Indian TP Evolution - How have the last 10 Union Budgets shaped TP policies?

India is emerging as the new ‘global economic hotspot’ according to the International Monetary Fund. For this purpose, it is imperative that India’s cross border and transfer pricing regime is investor friendly and steers away from potential and frivolous litigation.

The Indian Transfer Pricing (TP) Regulations have also evolved over the years, from the Finance Act, 2001 that introduced for the first time detailed TP Regulations in India to the implementation of OECD’s Base Erosion and Profit Shifting (‘BEPS’) recommendations. The introduction of CbC Reporting in the 2016 Union Budget following the release of OECD's BEPS report on Action Plan 13 and the more recent introduction of interest limitation rules in line with BEPS Action Plan 4 in the 2017 Union Budget are just some examples of how the Indian Transfer Pricing Provisions are keeping abreast with the times.

As India joins the global stage with Indian TP regulations reaching maturity and now being in line with the world, Taxsutra takes you on a walk down memory lane to see how India’s last 10 Union Budgets have shaped its transfer pricing policies. The amendments made in transfer pricing have been divided into 4 broad categories - Amendments triggered by judicial precedents, Amendments that have sparked judicial controversy, Amendments to reduce TP-litigation by introducing Alternate Dispute Resolution Mechanisms and Amendments to keep in line with international best practices and BEPS. 

Click here to read the insight titled “Indian TP Evolution - How have the last 10 Union Budgets shaped TP policies?”

Business Connection's digital nexus - A global comparative analysis

Over the last couple of years, the Government has enacted several provisions in line with OECD’s Base Erosion and Profit Shifting Action Plan (“BEPS Action Plan”). This year has been no different, Budget 2018 proposes to expand the scope of the ‘business connection’ test (the equivalent of permanent establishment) by inter alia including a ‘significant economic presence test’ (“SEP Test”) to tax new business models in the digital space. Under the SEP Test, download of data or software, or solicitation of business activities through digital means in India could lead to non-residents coming within the tax net. The concept recognizes the fact that it is possible to be heavily involved in the economic life of another country without having a fixed place of business or a dependent agent thereto. Hence, the question of existing definition of PE being inconsistent with the underlying tax principles is avoided. Interestingly enough, OECD in the BEPS Action Plan is still evaluating various options to tax the digital economy transactions.

While India has lead the way to carve out tax provisions to tax digital transactions by first incorporating equalization levy in 2016 ​and now the SEP Test, other countries are not far behind. Countries like Italy, Norway, Taiwan, Indonesia etc. have also recognized the importance of digital economy and implemented provisions to tax digital / e-commerce services. Italy and Taiwan’s proposals probably come closest to India’s SEP Test – Italy’s 2018 budget law (Draft) proposes to amend the domestic definition of PE by inter alia introducing a new concept of a significant and continuous economic presence in the territory of the State set up in a way that it does not result in a substantial physical presence in the same territory while Taiwan provides that income earned by a non-resident enterprise from provision of e-commerce services in Taiwan will be deemed as Taiwan source income based on the economic nexus of the services to Taiwan.

With the way things are unfolding, short-term solutions followed by long term overhaul of the tax system looks like the game plan for taxation of the digital economy. As India works its way around this new nexus rule, Taxsutra Team thought it relevant to bring to you a compilation of digital / e-commerce tax provisions (under the direct tax laws)​ in various countries.

Click here to read the compilation.

CBDT pre-empts tax world's queries, issues 24 FAQs on LTCG regime

CBDT issues 24 FAQs on long-term capital gains (‘LTCG’) taxation proposed in Finance Bill, 2018; Clarifies that proposed regime applies where equity is held for a minimum 12 months and the STT is paid at the time of transfer (however, for shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition); CBDT further clarifies that the modes of acquisition of equity shares that are exempted for the purposes of Sec. 10(38) vide its notification no. 43/2017, is proposed to be reiterated for the new regime; Likewise, CBDT clarifies on the point of chargeability, method for - calculating LTCG, determining cost of acquisition for assets acquired on or before 31st January, 2018, determining fair market value (‘FMV’), states that FMV of bonus shares and rights shares as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations) for such shares acquired before 1st February 2018; CBDT further clarifies that “As the exemption from long-term capital gains under clause (38) of section 10 will be available for transfer made between 1st February, 2018 and 31st March, 2018, the long-term capital loss arising during this period will not be allowed to be set-off or carried forward.”; Lastly, CBDT clarifies that grandfathering of gains upto January 31st will apply to FIIs also.

Click here to read the 24 FAQs issued by the CBDT including several illustrations to explain the computation as also detailed explanation of how the LTCG regime will apply to FIIs.

Direct Tax Rulings Overruled / Impacted by Finance Bill, 2018

One of the highlights of the Finance Bill 2018 is an attempt to address some provisions that are disputed or have potential for dispute. Taxsutra Team​,​ with the support from our tax research platform - Orange, has compiled a list of case-laws on positions that are prima facie impacted if the proposed amendments take effect.​​

Click here to read the Insight titled “Direct Tax Rulings Overruled/ Impacted by Finance Bill, 2018”.

Analysis of 50+ direct tax amendments proposed in the Finance Bill

Finance Bill retrospectively preserves ICDS; Proposes 30% DDT on deemed dividend

In addition to big ticket amendments like LTCG tax on stock-market transactions, expanded scope of 'business connection' u/s 9, Finance Bill proposes amendments to regularize compliance with ICDS w.e.f. AY 2017-18 in view of Delhi HC judgment in Chamber of Tax Consultants case; Finance Bill 2018 introduces specific provisions on MTM loss, taxation of retention money in construction contracts, bucket valuation approach for listed securities as the Delhi HC had struck down several ICDS standards on the basis that a delegated legislation could not overturn binding judicial precedents; Bill brings deemed dividend u/s 2(22)(e) within the scope of Dividend Distribution Tax (‘DDT’) at the flat rate of 30% (without grossing up); Also, relaxes rigours of sections 50C (capital gains) or Sec. 43CA (business profits) or Sec. 56 (income from other sources) with respect to transactions in immovable property, where the variation between stamp duty value and the sale consideration is not more than 5% of the sale consideration; Extends Sec. 80P benefit to Farm Producer Companies (FPC); Further, proposes MAT and loss carry forward relief u/s 79 where company’s application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 has been admitted

Click here to read the Taxsutra analysis of the 50+ direct tax amendments proposed in the Finance Bill. 

Finance Bill introduces digital PE concept, amends business connection definition, preserves ICDS

Budget 2018 proposes enlarging of the scope of business connection with modified PE Rule as per Multilateral Instrument (MLI); "Business connection” shall include any business activities carried through a person who, acting on behalf of the non-resident, habitually concludes contracts or habitually plays the principal role leading to conclusionof contracts by the non-resident; “Business connection” definition also expanded to include “Significant Economic presence”; Significant Economic presence includes any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means; Plethora of ICDS related amendments introduced in the wake of recent judicial pronouncements; ICDS amendments to have retrospective application given that most taxpayers have already complied with the same.

Copy of Memorandum to Finance Bill, 2018

Click here to download copy of Memorandum to Finance Bill.

Key Budget Proposals

FM proposes LTCG on stock market transactions, re-introduces standard deduction for salaries class

Click here to read Key Budget Proposals.

Economic Survey 2018 Highlights

Economic Survey tabled in Parliament, reveals rich data points thanks to ushering in of GST regime; Survey highlights large increase in no. of indirect taxpayers, many who have voluntarily chosen to be part of GST; Based on average GST collections so far, weighted average collection rate estimated at about 15.6% and hence the Survey projects that a 15-16% GST rate would preserve revenue neutrality; GST data reveals that 5 states (Maharashtra, Gujarat, Karnataka, Tamil Nadu & Telangana) account for 70% of India's exports, also suggests that India's internal trade in goods & services is even higher than previously thought, at about 60% of GDP; Survey highlights “…there are many firms that appear to be outside the GST even though they are in the GST-included sectors. One possible reason is that they fall below the GST threshold, but there might be others...”; Survey terms the encountering of GST implementation challenges as "unsurprising" given the scale, scope & complexity of the change, calls for Govt. to stabilize GST implementation as a big agenda item for next financial year; Economic survey advises the Govt. to conduct a comprehensive review of embedded taxes arising from products left outside GST as also those that arise from 'tax inversion'; Survey terms GST revenue collections as 'surprisingly robust' given that these are early days of a disruptive change; Survey highlights poor success rate of Income tax & Indirect tax depts. in Court litigations despite filing an overwhelming majority of petitions/appeals; Survey further highlights addition of about 1.8 million in individual income tax filers since November 2016 (i.e. post demonetisation), states that an attack on illicit wealth has helped to level the playing field; Survey reveals that direct tax collections are on track and that non-tax revenues have under-performed : Economic Survey 2017-18

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