Direct Tax

India Budget 2020 expectations

  • Tax cuts for individuals

    Based on media reports and current slowdown, it is imperative that the Government of India revises and increases the slab rates for individuals in order to boost consumption and sentiments.

  • Rationalization of Tier-3 dividend tax

    With the introduction of tax on dividends, India now has Tier-3 taxes on corporate profits and hence it is important that the government abolishes the dividend distribution tax or at least reduce the rates from 15% to 5%.

  • Significant Economic Presence (SEP)

    SEP was introduced from FY 2018-19. SEP is applicable if certain thresholds are breached by the taxpayers. The threshold limits are still not notified by the government, however, we are hopeful that the same shall be notified in Budget 2020.

  • Long Term Capital Gains

    Introduction of Long Term Capital Gains tax has not achieved its purpose of huge tax collections in the true sense. We are hoping that this may be revisited and bring along additional relief to taxpayers by either increasing the threshold limits or withdrawing the Long Term Capital Gains tax along with increasing the holding period for asset to qualify as a Long term.

  • Robust Dispute Resolution Mechanism

    Currently, India is struggling with a long list of pending cases in tax so much that in year 2017-18, taxes pertaining to income, services, and excise blocked in disputes were calculated to be roughly INR 7,773.22 billion. In fact, the number of pending cases before Commissioner of Income Tax (Appeals) stands at a massive 70%, approx. 20 per cent in various tribunals, and the remaining in high courts and the Supreme Court. In a recent study, it was found that the Revenue Department was the largest litigant, though it lost 65% of the cases. In the past, the Government has tried its hand at curbing tax litigation by increasing the appeal threshold limits for tax tribunals, High Courts and the Supreme Court.

    However, the need of the hour for India Inc. is to come out with a more efficient method of resolving tax disputes. In this regard, Government is seriously considering the idea of introducing some dispute resolution mechanism in Budget 2020.

Direct Tax Code

Direct Tax Code report was submitted by the appointed committee in August 2019. It is important for the government to provide a clear roadmap on the implementation of Direct Tax Code and propose a substantial time for transition from existing law to the new.

Supreme Court Ruling on Software Payments

Taxability of software has been a matter of debate which has affected many corporations especially the multinationals. The debate is surrounding the characterization of revenue received from supply of software as ‘royalty’ or ‘business income.’

Legacy of Controversy

  • Tax authorities have taken a position that such payments are for acquiring intellectual property rights/copyright in the software and hence are royalties within the meaning of the Act and Double Taxation Avoidance Agreement (DTAA). The taxpayer, on the other hand takes the position that the payment is for a copyrighted article and therefore the same is not taxable as ’royalty.’
  • The debate over taxability of receipts from sale of software as 'royalty' took an interesting turn, after two High Courts (Karnataka HC in case of Samsung2 and Delhi HC in case of Ericsson3) delivered conflicting rulings on this issue.
  • Apart from the High Court rulings, there is a plethora of ITAT and AAR rulings, taking diametrically opposite views on the taxability of software receipts. The divergent views taken by various courts have created significant amount of confusion regarding shrink wrapped software being a 'copyright' or 'copyrighted article?'

The Supreme Court is to determine whether the payment for software is taxable as royalty in a batch of over 50 cases due for hearing in 2018. However, the same has been continuously postponed to various dates. It is expected that the issue of software payment taxability as royalty would be heard and concluded in 2020.

Taxation of Digital Economy – Final Report 2020

It is expected that OECD would release the final report on taxation of digital economy sometime in December 2020 after arriving at a global consensus. Technology driven businesses are growing at a fast pace and there is no clarity on how to tax such businesses. Further, unilateral measures by various countries have attracted severe criticism from US and have complicated the matter for the worse. Appropriate tax collection from digital economy companies is significantly high and very important for the growth and development of developing economies. Hence, it is highly expected that OECD would be able to bring global consensus on this sensitive subject and release the final report on taxation of digital economy in 2020.

Transfer Pricing

BEPSed world

It would be a fair to state that the tax world has been BEPSed with more and more jurisdictions (including those who are known to be tax heaven in past) adopting the BEPS framework. While India introduced three-tiered documentation (CbCR, Master File and Local File) in the year 2017, the Indian revenue will be scrutinising 2017 filings in the year 2019-20, as per the audit cycle. With the amount of group level information available with the tax authorities through MF and CbCR, the taxpayers can expect an eventful year 2020 on the assessment front.

Rationalization of Safe Harbour mechanism

Existing Safe Harbour Regulations were applicable only upto FY 2018-19, and, it is very likely to be renewed soon. The taxpayers Wishlist on this front includes rationalisation of profit mark-up for certain eligible transactions such as manufacture and export of auto components and provision of IT/ ITeS services (owing to global downtrend in auto/ IT sector). At the same time, it would be helpful if the Indian revenue considers including certain additional transactions eligible for safe harbour application (e.g. availing of intragroup loans, provision of marketing support services etc. etc.)

Resolution to pending litigation

With the Government’s recent efforts (such as increase in monetary limits for filing appeal, finalisation of APAs, setting deadline to dispose off more than twenty thousand appeals pending for more than 5 years etc), we expect faster resolution of pending litigation. These steps would definitely help in achieving ‘Ease of Doing business’ motto of Government.

FAR v/s Formulary apportionment

With the introduction of draft regulation for profit attribution to Permanent Establishment in India, which emphasize on Formulary apportionment method (as against traditional attribution based on FAR based method), it would be interesting to see how arm’s length standard may continue to apply.

Indirect Tax

The GST revenues have so far not met the budgeted estimates of the government. The government is keen to plug revenue leakages by further integration of technology with various aspects of GST compliances. Key expectations on the GST front are as follows:

Implementation of e-invoicing

With effect from 1 April 2020, e-invoicing provisions will be mandatory in respect of B2B supplies by registered persons having aggregate turnover in a financial year exceeding INR 1 billion.

Further, registered persons with aggregate turnover in a financial year exceeding INR 5 billion will be required to have a Quick Response (QR) code on their invoices issued to an unregistered person i.e. (B2C invoices) with effect from 1 April 2020.

Introduction of RoDTEP scheme

Recently, a Word Trade Organization (WTO) panel held that key export incentive schemes of the Indian government such as the Merchandise Exports from India Scheme (MEIS), Export Promotion Capital Goods (EPCG) scheme etc. are non-compliant of the WTO norms. Accordingly, the Indian government is expected to replace these schemes with a WTO-compliant Remission of Duties or Taxes on Export Products (RoDTEP) scheme expected to be introduced in Foreign Trade Policy 2020-25 from April 2020.

Implementation of new return filing procedure

The new GST return filing procedure will also be implemented from 1 April 2020. The new return filing procedure intends to intrinsically link the Input Tax Credit (ITC) of the recipient with the invoices declared by the supplier.

The new return filing system has been divided in 3 distinct parts which are as follows:

  • FORM GST ANX-1 - Annexure of outward supplies, imports and inward supplies attracting reverse charge
  • FORM GST ANX-2 - Annexure of inward supplies
  • FORM GST RET-1 - Monthly/Quarterly (Normal) return

All in all, while 2019 was an eventful year, 2020 promises nothing less. All eyes are set on the Budget 2020, where there are significant expectations to set India back on a high growth track. However, not just the budget but several other reforms both legislatively and administratively will define the tax environment in India.

We believe that India will play a critical role at the global stage and some of the tax developments in India, as well as India’s reaction to global developments will shape the global tax policies and outlook.

Maulik Doshi
Senior Executive Director
Transfer Pricing and Transaction Advisory Services