Budget 2016: Foreign investors seek a non-adversarial and stable tax regime

Is India back on the world map as a lucrative investment jurisdiction? Does the world see the Make in India dream becoming a reality? Well, the $222 billion investment pledges received during the Make in India week do resonate the revived positive sentiment!

In fact, recent policy measures have clearly been lauded by the investor community. Clarity on applicability of MAT for foreign investors, setting up of high level committee to interact with trade and industry and bringing clarity on tax laws, relaxation in the Foreign Direct Investment regulations for certain sectors, signing of advance pricing agreements, are some such measures.

This wave of positive sentiments will continue only if we keep surfing right. The Indian government and tax authorities will need to keep up with the expectations of foreign investors to continue on the growth trajectory. Providing investment allowances and R&D benefits for the Make in India projects in the 2016 budget could be a good starting point.
Reducing the DDT rate along with the proposed corporate tax reduction to 25 percent could help investors repatriate greater profits back home. Providing for non-applicability of MAT on exempt incomes/entities could provide true meaning to the exemptions.

Moreover, as we move towards a truly globalised world, income tax exemption for cross border mergers should also be introduced, after their inclusion in the Companies Act 2013.
With respect to the dreaded indirect transfer regime of India, specific exclusions for intra group transfers (other than amalgamation and demerger) and transfers by listed foreign entities should be considered. An investor favours a tax jurisdiction which provides certainty on taxes even if tax rates are on a higher side.

Acceptance of recommendations made by the Easwar Committee on tax procedure simplification would make life easier for tax payers, besides reducing litigation, and strengthening India’s position on Ease of doing business index.

A reality which could hit hard in the 2016 budget will be the mandatory action plans of the OECD’s Base Erosion and Profit Shifting (BEPS) project. Actions like preventing harmful tax practices, treaty abuse, country-by-country reporting, and dispute resolution could potentially find their way into the Statute.

Nevertheless, Action 13 provides for country-by-country reporting which prescribes a three- tiered documentation approach consisting of the Master file;high level information about the MNC’s business, transfer pricing policies, and agreements with tax authorities;, local file;capturing material transactions of the local taxpayer; and Country-by-country report (CBCR).

The CBCR shall capture information relating to global allocation of MNE’s income and taxes together with certain indicators of location of economic activity within the MNE group. High level information about the jurisdictional allocation of profits, revenues, employees and assets would also get captured. This will be the most critical item which will bring about greater transparency in the global tax systems.

Another provision which could seek a substance-based residency of corporations is the Place of Effective Management (POEM) provision, which though applicable from the financial year 2015-16, should be deferred by another year due to lack of final guidelines till now.

Deferring applicability of these provisions to financial year 2016-17 would allow tax payers to have better law compliant implementation.

Last, but not the least, measures which improve ease of doing business in India shall be highly appreciated by the global investor community.

Only saying Atithi Devo Bhava would not suffice, now is the time for action and not lip service. So let’s get our act together, and make Incredible India an incredibly desirable investment jurisdiction.