Outlook for Direct Taxes – flash back 2015 and envision for 2016
The focus has been on increasing global participation in India through liberalisation of foreign direct investment (FDI) laws. It covered easing FDI sectorial caps and conditions in diverse sectors ranging from highly regulated sectors like defence, construction& development, civil aviation to single brand retailing, automatic route for FDI in Limited Liability Partnerships ( LLPs) and relaxation of rules for getting foreign debt into India. In wake of ease of doing business in India and for boosting confidence among investors, efforts have been made in simplifying entry process coupled with announcement of a slew of other measures / incentives in the Budget 2015. To name a few were reinstatement of 10% rate (from 25%) for taxation of royalty / FTS income for foreign companies, deferral of General Anti Avoidance Rules ( GAAR) till 1 April, 2017, laying the contours for taxation of indirect transfers with exemptions as well as eliminating minimum alternative taxes on certain categories of non-resident taxpayers.
In addition, high impetus has been designed for the manufacturing sector and start-ups in India. Noteworthy measures include the proposal of lowering the corporate tax rate in a phased manner to make India competitive in global market place, incentives for investment in States of Andhra Pradesh, Telangana, Bihar and West Bengal in the form of investment allowance and additional depreciation, abolition of Wealth tax to reduce compliance burden on tax administrators. Further, stringent measures have been taken for reducing tax evasion / avoidance by introduction of black money law for disclosure of undisclosed foreign assets by taxpayers and concept of Place of effective management (POEM) for redefining rules for determination of residency.
The announcements made in the Budget 2015 were supported and strengthened through a series of direct tax reforms / measures announced during the year, which spills over in new year as well. These include (a) Time to time clarifications / guidelines for simplifying the procedures and reducing timelines for tax administration and taxpayers such as expeditious disposal of rectification applications, timelines for processing of refunds, de minimis limit for filing appeals etc; (b) Draft rules for determination of POEM in India on which public comments have been invited; (c) implementation strategy for lowering of corporate tax rate by release of a road map for phasing out tax incentives under the Income tax Act; and (d) Set up of committee under justice RV Easwar for providing recommendations for reducing litigation and ensuring transparency in tax administration – the report in respect of the same is expected in 2016.
On the spin, though the Government of India has shown willingness to reform the tax system, rationalize taxes and make the regime simpler, predictable and certain, in some sense, the tax system still remains to be one of the bugbears to FDI, investors and other taxpayers. Overall the year ended with mixed views and feelings and the expectations set rolling over to 2016.
In the forthcoming budget 2016, usher of direct tax reforms are expected particularly due to the Action plans introduced under Base Erosion and Profit shifting regime (BEPS) by OECD in 2015. This is a global initiative and India being part of G20, has been actively participating in BEPS discussions. In light of India’s commitment to BEPS, this Budget is expected to bring some changes taking the same in perspective. The Action plans on Transfer pricing and its documentation, thin capitalisation rules, specific anti-avoidance provisions could be specifically considered. It would be imperative for the investors to be wary of these developments as it is likely to bring radical changes in India’s tax environment requiring review of existing business models in India. It would be interesting to witness the impact of BEPS and other measures on the Indian tax treaties, both existing as well as in the offing!
Other direct tax reforms expected include final rules on POEM, further rules for indirect transfer taxation, digitisation of processes and correspondence with income tax department, withdrawal of tax exemptions and defining sunset clause for profit / investment linked incentives under the Income tax Act, guidelines for early processing of refunds, guidance on transfer pricing litigation in respect of AMP expenses etc.
Even on the regulatory front, more liberalisations and relaxations could be expected specifically in FDI caps and External commercial borrowings (ECB) norms, as we move along the year 2016 on the path attracting foreign capital in the country. This year promises to be year which would change the way business being conducted in India by domestic as well as foreign companies. Let’s see how the fiscal budget for year 2016 unfolds.
