Though it is conventionally an interim budget, some tax sops may be expected to facilitate ease of doing business in India.
Many of the suggestions below can no doubt be attended to by the Central Board of Direct Taxes (CBDT), but an intent to do that can be enunciated by the Finance Minister. Focus of the suggestions here is on improving the business climate, by bringing in tax certainty.
Expand the scope of Safe Harbour Rules CBDT issued the safe harbour rules in September, 2013 to curb the ever mounting litigation in India. However, these rules met with limited success due to perceived high margins for covered transactions. Taking cue from the above, the CBDT vide notification dated 7 June 2017 rationalised the margins for some transactions but no change was made to the safe harbour margin for contract manufacturers of core and non-core auto components, which is very high.
In a much needed impetus to “Make in India” initiative of the government, one can expect the government to revisit the safe harbour rate for auto components manufacturers and at the same time extend the scope of safe harbour rules to other contract manufacturing arrangements in the pharmaceutical sector, electronic goods etc.
Specific guidance on business restructuring Post Base Erosion and Profit Shifting (BEPS) era has witnessed a spurt in the number of business restructuring cases as multinational companies seek to streamline their operations in line with economic reality. Despite such flourish in restructuring and reorganization cases, there is no common approach that exists amongst international tax authorities with respect to tax treatment of these transactions.
Although Section 92B of the Income Tax Act, 1961 (Act) considers a transaction of business restructuring or reorganisation as an international transaction, yet there exists ambiguity as to what transactions may be construed as business restructuring or business reorganization. A specific guidance or definition on business restructuring in line with guidance provided in chapter IX of the Organization for Economic Cooperation and Development (OECD) Guidelines for transfer pricing, 2017 will remove the cobweb.
Standardize master file regulations
The current master file regulations in India are applicable to the multinational group with consolidated group turnover of Rs 500 Cr accompanied with aggregate inter-company transaction(s) of Rs 50 Cr or intangible related transactions of Rs 10 Cr, which is significantly lower than the global threshold. This has brought a number of medium-sized taxpayers under the ambit of master file regulations which was not the intent of OECD BEPS Action Plan 13.
Easing on those regulations and harmonising with global standards would provide respite to this segment of MNEs, and improve ease of doing business in India.
Rationalize the rules relating to range concept
Government has taken certain steps to align transfer pricing in India with the global standards.
It brought in the ‘range’ concept and allowed use of ‘multiple year’ data to benchmark the international transactions. However, while the global standards were inter-quartile range (i.e., 25th to 75th percentile), India opted for 35th to 65th percentile, making in narrower than what is generally there in many countries. Since there is overall harmonisation of law taking place in the tax laws, particularly those relating to multinational enterprises (MNEs), there is a good case to bring alignment even on the ‘range’.
Documentation requirement for intra-group services
Intra-group services transactions are often subject of litigation in India; primary questions being on need of the service or the benefit out of the service received. The CBDT can come out with certain guidance to define the evidences or documents which shall be maintained by the taxpayer to substantiate the need-benefit analysis. In any case, during APA process the CBDT does specify, what documents should be maintained to bring out the need-benefit equations.
Exemption of interest limitations
Large capital intensive companies with long gestation periods such companies in the real estate sector and infrastructure companies are negatively impacted by the interest restriction imposed under section 94B of the Act. Therefore, the exclusions granted to banking and insurance companies under section 94B (3) of the Act may be extended to these sectors as well or a higher threshold (in excess of 30% of EBITDA) may be prescribed for such companies.
Certainty and reduced litigation on transfer pricing issues will be the cornerstone for creating a non-adversarial tax regime in India. An early remedy of afore-mentioned issues could go a long way in fostering positive sentiments in the minds of investors and curbing frivolous and vexatious litigation.
(The authors are from Deloitte Haskins and Sells LLP)