The forthcoming Budget will have to balance many competing
forces and policy objectives. While the government is eager to push
growth, investment and ease of doing business through tax reforms,
it also faces the challenge of balancing its books and plugging tax
leakages. The 2015 Budget had set the tone for removal of
uncertainty in respect of certain high-profile tax issues like
indirect transfer of Indian assets, transfer pricing, Minimum
Alternative Tax (MAT) on foreign companies – all targeted
towards exorcising the ghost of "tax terrorism" unleashed
through post-Vodafone retroactive amendment and mindless transfer
This initiative is likely to be taken ahead by way of further
legislative amendments that will serve to remove the remaining
vestiges of uncertainties in the law dealing with indirect
transfers. Last year, it was provided that the indirect transfer
law would kick-in only if the underlying Indian assets comprised
half or more of the global assets. Certain doubts still persist
about the computation of value of global and Indian assets in
respect of valuation approach and reduction of liabilities. The
government is likely to address this issue.
On transfer pricing, the government would be faced with the
dilemma of whether to implement the OECD's Base Erosion and
Profit Shifting (BEPS) Report, which recommends changes in transfer
pricing regime to eliminate aggressive tax planning structures used
in shifting profits to low or nil tax countries. Any such change
would lead to interpretational and administrative uncertainties
that may be perceived by the MNCs as "unfriendly". On the
other hand, not following the recommendation may weaken the Indian
government's perception of being at the forefront of
elimination of BEPS.
As a compromise, the government may choose to soft-pedal this
recommendation through rules and administrative guidance rather
than legislative amendments, which tend to attract higher level of
media attention. Country by Country Reporting (CbCR) is likely to
be introduced, which will force large companies to collate and
maintain voluminous data regarding their transfer pricing
structures around the world. Apart from increasing compliance
burden, it would lead to weakening of aggressive transfer pricing
arrangements and increased propensity to apply profit split
Another BEPS recommendation that is likely to be acted upon in
the Budget is the elimination of excessive interest deductions. The
government may provide for an EBIDTA (earnings before interest,
depreciation, tax and amortisation) threshold to define the maximum
permissible interest deductions.
To facilitate more M&As, the government is reportedly
thinking of permitting carryover of accumulated losses in mergers
regardless of the sector in which the surviving company operates
– currently, it is allowed in a limited number of sectors
(mostly industrial and infrastructure).
On MAT, the government will have to fulfill its commitment of
bringing about a clarification retrospective amendment to exclude
foreign funds from MAT on capital gains. The law brought in last
year was prospective.
On reduction of tax rates and rationalisation of tax exemptions,
the government is likely to take its first steps by bringing down
the tax rate while eliminating a few exemptions. One big issue that
is being speculated is whether the government might remove the tax
exemption available to long-term capital gains arising on sale of
listed equities and mutual funds.
While the government is seriously looking at this
"unfair" and "pro-rich" sop, the dismal stock
market situation may act as a deterrent in this respect. As a
middle path, the finance ministry may settle for extending the
period of holding of long-term listed equity assets to three years
as against the current threshold of one year.
Last year the government set up the RV Easwar Committee to
suggest reforms in income tax laws. The committee had submitted its
first report suggesting a slew of procedural and minor reforms to
improve ease of doing business. Many of these suggestions, which
range from rationalising withholding tax thresholds to time-bound
processing of refunds, are likely to find their way to the statute
While the government's stated vision is to remove tax sops,
the startup euphoria may beat the trend and the government is
likely to announce several tax benefits for startups and their
investors. These may range from capital gains tax exemption on exit
to income tax exemption for a few years. Impetus to manufacturing
and generation of employment may also buck the trend and see sops
for increased investment in these areas.
While the government may want to present a big-bang budget, the
reality is tempered with the constraints presented by domestic
fiscal and global recessionary pressures.
Originally published in VCCircle
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