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Corporate taxation: Simplify and rationalise tax provisions

A non-adversarial and predictable tax regime has been one of the topmost priorities for the Government of India.

Ravi Mahajan, Tax Partner, EY India
A non-adversarial and predictable tax regime has been one of the topmost priorities for the Government of India. The keenness of the government's intention to create a tax regime that is certain, foreseeable and conclusive is clearly manifested from measures such as clarification on the non-applicability of MAT to FIIs and foreign companies in absence of PE based on the recommendations of A.P. Shah Committee, deferment of applicability of GAAR, constitution of a committee headed by former Judge R.V. Easwar to suggest measures to simplify income-tax provisions, one year extension of the Committee headed by Chief Economic Advisor Ashok Lahiri entrusted with the task of interacting with the industry and ascertain areas where clarity in tax laws is required, etc.

The conclusion of several APAs in the past 12 to 15 months and resolution of more than 100 cases under MAP with the US Competent Authority reassured foreign investors and built their confidence in the tax system in India. As the government embarks to deliver its third Budget on February 29, the stake holders - industry, foreign investors, service sector etc - expect tax reforms aimed at simplification and rationalisation of tax provisions, improving ease of doing business, and fostering a positive perception of India's tax environment.

In his last Budget speech, the Finance Minister proposed reduction of corporate tax rates from 30 per cent to 25 per cent over a four-year period with simultaneous removal of tax exemptions and incentives. The government should adopt a judicious approach and continue to allow incentives on the investment committed. Any phase out of incentives should be after public discussion and adequate advance notice. Further, withdrawal of tax incentives would also necessitate removal of MAT to bring tax buoyancy.

The 'Make in India' campaign is being internationally promoted to attract global companies to manufacture in India. To ensure necessary impetus to the initiative, the government should provide 'investment-linked' or 'profit-based' incentives, non-applicability of MAT to SEZ units, weighted deduction on research expenditure, etc.

Finance Act 2015 brought a paradigm shift in determination of residential status of a foreign company by linking it to 'Place of Effective Management' (POEM), which is applicable from 1 April 2016. Considering that final guidelines for guidance of tax authorities and tax payers have not yet been issued, it is imperative that the government should consider deferment of POEM by at least a year.

Income Computation and Disclosure Standards (ICDS) were introduced to reduce litigation and bring certainty and clarity in tax reforms. Currently, certain notified provisions of ICDS are inconsistent with accepted accounting principles and contrary to settled judicial precedents. Also, ICDS are based on current accounting standards whereas many corporates would move to IND AS from next year. In view of these uncertainties, the government should consider deferment of ICDS implementation.

OECD has released 15 Action Plan on BEPS to provide an effective mechanism for dealing with tax evasion. As a good public policy framework, the government should legislate on any BEPS Action Plan after due deliberations and public discussion. The Budget proposals must not rush with their implementation.

To promote entrepreneurial zeal and generate employment opportunities, the government has initiated 'Start-up India' campaign. The Start-up India Action Plan that addresses aspects of the start-up ecosystem and provide growth impetus announced on 16 January 2016 is commendable and overwhelming. As part of the Budget proposals, the government must give effect to the Action Plan.

The measures taken by the government so far assure the stakeholders that the journey towards tax reforms, simplification and predictable tax regime would continue in Budget 2016 and the Government would deliver more than the expectations.

(The author is Tax Partner, EY India. Views expressed are personal)