India stands on the threshold of major corporate tax reforms with the circulation of a draft Direct Taxes Code 2009 (DTC).
Lots has been discussed and debated about the DTC, especially on reforms such as lowering of corporate and individual tax rates, introduction of general and special anti avoidance measures, advance pricing arrangements (APA) relating to transfer pricing and tax treaty law applicability.
In short, significant corporate tax changes are expected to unfold, in the near future.
However, with the green shoots of global economic revival beginning to appear, urgent policy changes on the corporate tax front in addition to fiscal and monetary measures are required, to give industry the much needed traction, to push the domestic economic growth charts upwards.
A key to this may lie with what finance minister Pranab Mukherjee makes of the opportunity at hand through the Union Budget 2010. For starters, reducing the corporate tax rates to 25% from the current rate (effectively 33.99%), in line with the rate recommended in the DTC would bring Indian companies on a level playing field with their counterparts from other countries in the Asia Pacific regions.
Increased multinational companies activity in India has brought the transfer pricing legislation in the tax law to the forefront.
Aggressive interpretation of transfer pricing law by tax authorities, coupled with the subjectivity of the legislation, have given rise to huge transfer pricing adjustments to the income of multinationals in India resulting in cash flow problems and protracted litigation.
The power to make safe harbour rules granted to the Central Board of Direct tax (CBDT) through Finance Act, 2009 (No 2) has not yet been exercised.
Introduction of reasonable and fair safe harbor rules, could grant companies comfort, in their inter-group transactions at least until the time the APA regime under the DTC kicks in.
Cross-border mergers & acquisitions has given rise to much tax controversy in India. Tax authorities have of late, aggressively scrutinised M&A transactions performed outside India, resulting in indirect-transfer of shares of Indian companies, leading to a lot of uncertainty in such transactions, particularly in the negotiation of tax liabilities.
An explanation to the tax law, clarifying the technical position or instructions to the tax authorities on the manner of selection/ resolution of such cases could instill certainty and foster a quick and painless M&A regime.
On the withholding tax front, certain recent judgments appear to suggest that in the absence of a tax withholding order from the revenue authorities, a taxpayer is required to withhold taxes on any payment made to non-residents, even if such payments are not taxable in India.
Given the significant administrative process involved in obtaining such orders, delays in settlement of transactions, and the strain on government machinery to process such orders, an explicit clarification from the finance minister that payments to non-residents, which are not taxable in India may be remitted without the requirement of a specific tax withholding order from the Income-tax department, is desirable.