Manisha Gupta answers questions about India's recent legislative changes
1. What is the most significant change to your region/jurisdiction’s tax legislation in the past 12 months?
From an Indian perspective, there were three key changes in India’s tax legislation in the past 12 months which warrant a mention. First is the rationalisation of tax rates from 30% to 22% (excluding surcharge and cess) for existing corporates and 15% (excluding surcharge and cess) for newly setup manufacturing units. Second is the introduction of an “equalisation levy on e-commerce supply or services”–a measure taken by the Indian government to tax digital economy transactions (similar to the Digital Services Tax introduced in various other jurisdictions). And third would be MLI (Multilateral Instrument) being effective for the first set of 23 countries from 1 April 2020, resulting in the modification of existing tax treaties entered into between India and the rest of the jurisdictions.
2. How do you anticipate that change impacting your work and the market moving forwards?
The reduction in tax rates is clearly welcome and much needed to provide stimulus to the economy and attract investment. However, the introduction of an equalisation levy on e-commerce supply or services, with its many ambiguities in interpretation, has raised a number of issues in the international community given that it has been introduced whilst the OECD is still developing consensus on tax challenges arising from the digitalization of the economy.
MLI has triggered a number of companies to revisit their existing arrangements to reassess the taxability of business profits in light of the enhanced scope of PE (Permanent Establishment), and appropriately document the commercial purpose/rationale of entering into the transaction, while also assessing if the same satisfies the principal purpose test.
3. What impact do you see the COVID-19 pandemic having on your work directly and on the wider tax environment, in both the short and long term?
As global economies recover, taxation will play an important role. Developing countries are likely to see a significant decline in their average tax-to-GDP (Gross Domestic Product) ratio in 2020. This will
have lasting implications after the 2008-2009 global financial crisis, it took a few years for revenues to recover to their pre-crisis level. Clearly those countries with limited fiscal space going into the crisis will be hit harder than those that had greater flexibility on their fiscal and monetary sides. As tax collections compress, tax authorities will adopt different measures to increase them.
Given the above, tax is now more than ever being viewed by the top management as a critical input to take informed decisions and to deliver increased value to the business, as they critically assess their future plans. The ability to factor in precise tax cost estimates in business decision-making is a competitive advantage. Effective alignment and communication between the tax function and C-Suite executives is important, considering the high tax costs and reputational risk organizations may face on account of tax litigation
4. Given the likely long-term implications of COVID-19 on things like remote working and digital retail, how do you see tax technology developing to accommodate this new reality and where do you think the next area of focus might be?
In these times, the major challenge for tax teams will be to seamlessly collaborate with other functions and collate, curate and analyse data to not only meet statutory compliance in a timely manner but also to provide critical inputs as businesses assess and respond to the economic challenges. Organizations’ ability to factor in precise tax cost estimates in their business decision-making in these times will clearly be a competitive advantage.
Effective use of tax technology will broadly require the adoption of four solutions by companies–the first being tax compliance solutions that will help in generating accurate tax returns through leveraging data collected as part of core business functions, the second being insights-related solutions that can transform data into insights to deliver value to the organization by highlighting the accuracy of indirect tax calculations, margins on intercompany transactions, etc. Third, process management solutions will help in preparing corporate tax and GST (Goods and Services Tax) returns, tax invoicing handling and global mobility tracking, thereby increasing transparency and accountability. Lastly, components/infrastructure related solutions, i.e. the key enablers of tax technology, must be implemented to determine that the required process has the right computing and processing capacity.
Given that tax authorities globally are also ramping up their technological capabilities, tax technology will no longer be an option for companies. It will be a business imperative.
5. What potential other legislative changes are on the horizon that you think will have a big impact on your region/jurisdiction?
The Government of India, with special focus on the manufacturing sector, has launched various incentive schemes under its flagship initiative– ‘Make in India’. The government has recently launched production-linked incentives for large scale electronic goods makers for five years, to attract investment in mobile phone manufacturing and electronic component units. Incentives have also been announced for pharmaceutical companies for production of bulk drugs and on medical devices. Free trade agreements have also been entered into with various countries, which enable trade partner countries to enjoy concessional duty rates on import and export transactions, with many more such agreements under negotiation.
Various incentive schemes in other key sectors, i.e. components, food processing and textiles, etc., are expected to be announced as well.
6. What are the potential outcomes that might occur if those changes are implemented?
The various schemes introduced by the Indian government have garnered considerable interest, which should attract investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure in the country.
7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
Certainly, without doubt. Impetus to businesses in India in the form of various fiscal and non-fiscal incentives will have a significant positive impact on Deloitte India’s practice and the Indian economy.
8. What legislative changes would you like to see be implemented that you think would have the most positive effect on your practice and the wider regional/jurisdictional market?
Given the economic uncertainties posed by the COVID-19 global disruption, as a transfer pricing practitioner I would like some real-time guidance by the Indian revenue authorities to taxpayers as they witness significant changes in their operations, supply chain, etc., so as to provide certainty and help prevent disputes.
A few key transfer pricing measures which would be desired include guidance on possible margin adjustment methodologies to offset the impact of the pandemic, enhancing the range from the 25th to the 75th percentile, acceptance of loss-making comparables, increasing the tolerance band where an arithmetic mean is adopted, enabling comparability adjustments to the tested party, timely notification of safe harbour margins for the fiscal year 2020-2021, and impact on concluded and ongoing APAs (Advance Pricing Agreements).
9. Do you think something like that is likely to be implemented in the near future?
Whilst specific detailed guidance is unlikely, there is a possibility that broad guidance on the approach that may be accepted by the revenue authorities during the pandemic could be issued.
10. What have been the biggest developments in tax technology and where do you think the next area of focus might be?
Adoption of technology at a robust pace by tax authorities globally, resulting from having closer access to the source data to better understand taxpayer trends and provide better compliance, is one of the biggest trends we are witnessing in tax technology. Tax authorities are leveraging digital platforms to collect, reconcile, and analyze taxpayers’ data, i.e. electronic filing of CBCR (Country-by-Country Reporting) and master file reporting requirements under BEPS (Base Erosion Profit Shifting) Action 13, and the signing of Multilateral Competent Authority Agreement for Automatic Exchange of Information, whereby signatories will start exchanging information automatically. In the Indian context, introduction of GST and related technology platform by the Government of India could be considered as one of the biggest technology-led tax reforms. Enterprise tax functions cannot be blindfolded due to a lack of access to and visibility on their own source data, and an ability to assess trends and issues accessible to tax authorities.
With the global implementation of BEPS, tax administrators have access to information across the globe. Therefore, inconsistency in information used in various tax filings for diverse tax laws in multiple jurisdictions is a challenge and without technology monitoring, policing and embedding, it is not possible to streamline tax processes and help improve consistency and accuracy. Hence, there is an urgent need for tax functions to go digital and adopt tax technology, with its enhanced capabilities to converge, store and analyse huge amounts of data.
The next area of focus for global companies would be ‘Managed Service’. Deploying technology for tax requires substantial investment in costs and specialization. Moreover, technology needs to keep evolving with business and as tax law evolves. Companies are looking to outsource their entire tax function to professional firms which is termed as ‘managed service’. In the past, companies would engage professional firms for compliance, advisory or litigation, etc. However, the technology infrastructure, data collation, reconciliation, etc., was not outsourced. A large portion of tax technology touches upon these data management, collation, curation and workflow elements. This will help companies focus on their core competencies whilst using the professional firm’s specialized knowledge and investment in people, process and technology without making such specific investments themselves.