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The proposed ‘Border Adjustment Tax’— which is at the drawing board stage in the US — may have “devastating” implications for India, especially its IT sector, a top visiting KPMG official has said.
“Making Border Tax non-deductible for tax purposes will raise prices by 20 per cent. This tax is intended to apply for goods, services, and even payments on intangibles”, Rodney J Lawrence, Global Head of International Tax, KPMG, told BusinessLine .
The big feature of the proposed Border Adjustment Tax – which is being seen by the US as a sort of VAT-like tax on imports – is that anything an American business pays to foreigners is going to be non-deductible. Equally, if an American business exports, the income from it is non-taxable.
“This is being called tax reform (in the US). But actually, it is really trade policy reform. Because what it seeks to do is actually incentivise people to locate jobs and manufacturing in the US and decrease reliance on imports,” Lawrence, who is based in Chicago, said.
So, if India provides, (say) $100 billion of services to multinationals in the US, the proposed border tax will make it non-deductible and increase the cost of those services by 20 per cent. Now, the question is who is going to bear that additional cost of $20 billion, Lawrence said. He also referred to media reports about Trump administration’s tax reforms likely to be rolled out in the next two weeks.
Many in India still believe that this border adjustability would apply only to goods. The reality, however, is that it would apply to all payments.
“For Indian multinationals, the big thing is border adjustment because of your IT sector. Yes, of course, there are benefits that tax rate will come down to 20 per cent,” he said.
In theory, the border tax on imports will make them more expensive for US consumers. Policy makers are betting that this would then be offset by stronger dollar. There is a view that a 20 per cent tax on imports will help the dollar appreciate by 15-25 per cent.
“That’s a big bet (that the US dollar will appreciate) to make. This is how the political calculations are going in the US,” Lawrence said.
He also said that the lobbyists in Washington DC think this (border adjustment tax) law will get passed 95 per cent. “Our firm’s view is that it will be 50-50 as this is quite political”, he added.
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