Tax reforms in the absence of DTC

With the Indian economy growing rapidly, the country’s tax policies and procedures cannot remain arrested in a time-wrap.

Bearing this in mind, the NDA government has taken several steps to overhaul the tax regime in the past few years.

Reforms in direct taxes

Even though the Direct Taxes Code (DTC) — originally introduced in 2009 for the purpose of simplifying taxation laws — has not yet been implemented, some of the changes envisaged have been introduced to the Income Tax Act over these years.

The most talked about General Anti-Avoidance Rules (GAAR) was introduced in 2016 to deal with tax evaders.

Thereafter, in order to curb the practice followed by various companies of evading taxes in India by ensuring that they are not Indian residents, a rule for determining the residential status of companies – Place of Effective Management (POEM) — was put in place. With effect from April 2017, a foreign company is taxed on its worldwide income if its POEM is in India. POEM refers to the place where the key management and commercial decisions are, in substance, made.

Keeping up the promise of reducing the corporate tax rate to help Indian companies remain globally competitive, corporate tax rate was reduced to 25 per cent.

Besides, the tax payable by individuals and HUFs (Hindu Undivided Families) have been substantially reduced since 2014, and the tax rate applicable to an individual is even better than that proposed in the DTC.

Minimum Alternate Tax (MAT) — which ensures that companies which claim tax exemption do pay their due share of taxes — has been gradually increased to 20 per cent (by way of grossing up).

Advance Pricing Arrangement (APA) is successfully in place for the determination of the transfer price for those transactions over a fixed period of time, paving way for reduced litigation in Transfer Pricing.

Though DTC had proposed widening the ambit of wealth tax, to the relief of taxpayers, it has be abolished.

However, the disclosure requirement in the ITR forms has ensured that the tax authorities have the requisite details of the wealth of the taxpayer.

These moves apart, removal of cumbersome processes, rationalisation of tax rates, digitisation and promotion of cashless economy have been priorities over the past years.

The concepts of e-assessments, presumptive taxation for professionals and simplification of tax returns are also among the slew of measures taken to bring efficiency into the system.

The Centre has often expressed concern over tax evasion and avoidance. GAAR provisions were introduced to include the specified transactions entered into by a taxpayer as an impermissible avoidance arrangement, consequently requiring action by tax authorities (including denial of tax benefits or a benefit under a tax treaty).

Concerns remain

GAAR is a major reform, but certain questions remain as to whether the litigation in India may worsen with GAAR and whether ground staff is well-equipped to use the tool.

Secondly, despite a series of guidelines issued on the determination of POEM, certain ambiguities still exist. Questions remain as to whether every scrutiny that starts with the Permanent Establishment (PE) determination of a foreign entity in India would end up in constituting its POEM in India, thereby enlarging the taxing ambit to worldwide taxation.

The Controlled Foreign Company (CFC) regime was introduced in DTC, but has not yet been introduced in the Income Tax Act. The CFC regime aims at taxing profits which are parked in foreign companies in low- or no-tax jurisdictions, at the parent company’s home jurisdiction.

Implementation of CFC rules and withdrawal of POEM may help the government achieve its objective of earning tax revenues from profits earned by Indian companies outside India.

The Centre has set in motion the process of revamping the Income Tax Act. But only time will tell whether the Centre would bring in the reforms just before the elections.

The writers are Managing Partner and Executive Director, respectively, at Nangia Advisors.