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published on June 24, 2019 | reading time approx. 2 minutes
Back in May 2014 Modi wave swept through the nation resulting in thumping majority and firmly putting India's reigns in the hands of the Modi led Bharatiya Janata Party (BJP). Since then, the government has been implementing some path-breaking initiatives such as Demonetisation, Insolvency & Bankruptcy Code, Goods & Services Tax (GST) and plethora of such policies.
In order to transform India into a modern well governed economy, the government had unwavering conviction in their decision, and it stuck to its task despite facing severe backlash and tremendous execution challenges. This has consequently led to India's meteoric rise to the top 100 in the World Bank's Ease of Doing Business (EoDB) ranking in 2017.
In spite of discomfort but required reforms, people of India re-elected Modi with an even stronger majority in May 2019, to carry on with the work it had started. As the government overhauled the existing indirect tax system last year by implementing GST, on a larger scale, it was felt that tax reforms would remain incomplete without revamping country's decade old direct tax system.
Acting towards it the Finance Ministry constituted a task force to review the country's 56-year old Income Tax law and suggest a new law in form of Direct Tax Code (DTC) to replace it.
This task force is expected to submit its first draft by 31st July 2019. Some of the key considerations are highlighted below:
With the growing awareness of Base Erosion Profit Shifting and India being a key participant in these measures, it is possible that reforms may be introduce to tighten India’s ability to tax gains and profits that non-residents make in India.
The Central Board of Direct Taxes (CBDT) has already come out with the draft recommendatory report on profit attribution for Permanent Establishments suggesting the formulaic approach for attribution of profits.
It is possible that this approach may make way into the new Code, bringing about a change in the way officials attribute taxable profits to a non-resident enterprise operating in India without a subsidiary technically called as ‘permanent establishment (PE)’ in line with.
Some of the recently introduced changes such as General Anti Avoidance Rules (GAAR), Significant economic presence (SEP), Place of effective management (POEM) will also be part of DTC.
All the above measures are likely to have significant impact on overseas entities doing/having business from/in/with India.
Another key consideration in this exercise is to improve tax compliance.
It will seek to bring more taxpayers into the tax net and make the system more equitable for different classes of taxpayers.
The Modi government emphasis has been self-governance and thus, in line with the objectives, the last few year's budgets, did include measures to lower the corporate tax rates and phase out tax exemptions that lead to litigation. Such measures are expected to continue and reemphasized, making businesses more competitive.
The DTC is expected to consolidate the Income Tax Act, Black Money law, benami transactions and certain portions of Finance Act, such as Equalization Levy, all of which is administered by the Tax Department, thus propagating one single legislation.
These considerations are likely to have significant impact on multinational companies doing businesses in India, and existing business models may have to be revisited to align them with a more globally aligned tax regime.
The newly-appointed Finance Minister will be presenting the full Budget for Indian tax Year 2019-20 on 5th of July. This will give further peek into what to expect in the coming future.
Rahul Oza
Partner, Office head
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Anand Kankariya
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