The Year 2018 witnessed significant tax changes and reforms across the globe and India was no exception. The government intensified its steps towards increasing the tax base and took further measures to crack the whip on the parallel economy. The latter half of 2018 saw government take initial steps on reforming the Indian Income Tax Act with the formation of the committee to draft a new tax law which promises to be simple and non-adversarial. In this background, 2019 promises to be yet another year of the roll-a-coaster ride primarily on the tax side where some challenges would intensify, and some aspects would get simplified. Let us look at what can we expect in 2019:

  1. Direct Tax Code - Income Tax Law Rechristened
    It has been the stated position of the government that it propagates simplified and non-adversarial tax regime in India. The current law is perceived to be complicated, lengthy, open to interpretation, and was amended several times since its commencement in 1961.

    From the initial attempts, it appeared that government wanted to introduce this in their current term however, the Government had to reconstitute the task force in November 2018 which is currently drafting new income-tax code. It is now expected that the new code would be available in 2019 however when it would be implemented would primarily depend on the outcome of the national elections in the first half of 2019.
  2. Taxation of Digital Economy
    Businesses still tend to be taxed where they have a physical rather than virtual presence and taxation continues to be built on traditional product and service lines. The current international tax laws have become outdated and are not in a position to tax such digital transactions. The entire world is struggling with the taxation of digital economy and lack of international consensus on taxing the digital economy is creating a vacuum of uncertainty.

    However, India has taken a leadership position in taxing digital economy, and it started its journey by an introduction of Equalisation Levy (EL) in June 2016, on online advertisements. The concept of significant economic presence (SEP) was introduced from April 2018 in Indian domestic law, triggering a possible tax exposure for non-residents although situated outside India but having a digital presence above a certain threshold that is yet-to-be-specified.

    Recently, the government invited suggestions from various stakeholders for prescribing the above thresholds by August 2018. It is expected that after considering the recommendations from the stakeholders at large, the government shall prescribe the thresholds sometime in early 2019. The limits would decide whether only tech giants are impacted, or even mid-size companies would be under the net.
  3. Critical Decisions from Supreme Court
    There are certain matters which affect many corporations especially MNCs which are now pending before the Supreme Court. There is a raging controversy on whether the payments made overseas to non-residents / foreign companies for purchase software could constitute payment in the nature of 'royalty.' Over 50 appeals have been filed before the Supreme Court and matter is now scheduled for hearing in January 2019. This could be a significantly important judicial precedent as it will bring clarity to a highly litigative subject, hopefully putting rest to the burning controversy.

    Similarly, the issue of marketing intangibles has gained significant importance in India wherein Indian subsidiaries of global Multi-National Enterprises (MNEs) incurring Advertising, Marketing and Promotional (AMP) expenses have been challenged by the Revenue Authorities. The Revenue Authorities allege that the AMP related activities add value to the trademark/brand (owned by the foreign parent entity) by way of brand building and the local subsidiary must be compensated by the brand owner (foreign parent) either by way of a service fee or reduced/nil royalty payments. Since the Indian Transfer Pricing Regulations do not provide any specific guidelines on intangibles, other than defining them as part of "international transaction.'' This issue is also pending for adjudication before the Supreme Court and the outcome is expected in 2019. This will have an impact on cases of various Multinational Companies.
  4. Full-fledged Electronic Assessment Proceedings
    In previous years, the Indian Revenue Authorities have implemented the electronic assessment proceedings on a pilot basis and then extending its reach to a large number of taxpayers. It is now expected that the e-proceedings may be implemented for all the taxpayers. This would be helpful in reducing the time and costs involved in the process and should significantly reduce the discretionary powers of the tax authorities.

    However, the implementation of the same should be in right spirit and the taxpayers should not be slapped with arbitrary orders.
  5. Tax Notices for Master File and CbCR
    In light with Base Erosion Profit Shifting (BEPS) project, India introduced enhanced Transfer pricing documentation in form of Master File and Country-by-Country Report (CbCR). Both filings were applicable for Financial Year 2016-17 and the first round of audit is expected to be undertaken in 2019. MNCs would be keen to understand the approach of the Revenue Authorities on these filings.
  6. Budget 2019 – What can be expected?
    Typically, in election year an interim budget is announced, and the newly elected government would come out with the final budget.News reports suggest that this year the government is proposing a full budget in 2019. It would be interesting to see whether its going to be a populist budget pre-election or government will stick to its path of fiscal prudence.
  7. Goods and Services Tax (GST)
    The most awaited development on the GST front is the new compliance mechanism which the government is slated to introduce on an optional basis from 1 April 2019 and compulsorily from 1 July 2019. It is anticipated that the government will take all steps to ensure smooth implementation to avoid the confusion and technological challenge faced at the time of initial stages of implementation of GST. The government has already extended the deadline for Annual return (GSTR-9) and Reconciliation, i.e. GST Audit (GSTR-9C) which will now be due by 30 June 2019, and it would be interesting to watch how the taxpayers overcome the challenges, given lack of precedence on this front. Further, in view of GST collections falling short of the expected target, the government is expected to strengthen the anti- evasion measures such as commencing special audits, making e-way bills robust, deploying data analytic tools and going after businesses involved in tax frauds.

The Year 2019 appears to be an interesting year for the taxpayers in India. India, at the brink of overhauling the tax system, implementing the BEPS measure, further evolution of GST and at the same time scheduled general election makes 2019 an exciting and challenging year ahead.

This article appeared in Business Standard on Sunday, 6 January 2019.

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