Foreign investors are eagerly awaiting the upcoming Union Budget, keeping an eye out for the investment climate it will herald and possible opportunities to work with one of the world’s largest growth economies. The Indian government’s vision is to turn the country into a $5 trillion economy with Pillar 1 and Pillar 2 solutions developed by the Organization for Economic Co-operation and Development (OECD) to tackle Base Erosion and Profit Shifting by Multinational Corporations ( BEPS) or tax evasion, while also dealing with other macroeconomic factors such as a looming global recession, the ongoing Russia-Ukraine war and soaring inflation, which are expected to help achieve a sustainable and balanced budget.
For the ‘Make in India’ initiative, incentivize manufacturing, create jobs and spark overall growth, the government is offering 15% tax incentive for new manufacturing companies established after October 1, 2019 and commencing production latest than March 31, 2024 The day is even later. But the time between incorporation and opening of business seems too short, especially given the impact of the pandemic on every sector. Extending that timeline by at least a few years — say March 31, 2026 — would only boost the outlook for domestic manufacturing.
Likewise, the preferential 5% tax rate on borrowing from foreign lenders needs to be extended beyond the current July 1, 2023 deadline for the formalization of loan agreements. This could go a long way in helping Indian companies maintain required liquidity and manage overall costs.
While Indian company laws and stock exchanges allow outbound mergers and acquisitions, the tax liability of such transactions is not commensurate with the tax relief provided for domestic mergers, which are exempt from capital gains tax. This needs to be remedied. Likewise, equality is sought in providing tax exemption for mergers in which shares of a domestic company are transferred from one foreign entity to another, whether the transfer of shares is direct or indirect.
There is an anomaly in the consideration of acquisition costs when calculating long-term capital gains. While prior to the 2017-18 financial year, an upgrade benefit was provided in the case of a merger of an unlisted company into a listed company by granting indexation benefits, no such benefit was provided for the merger of a listed company into another listed company. This resulted in taxpayers being required to pay taxes on gains on shares of the public company acquired before January 31, 2018, which were subsequently exchanged for shares of the listed merging company in a plan of merger. In order to equalize all investments and avoid any unnecessary litigation, the availability of cost-increasing benefits in the event of a merger of two public companies should be clarified.
The government also needs to come up with a clear roadmap for implementing the two-pillar solution proposed by the OECD. India is a signatory to the second pillar solution, so the government needs to align the existing Equalization Tax (EL) and Significant Economic Presence (SEP) provisions with the emerging global consensus and clarify various outstanding issues.
Transactions of traditional services provided in offline mode or non-digital means (for example, overseas hotel accommodation paid for by an Indian payer in India) may also fall within the scope or September under the current rules. This taxability appears to defeat the purpose of non-resident taxation by effectively bringing it within the scope of the tax on services provided and consumed in entity mode outside India. Globally, SEP provisions were introduced following BEPS discussions to address the taxation of digital businesses. People will ask the government for the necessary clarification in this regard. Furthermore, if a non-resident’s SEP is established in India, the attribution of business profits for Indian taxation should be clearly calculated to enable the non-resident to properly comply with these regulations.
These make up the wish list of non-residents who contribute to nation-building. These will also pave the way for India to move closer to becoming the destination of choice for foreign investors and its dream of becoming a $5 trillion economy.
(The writer is a partner – Price Waterhouse & Co LLP)