If just after the finance minister’s speech it was tempting to title this analysis “Tinker, Tailor”, such off-the-cuff thoughts disappeared as one peered into the uploaded documents. Some more of the plot unfolded as we had the first look at the gamut of changes proposed.
Showing that it is not merely in step with global taxation headwinds but willing to leap ahead with implementing change, India has capped the claim of interest in computing taxable income at 30 per cent of EBITDA. The ability of taxpayers to recoup these lost amounts within an eight- year period maybe of little succour.
The prevailing use of financial leverage, both for healthier metrics and for tax advantage alike, maybe imperilled by this change and will require a relook at capital structures of investee companies of MNCs and select PEs. In reading the provisions, you may be stopped cold as you try to understand what an “implicit” guarantee is, or wonder how to toggle business loss, unabsorbed depreciation and the new entrant, unabsorbed “excess interest”.
Money changing hands
A far reaching codification of an issue that has already surfaced in recent unilateral advance pricing agreements (APAs) is the nature of a transfer pricing (TP) adjustment. The Budget proposes to mandate that any concluded variance in the value of a transaction from the original TP position of the taxpayer on such transaction is required to be brought into India in cash.
Should a taxpayer fail to do so within timelines to be prescribed, interest shall be imputed and taxed in the hands of the taxpayer. It may therefore be insufficient to pay tax, interest and penalty on concluded TP failings, but necessary to pay tax, interest and penalty on the interest on such failings!
It is hoped that certain possible but unintended potential consequences of deeming it as an advance be addressed suitably before the changes become law. In the meantime, companies would do well to understand the impact of this on litigation, open APAs, MAP settlements underway and potential future disputes — not many a company exists, where cash comes easy in current circumstances.
Welcome changes are the extension (to 2020) of the beneficial rate of 5 per cent on tax on cross-border loans, reduction of tax rate to 25 per cent for MSMEs whose turnover is up to ₹ 50 crore and increase in the period for availing Minimum Alternate Tax (MAT) credit. The relaxation of compliance requirements for Domestic TP by restricting it to cases involving profit-linked exemptions is welcome —this may, however, leave room for doubt on the nature of documentation that would satisfy the tax administration on related party expenditure.
The din surrounding FPIs and indirect transfer taxation provisions has led to relief by exclusion of Category I and Category II FPIs from the ambit of such provisions.
Some salve has been applied on the wounds of taxpayers grappling with income of multiple varieties (I-GAAP, Ind-AS, ICDS, taxable income, book profits), by dealing with issues emerging from first time Ind-AS adoption.
It is proposed to defer the inclusion of Other Comprehensive Income in book profit (for MAT purposes) arising from transition adjustments. With respect to change in revaluation surplus of property, plant and equipment, the adjustments are taxed only at time of their realisation/ disposal/ retirement, whereas adjustments arising from re-measurements of defined benefit plans and other such adjustments would be spread over five years.
This should allay the fear of big tax bills in the year of transition but necessitate a close look at the tax consequences of adoption.
Time factor
Unwelcome is the amendment annulling the impact of reasoned judicial precedent on the manner of computing tax holidays, which had hitherto protected losses of non-exempt units. The proposed and progressive curtailing of the time available for assessments to two years from the close of the financial year requires attention as taxpayers need to be suitably prepared ahead of time.
This Government is seen as one committed to larger reforms, which are fundamentally difficult to build consensus for, as one with a flair for the dramatic and that delivers its fiscal messages consistently and across years, yet delivers shock-therapy at times. Set against this backdrop, the Budget continues on the set course of moderating tax rates, while in parallel, tax incentives are being done away with to fund the moderation.
The finance minister has termed the Fed increasing rates, hardening oil prices and rampaging protectionism across the globe as limiting factors. We should, with equal sobriety, look at the changing landscape of corporate tax, not just through the prism of the Budget but of every change that occurs through the year.
(The writer is Tax Partner at EY India. With inputs from Madhusudhan S, Senior Tax Professional at EY. The views are personal. The article first appeared in The Hindu BusinessLine.)