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
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.
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
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
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
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
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.
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.