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The Indian tax landscape: changing for the better

​By Suraj Nangia, Partner, and Neha Malhotra, Executive Director, Nangia & Co. LLP

The Indian economy and its tax system is undergoing a period of massive change. What’s happening and what does it mean for businesses?

India is moving at a rapid pace on the path of economic growth and the Indian tax landscape has witnessed many and varied changes in the recent past. The 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.

The past year has been marked by major reforms impacting multinationals, namely ‘One Nation One Tax’ or the Goods and Services Tax (GST); the adoption of new laws incorporating the OECD/G20 base erosion profit shifting (BEPS) project to address tax avoidance; and the issuance of a series of circulars on controversial topics such as the general anti-avoidance rule (GAAR), the definition of Indian tax residence, and widening the scope of Business Connection.

Tax rates are already moving lower toward 20%. This year’s Budget proposal to reduce the corporate tax rate to 25% for companies with turnover of 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 has encountered challenges of policy, law and IT systems. The Government has 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 multinational companies (MNCs) setting up operations in India. In the spirit of making India’s tax environment non-adversarial and to minimize litigation, the Government has started the move towards more efficiency and speed in the disposal of matters under litigation. In fact, the Indian litigation landscape has been completely overhauled recently.

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.

Changes to transfer pricing

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 reduced the taxpayers’ burden particularly for those who are involved in assessment proceedings all year round, thus entailing substantial time and costs. It has also allowed tax officials to conduct a more qualitative scrutiny of items of greater impact.

BEPS and tax avoidance

In the last few years, media reports have revealed that the effective tax rates of some MNCs are lower than 1% of their revenues. These reports have sparked public protests and led to anger within the taxpayer community, who compared their own effective tax rates with those paid by the supposedly highly-profitable MNCs. It also led people to wonder how this was achieved. The answer lies in the sophisticated tax planning practices of MNCs, namely reducing their tax base by shifting profits to other countries especially tax havens (BEPS). This was being done within the existing legal framework by taking advantage of loopholes, gaps and 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, and indeed India has been one of the front-runners in the BEPS initiative. The Indian tax authorities’ position on certain tax matters, which was criticised in the past for being narrow-minded and revenue-focused, now falls under the BEPS action plan.

India has already introduced certain provisions in its domestic tax law to deal with concerns highlighted under the BEPS action plan. The imposition of an equalisation levy, country-by-country reporting and ‘master file’ requirements under the transfer pricing provisions all have their origins in the BEPS project.

Taxing the digital economy

The 2018 Budget continues the theme of the Government’s focus on implementing anti-BEPS measures in India. The Budget proposes 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. Regarding interaction with specified users, more detailed metrics would need to be developed in consultation with businesses for this to be workable, such as how to identify a unique user or what level of engagement is required for a user to be considered.

Technology and tax simplification

There has been an increased use of technology by 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 tax returns, receiving queries from tax authorities and submitting responses have already been digitalised.

The use of technology will further increase in the years to come, digitalising almost all interaction. For instance, queries raised by tax authorities and the submissions made during 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, the Central Board of Direct Taxes has signalled its intention to move to centrally-issued notices. All notices requiring someone to furnish information or documents will be issued by the Centralized Communication Centre (CCC). Digital signatures will be provided by sending an email or by placing a copy in the registered account on the portal, which will be followed-up via SMS.

Machine-readable, structured formats will be used for information and documents and the taxpayers will not be required to appear personally before the designated authority at the CCC. This anytime/anywhere facility will save time for those being assessed. It will also help them submit responses to departmental queries easily and retain important submissions.

Efficiency, transparency and green governance

Eliminating person to person contact will lead to greater efficiency and transparency in the Indian taxation system. Furthermore, paperless communication will prove to be environmentally friendly.

Such initiatives taken by Indian government convey the message loud and clear that India is committed to 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 within the financial system are enabling tax authorities to capture better information about taxpayers. In the years to come, we expect seamless assimilation of different aspects of taxpayers’ information such as bank accounts, income, expenses and investments through the Permanent Account Number (PAN) issued by the Income Tax Department to those who apply, and Aadhaar, the 12-digit unique identity number issued to Indian residents. This will result in particulars of a transaction and tax event becoming readily available to 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, the Indian Government has also stepped up its spending on infrastructure, rural and agriculture sectors and on achieving inclusive growth. India is already witnessing a strong recovery. Targeted sectors such as infrastructure, construction, agriculture and health are known to have large multiplier effects and this should support the ongoing recovery.

Nangia & Co. LLP is a participant firm in Praxity Global Alliance.​