Partner and Head - Tax,
KPMG in India
India has emerged as a rising star amidst a global economic slowdown. For FY2015-16, India’s economy is expected to grow at an impressive rate of 7.5 per cent of the GDP(source: World Bank’s India Development report issued in October 2015) and attracted FDI amounting to USD 22.65 billion until September 2015 (source: DIPP: Government of India).When viewed against this backdrop, the expectations from Budget 2016 can only soar northwards. Given the overwhelming response received for various government initiatives, it is a possibility that the government shall live up to those expectations to keep the economy buoyant, create and sustain a non-adversarial, certain and predictable tax regime.
During the last Budget, the government announced phased reduction in the headline corporate tax rate from 30 per cent to 25 per cent. A plethora of tax incentives and tax holidays were also announced to be phased out. The manner in which the proposal will be implemented is something that will be keenly watched in the coming Budget. However, two caution points need to be borne in mind – first, that the reduction of tax rates and withdrawal of tax exemptions should be done with a sense of parity to help ensure that one does not outpace the other. Second, appropriate grandfather provisions should be put in place to help ensure that the currently availed tax benefits are allowed to run their course.
With the phasing out of incentives and reduction of corporate tax rates, the government could also look at gradually reducing the burden of Minimum Alternate Tax (MAT) which is currently levied at rate of 18.5per cent.
Further, one can expect the government to provide tax sops to start-ups under the ‘Start- up India Stand-up India’ plan along with its other flagship initiatives, namely, ‘Make in India’, ‘Digital India’, and ‘Skill India’ in the upcoming budget. Attracting foreign investments in some priority sectors like manufacturing, real estate, IT and infrastructure is the need of hour, it will be interesting to see how the government walks the tight rope of incentivising these sectors on one hand and phasing out of tax incentives on the other.
With the government’s focus on preventing tax avoidance and treaty abuse, it is likely that some of the Base Erosion and Profit Shifting (BEPS) recommendations may make their way into the Indian tax laws, especially relating to transfer pricing viz. master file, local documentation file, Country by Country (CbC) reporting and thin capitalisation. It will also be interesting to see how the government implements the General Anti Avoidance Rules (GAAR) from 1 April 2017. Prescribing more objective guidelines/criteria, in this year, for triggering GAAR and applicability of treaty benefits in such cases will be an important step towards providing certainty to the business community.
The government could do well by deferring Place of Effective Management (POEM) to 1 April 2017, in the absence of the final guidelines which were to be drafted pursuant to the various suggestions to the draft guidelines. Also, deferment of Income Computation and Disclosure Standards (ICDS) as recommended by the Easwar Committee would be in line with the government’s larger objective of simplification of tax laws.
While the government during Budget 2015 showed a strong commitment towards implementation of Goods and Services Tax (GST) from 1 April 2016 by introducing a Constitutional Amendment Bill in the Parliament, the Bill is still pending in the upper house. It is critical that consensus is reached among various political parties so that GST could be implemented at the earliest to provide the much needed stimulus to economic growth.
While the government is looking at augmenting GDP growth above 8 per cent in 2016-17, it will be critical that the government maintains its fiscal prudence and continues to move on the path of fiscal consolidation while finalizing its policies for the upcoming budget.
The views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG India.
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