may prescribe a machine readable structured format and the taxpayers shall not be required to appear personally before the designated authority at the CCC in connection with the proceedings. Besides saving the precious time of the assesses, this anytime/anywhere facility will help the assessee to submit response to the departmental queries easily and retain important submissions. Also, the elimination of person to person contact will lead to greater efficiency and transparency in the Indian.
Taxation System. In fact, this simple way of paperless communication will also prove to be environment friendly. Such initiatives taken by Indian Government conveys the message loud and clear that India is all in for improving its tax administration, making the tax system as simple as possible and at the same time becoming tech-savvy. It’s never too late to be tech-savvy in the age of green governance.
Furthermore, data-linkages between different arms of the government and the institutions in the financial system are enabling the Tax Authorities to capture better information about a taxpayer. In the times to come, we expect seamless assimilation of different aspects of taxpayer information such as bank accounts, incomes, expenses and investments through the key field of Permanent Account Number (PAN) and Aadhaar. This will result in particulars of a transaction and tax event becoming readily available to the Tax Authorities. Data-linkages are expected to increase the tax compliance base, identify defaulters and make enquiries more specific and ‘to-the- point’.
In addition to creating a transparent and stimulating tax environment for MNCs, Indian Government has also stepped up its spending on the infrastructure, rural and agriculture sectors and on achieving inclusive growth. India’s growth is already witnessing a strong recovery. The selected thrust sectors such as infrastructure, construction, agriculture and health are known to have large multiplier effects, which would support the ongoing recovery.