Budget 2015: How reforms can help Modi’s “Make in India” campaign

January 28, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The government’s “Make in India” initiative is being closely followed by Indian companies and foreign investors. A lot of hope rests on the BJP government’s first full-year budget following its victory in last year’s general election as the announcements made by Finance Minister Arun Jaitley will impact the investment cycle.

Some reforms that will help the “Make in India” campaign are:

A stable tax regime – Reforms proposed in the budget should be in line with the long-term vision for India. There should be no surprise addition of taxes or removal of tax holidays or deductions.

Clarity on tax law – Taxation in India is subject to multiple interpretations by the taxpayer and the tax department, and some of them need to be addressed at the earliest. For example, the rule on taxability of offshore transactions resulting in an indirect transfer of assets in India needs clarification. The government should come out with detailed guidelines on the methodology to compute the tax liability in India in case of such indirect transfers. The deferment of General Anti-Avoidance Rules till the tax regime stabilizes would be helpful.

Further, there are many industry-wide tax issues wherein tax officers in different jurisdictions have taken different positions. The government needs to set up a panel which would address specific industry issues, and the same should be made enforceable through the country.

Tax sops for investment in key sectors and reduction in the Minimum Alternate Tax (MAT) rate – Tax holidays for new manufacturing facilities set up across sectors would boost investment. Such new facilities should not be subject to taxes under the MAT regime. Also, the existing MAT rate should be reduced for units currently availing tax holidays.

Implementation of GST – Implementation of a nationwide goods and services tax (GST) and removal of the numerous indirect tax laws would have a major impact on businesses. A clear roadmap for implementation of GST would enable investors to take calculated calls on their investment/expansion plans in India.

Transparent and quick resolution of disputes – Increasing the scope and power of the Dispute Resolution Panel could help tackle the long list of unresolved litigation matters. Also, additional benches of the Authority of Advance Rulings (AAR) would strengthen the tax tribunal and result in speedy disposal of applications for advance rulings.

Transfer Pricing – Introduction of the concept of the rollback provisions for advance pricing agreements (APAs) in the 2014 budget was a welcome move. One expects the necessary legislative amendments being introduced in the upcoming budget to prescribe the extent and manner of the applicability of these provisions.

Going forward, the government should consider creating a financial zone to turn India into a manufacturing hub. Benefits such as lower taxes, no permanent establishment issue and non-applicability of transfer pricing provisions could be provided to businesses in this zone. They would act as enablers to convince firms to conduct their business without having to worry about the tax consequences on their overseas income in India.

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