A tale of two tax provisions

Govt has come out with long-awaited guidelines for applying the PoEM test and the GAAR provisions

The government has come out with the long-awaited guidelines for applying the Place of Effective Management (PoEM) test and the General Anti-Avoidance Rules (GAAR) provisions. Despite allaying some fears of taxpayers, experts tell Business Standard that the element of subjectivity in applying these rules is still a matter of concern.

Why GAAR still makes corporate India jittery

The right to plan tax affairs is a fundamental right of every taxpayer. However, there are times when tax planning results in tax avoidance. To prevent this, rules have been introduced, both globally as well as in India, to ensure that appropriate taxes are levied. (ALSO READ)

Understanding the PoEM effect

The test of Place of Effective Management (PoEM) of an offshore company came into effect on April 1 last year. However, the provisions of the guiding principles came in the last quarter of 2016-17. This makes it challenging for companies whose management, operational structures and functioning are not aligned with the new rules. “The greatest impact shall be upon entities set up outside India, shell or otherwise, by Indian residents,” says Pallav Pradyumn Narang of chartered accountancy firm Arkay & Arkay. (ALSO READ)

The unfinished agenda

The Finance Minister has the opportunity while presenting Budget 2017-18 to clarify government’s position on three other contentious issues involving changes in tax rules. On top of the mind of many taxpayers is the potentially huge tax exposure – specifically due to Minimum Alternate Tax (MAT) - arising out of converting their accounting from existing Indian GAAP to IFRS-compliant IND-AS. The MP Lohia Committee that looked at the MAT related aspects has submitted three reports in this regard to the CBDT. Some recommendations of the committee are likely to be included in the Budget proposals. 

As a signatory to the Base Erosion and Profit Shifting (BEPS) Action Plans, an OECD and G-20 driven project, India has already introduced equalisation levy as a self-contained code to tax e-commerce transactions under Chapter VIII of the Finance Act 2016. Tax experts expect the government to come out with detailed rules for country-by-country reporting and those relating to creation of master file and local files as per OECD Action Plan 13. Experts further point to the need for clarifying the scope and coverage of payments under the equalisation levy to avoid disputes on classification of services that are liable to attract the levy.

The government had proposed to introduce Income Computation and Disclosure Standard (ICDS) under the Income-Tax Act to determine taxable income by corporate entities. Tax experts, however, are unanimously in favour of withdrawing ICDS. The Easwar Committee that looked at measures to simplify tax laws is reported to have proposed deferment in the implementation of ICDS.

Girish Vanvari is head of tax at KPMG in India. He was assisted by associate director Krishnan TA