Indian tax legislative and judicial environment is constantly evolving, along with globalization, economic shifts, and operational adjustments. Now, more than ever, businesses must have an ongoing system for adapting to and staying on top of these complex changes.
Some of the recent developments in Indian taxation regime include introduction of the General Anti-Avoidance Rules (GAAR), applicability of tax on gains arising out of indirect transfers of Indian assets, re-negotiation of tax treaties, Income Computation and Disclosure Standards (ICDS), change in tax residency conditions by introduction of the Place of Effective Management (POEM) concept, etc. The latest among all this is signing of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Additionally, there may be tax impact on Corporates on account of applicability of the new Indian Accounting Standards (Ind-AS) which are a set of standards converged with International Financial Reporting Standards (IFRS).
a. Tax residency test – Place of Effective Management (POEM)
The Indian domestic tax law has been amended to introduce the concept of POEM while determining the tax residential status of a foreign company in India. Earlier, the residential status was determined on the basis of whether or not the foreign company had control and if the management of its affairs was situated wholly in India. Under the new concept, a foreign company is considered to be resident in India if its POEM, in that year, is in India. This new concept was applicable from 1 April 2015.
b. Income Computation and Disclosure Standards (ICDS)
There is a conflict between the income as per the books of account and the taxable income as computed under the Income tax Act. Further, the introduction of Ind AS (IFRS converged standards), which permitted voluntary adoption for Financial Year (FY) 2015-16, could raise additional conflict areas while computing the taxable income. To overcome this issue, the Indian Government recently issued 10 ICDS which provide a new framework for computation of taxable income for all taxpayers, following the mercantile system of accounting in relation to income taxable under the heads ‘Profits and Gains from Business and Profession’ and ‘Income from other sources’. The new framework is expected to provide consistency in computation and reporting of taxable income and to further reduce litigation and disputes on tax issues. The new framework is applicable with effect from 1 April
c. General Anti Avoidance Rules (GAAR)
As per India’s income tax law, the GAAR empowers the revenue authorities to declare transactions/arrangement as an impermissible avoidance arrangement, thereby determining and levying taxes as may be deemed appropriate, thereon denying benefits originally claimed (including those under the tax treaty). More and more countries are adopting GAAR to check aggressive tax planning. In India, GAAR is scheduled to come into effect from 1 April 2017.
Further Indian Government also has gradually reduced some corporate tax rates and will soon phase out certain deductions including weighted deductions. And lastly, increased focus on the tax compliances by the foreign companies undertaking business in India. The emphasis is now shifting towards enforcing compliance and expanding the tax base with e-governance and digitization gaining importance. Taxation is also used as a tool to promote investments in identified industry sectors, thereby spurring overall economic growth. As such, understanding the impact of developments in tax and regulatory aspects and strategically using them to the benefit of Indian business activities is becoming increasingly important.