India budget update: top points for multinationals

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In an effort to jump-start a weak economy, the Indian government’s Union Budget adopts several new measures while taking a balanced approach.

These are the government’s key areas of focus:

  • Reduce tax litigation and the transfer pricing challenges affecting foreign multinationals by introducing rollback provisions via advance pricing arrangements
  • Boost infrastructure investment
  • Introduce a tax framework for REITS and infrastructure funds
  • Create a roadmap for implementation of the goods and services tax

Below are the key tax changes that may affect foreign multinationals with operations in India.

GENERAL TAX POLICY PROPOSALS

Leading up to the release of the Budget, there was anticipation the government would put into place measures to assuage foreign investors dealing with the fallout of the Vodafone case with respect to indirect transfers of assets having a “substantial” connection to India.

While the budget included no new provisions in this regard, the government has created a new committee to review any new cases under this provision.

Several administrative and legislative measures were proposed to reduce direct tax litigation:

  • All resident taxpayers can obtain an Advance Ruling in respect of their income-tax liability above a defined threshold.
  • The Authority for Advanced Rulings will be strengthened by constituting additional benches.
  • The scope of the Settlement Commission will be enlarged so that taxpayers can approach the commission to settle disputes.
  • The government will set up a high-level committee to interact with trade and industry on a regular basis to ascertain areas requiring clarity in tax laws.
  • Several taxpayer-friendly changes were proposed to the transfer pricing regulations.

The Direct Taxes Code - the new income tax code - will be reviewed in its present shape.

DIRECT TAX CHANGES

  • The tax rate and education surcharges remain unchanged.
  • Effective October 1, 2014, dividends distributed by domestic companies and mutual funds will be grossed up for the purpose of computing dividend distribution tax. The new effective rate based on the gross calculation will be 20.47 percent.
  • Unlisted security and units (other than equity-oriented mutual funds) will be regarded as short-term capital assets if held up to 36 months.
  • Long-term capital gains from transfer of units of mutual funds, other than equity-oriented funds, will be taxed at 20 percent, compared to the present levy of 10 percent.
  • For the first time, REITs and infrastructure investment trusts will be permitted in accordance with the guidelines of the Securities and Exchange Board of India.  They shall enjoy tax pass-through status, except in respect of capital gains on disposal of assets.
  • The sunset date for power-generating, distributing or transmitting companies to claim a tax holiday has been extended to March 31, 2017.

INDIRECT TAX CHANGES

  • No announcement has been made on a timeline for implementation of a goods and services tax.  All pending issues will be resolved during the year.
  • The general rates for customs, excise and service tax remain unchanged.
  • Excisable goods sold at a price below manufacturing cost and profit to be assessed on the basis of ”transaction value” for excise duty, if no additional consideration flows directly or indirectly to the seller.
  • The benefit of advance ruling is extended to include resident private limited companies.
  • The sale of space/time on media, such as Internet, films and billboards, will be subject to service tax.

TRANSFER PRICING

In order to reduce transfer pricing litigation in India, the government had introduced an Advance Pricing Agreement (APA) regime and safe harbor rules.

The budget introduces rollback provisions for the APA, wherein taxpayers and APA authorities can agree to the same arm's length margin or the methodology for the prior four years as an existing APA.

Furthermore, the definition of a “deemed international transaction” has been amended to include transactions between “resident entities” if there exists a prior agreement or if the terms of the transaction are determined between an unrelated resident entity and the offshore associated enterprise of the Indian entity. This could create additional compliance challenges for many multinationals.

Amendments are also proposed to introduce a “range” concept for determination of the arm's length price along with the use of multiple year data to assist taxpayers who find it difficult to benchmark a transaction using current data that is not available in the public domain.

NON-TAX PROVISIONS

  • The Prime Minister’s vision to develop 100 smart cities as satellite towns of larger cities, by modernizing the existing mid-size cities, has been unveiled with a reservation of INR70.60 billion.
  • Within the next six months, technology to facilitate electronic travel authorization (e-Visa) to identified countries will be introduced in a phased manner at nine airports.
  • A national multi-skill program called Skill India will be launched, along with several other programs.
  • An eBiz platform for all central government departments and ministries was announced, which is expected to create a business and investor friendly ecosystem in India bymaking all business and investment-related clearances and compliances available on one 24/7 portal, with an integrated payment gateway.
  • The Special Economic Zone program is to be revived in order to turn it into an effective instrument of industrial production, economic growth, export promotion and employment generation. SEZs will be developed in Kandla and the Jawaharlal Nehru Port Trust.
  • Sixteen new port projects are proposed, and a program for developing new airports in Tier I and Tier II cities will be launched.
  • A consultation is to be completed on the enactment of the Indian Financial Code and on the reports of the Financial Sector Legislative Reforms Commission.
  • Indian companies are to adopt the new Indian Accounting Standards in line withinternational financial reporting standards – for Indian companies, this process will be voluntary for the financial year 2015-2016 and mandatory in FY 2016-2017.
  • The Reserve Bank of India will create a framework for licensing small banks and other differentiated banks. The government, in close consultation with the RBI, will put in place a modern monetary policy framework.
  • The Budget includes a proposal to revamp the ADR/GDR and IDR regimes and introduce a more liberal Bharat Depository Receipt.
  • An Indian Customs Single Window Project to facilitate trade will be implemented.
  • The Budget aims to expedite the implementation of the goods and services tax. We should expect a new draft of the GST sometime this year.
  • The Budget gives a boost to the FDI policy in the larger interest of the Indian economy in these ways:
    • The composite cap of FDI in defense manufacturing will be raised to 49 percent
    • The composite cap of FDI in the insurance sector will be raised to 49 percent
    • Manufacturing units with FDI that are under the automatic route will be allowed to sell their products through retail, including e-commerce platforms, without any additional approval.

 

Topics:  Economic Development, India, Tax Reform

Published In: General Business Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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