SKP Budget Primer 2016-17
| Budget 2016 | Issue 3
SKP International Tax Wish List

With reforms by the Indian government to encourage foreign investment in the country, the upcoming budget is expected to introduce an investor-friendly tax regime and facilitate the ease of doing business in India for foreign investors. In the upcoming budget, we hope to see appropriate steps taken to introduce effective tax laws and boost foreign investors' confidence, some of which are listed below:
  • As announced in Budget 2015, a gradual reduction in the corporate tax rate from 30% to 25% is expected to be implemented from Budget 2016. A similar reduction in corporate tax rates should be implemented for foreign companies.
  • Currently, a taxpayer is not considered a defaulter for non-deduction or short-deduction of taxes with respect to payments made to a resident, where the resident pays taxes on that income, files a tax return for this income and furnishes a certificate from an accountant. Similar benefits should also be extended to payments made by a taxpayer to a non-resident where the non-resident files the tax return in India.
  • As per the current tax law, every company with a Permanent Account Number (PAN) is required to file a tax return in India. For administrative convenience, a threshold limit should be prescribed for foreign companies whereby they are not required to file the tax return in India with respect to income taxable at special rates (royalty, fees for technical services, etc.) where appropriate taxes have been withheld on the same. Alternatively, the government should prescribe separate forms for non-residents earning any special income such as royalty, fees for technical services, etc. which are taxable on a gross basis.
  • Provide clarity on whether liaison offices of foreign companies need to file tax returns in addition to Form 49C.
  • Due to the automation of various processes by the Indian revenue authorities, various foreign companies including their liaison offices in India have started receiving defective notices from the Central Processing Centre (CPC) for failing to update profit and loss accounts and balance sheets in the return of income. Since foreign companies offer income on a gross basis, the government needs to clarify that the returns filed would not be considered as defective. Similar clarity has already been provided for foreign institutional investors (FIIs) and foreign portfolio investors (FPIs).
  • Currently, a concessional rate of taxation on dividends (i.e. 15% instead of 30%) received from foreign subsidiaries is available only to Indian companies. Additionally, according to the Reserve Bank of India’s guidelines, Limited Liability Partnerships (LLPs), are also allowed to invest overseas. Similar benefits should be extended to the dividend received by such LLPs from their overseas investments.
  • Reduction in the Securities Transaction Tax (STT) rates is required to encourage inflows in capital markets.
  • Provide clarity on aspects such as withholding tax, tax credit, etc. on the transactions chargeable to tax in India when both the parties are non-residents.
  • The OECD’s BEPS[1] Action 13 dealing with country-by-country reporting should be implemented in the upcoming budget. As this is one of the most important actions and deals with confidential data and information, the government needs to ensure that tax officers handle this with extreme care and caution.
  • Provide detailed rules and guidelines on the General Anti-Avoidance Rules (GAAR) before its implementation from 1 April 2017.
  • Provide clarity on pressing issues such as the tax implications on software and the secondment arrangement.
  • While Indian tax authorities have been quick in signing unilateral Advance Pricing Agreements (APAs), authorities should also take up bilateral APAs along with the Mutual Agreement Procedure (MAP) to expedite the disposal of bilateral APAs more effectively.
  • The Central Board of Direct Taxes (CBDT) recently released the draft guidelines for determining the Place of Effective Management (POEM) open for public comments. Key suggestions including deferring POEM, refining the definition of passive income to exclude purchase and sales transactions between Associated Enterprises, and clarity on compliances and tax credits should be included in the final guidelines.

[1] Base Erosion and Profit Shifting Project
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