Direct taxes: That’s a long wishlist for the Modi Govt to fulfill in Budget 2016

Amidst the lingering uncertainty in the world involving the slowdown of China’s massive economy, default by Greece in repayment of its debt to the International Monetary Fund (IMF) and a steep fall in global oil prices, India’s growth trajectory stays intact.

Against the backdrop of such a global volatile economy, the Union Budget 2016 is eagerly awaited with a host of expectations both in India and internationally. With the GDP growth projections on the rise and India being viewed as the next growth giant, the Finance Minister Arun Jaitley should focus on introducing reforms that can propel economic growth in India.

Tax, one of the key components of the economic policy needs to be proactively geared towards boosting our economic growth. While the Goods and Services Tax (GST) is still in the pipeline with industry keenly awaiting its enactment, there are several other factors that warrant a closer look.

Balancing it out

The announcement by the FM in the last Budget to reduce the corporate tax rate from 30% to 25% over the next four years was certainly good news. According to the Central Board of Direct Taxes (CBDT), such a reduction in tax rate will be balanced by discontinuance of various kinds of prevailing deductions and exemptions latest by 31 March 2017. Such phase out of deductions and exemptions may adversely impact various industries/sectors that have long gestation periods or have recently commenced their operations in anticipation of tax benefits.

Pushing it for Modi’s grand plans

Further, it will be worthwhile to watch how the proposed withdrawal of exemptions/deductions shall sync with government initiatives such as Make in India, Digital India, Smart Cities and Start-Up India, Stand-Up India. Given the current economic scenario and the thrust required to achieve the underlying goals behind the aforesaid initiatives, the phasing out of the exemptions/deductions should be effectively planned and applied in a selective manner over the span of a few years considering the sensitivity of various industries.

Minimum Alternate Tax (MAT), which was introduced to neutralise the impact of tax incentives, should also be reconsidered on such phase out of tax incentives. Abolition of MAT for Special Economic Zones (SEZ) developers has already been on the wish list for long.

Clarity in POEM

The Finance Act, 2015 included the concept of Place of Effective Management (POEM) to determine the residential status of companies. POEM is likely to have far reaching consequences on foreign companies as well as several other stakeholders. While the government has recently issued draft guiding principles for consideration and comments by the public, it is imperative that the final guidelines be carefully calibrated to help ensure that POEM is indeed an anti-avoidance rule and does not trap genuine transactions in its ambit. India is keen to adopt the Base Erosion and Profit Shifting (BEPS) guidelines along with its global players. These have to be implemented cautiously, especially the compliance requirements to determine that they do not add to the administrative burden.

Push Ease of Doing of Business

While the ‘Ease of Doing Business’ initiative is targeting policy-related bottlenecks, they may soon be replaced by infrastructure bottlenecks. Infrastructure development is critical for success of various policy initiatives and there is an increasing need for investment in the infrastructure sector through investment linked deductions/incentives.

There has been considerable ambiguity on the taxation of consortiums formed by non-residents to execute infrastructure contracts in India. Revenue Authorities are taxing such non-residents as Association of Persons (AOP) at the withholding tax/assessment procedure stage. Further, there are various tax complexities associated with assessments of AOP, including double taxation of non-residents in India as well as their country of residence. This causes hindrances to the industry and also results in pessimism with regards to the uncertain tax environment in India. A clarity on the tax treatment in this regard is indispensable for encouraging such non-resident contractors to undertake investment in India.

Reduce DDT

Currently, Dividend Distribution Tax (DDT) is being levied at the rate of 15% (effective rate of 20%) on the dividend distribution by domestic companies. Such an effective rate is much higher as compared to the tax deduction rate of 10% on dividend in many Indian and international tax treaties. This has significantly reduced the tax distribution capacity of such domestic companies and has adversely impacted non-resident shareholders due to ambiguity with respect to its credit in the overseas jurisdiction. Structural reforms may be expected in the DDT regime to allow availability of credit for such taxes under the Double Tax Avoidance Agreements (DTAA).

India is considered to have one of the most litigious tax regimes across the world. Though the government has been actively addressing this issue, a lot still needs to be done at the ground level to improve industry sentiment, especially in respect of international transactions.

The article has been authored by Ravi Shingari, partner, Tax at KPMG India. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.