India is set to make major changes in its Income Tax Act and sign a multilateral agreement with G20 and OECD nations to prevent the corporate practice of showing large parts of global profits in low tax countries and tax havens instead of the country where economic activity takes place.

The government would sign a legal instrument with nearly 90 countries as early as 2016 to counter tax avoidance strategies of corporations, including abuse of tax treaties such as the one with Mauritius. These nations would also take coordinated measures to bring digital economy under the tax net, tighten disclosures of cross-border transactions among related group firms, tax the profits held abroad without repatriation and tighten the definition of a company’s business presence in a country.

Industry experts, however, said enhanced taxation powers ought to be balanced with fair tax administration and efficient dispute resolution, considering that India has a huge backlog of tax litigation, and a history of changing tax law with retrospective effect besides making huge tax demands on cross-border transactions of MNCs.

The 15 steps announced on Monday by OECD, a global thinktank on economic policy, are the outcome of its project on tax Base Erosion and Profit Shifting (Beps) that will be reviewed by finance minister Arun Jaitley and his counterparts on October 8 at the G20 Finance minister’s meet in Peru.

Department of Economic Affairs secretary Shaktikanta Das said: “Our officers are part of the OECD working groups and India’s views are duly reflected in the report.” Revenue secretary Hasmukh Adhia also said India was very much in support of the Beps project.

Once these nations sign the multilateral legal instruments to prevent tax base erosion, all bilateral agreements they have signed including India’s double tax avoidance agreement with Mauritius will stand modified to that extent. That amounts to introducing a limitation of benefits clause in this treaty to deny its benefit to shell companies that do not have any business substance. Under the India-Mauritius treaty, tax on short term capital gain from India is taxable only in Mauritius, where it is zero rated. This has led to a lot of ‘post box companies’ being set up in the island nation only to route funds into Indian markets. Tax authorities call this ‘double-non-taxation.’ Currently, India is trying to re-negotiate the treaty bilaterally with Mauritius.

“As a destination competing for investments, Indian policymakers should be careful in implementing Beps and should ensure there are checks so that there is enough clarity and that the taxpayer is not burdened with litigation arising from Beps. Tax administrative reforms need to be concurrently pursued to avoid undue hardship to taxpayers,” said Vijay Iyer, National Leader, Transfer Pricing, EY India.