Impact of changes in tax rules: An analysis by Deloitte

Base Erosion and Profit Shifting (BEPS)
Background
As a process for reforming the international tax system and discourage international tax avoidance, the Organisation of Economic Cooperation and Development (OECD), in 2013, released a 15-point action plan, known as the BEPS Project. The core pillars of BEPS are: Increasing coherence in tax rules that impact cross-border taxation, increased tax transparency and documentation, improve information sharing among governments and reinforcing requirement for commercial substance, so that tax liability is aligned to the location of value creation.
 
Issues

• There is need for a road map on a multilateral tax treaty or amendments to bilateral tax treaties to give effect to the BEPS objectives
• Amend the Income-Tax Act, including Chapter X (transfer pricing code) or GAAR rules to align them to the BEPS action plan
• Need for specific rules related to deductibility of interest in case of hybrid instruments and other thin capitalisation issues 

Impact

• The Budget has sought to limit expense deduction in respect of interest paid by an Indian company or permanent establishment of a foreign company to a related party outside India in excess of prescribed limits, thereby giving effect to BEPS issues on thin capitalisation and hybrid mismatches
• The scope of the domestic transfer pricing provisions is proposed to be curtailed, thereby reducing the compliance burden on those companies which are not claiming any specified profit-linked deduction

 
General Anti-Avoidance Rules (GAAR)
Background

The objective of general anti-avoidance rule (GAAR) is to deny tax benefits to an arrangement, which has been entered into with the main purpose of obtaining tax benefits and which lacks commercial substance or creates rights and obligations that are not at arm’s length principle or results in misuse of tax law provisions or is carried out by means or in a manner that are not ordinarily employed for bona fide purposes. The over-arching principal of GAAR provisions is “substance over form”.
Most developed economies, including Australia, the US, Germany, the UK, have incorporated GAAR rules in their domestic legislation. The broad international consensus in implementation of GAAR is that such measures should only be invoked in a limited number of cases. Recent clarifications issued by the central board of direct taxation (CBDT) indicate the government’s commitment to make GAAR provisions effective from April 1, 2017.

• Specific Anti Avoidance Rules (SAAR) are those which are targeted towards a particular class of transaction. This includes rules relating to transfer pricing in domestic tax law
• Many countries have incorporated GAAR/SAAR rules in their domestic legislation such as Australia, USA, Germany, UK etc. The broad international consensus in implementation of GAAR is that such steps should only be invoked in a limited number of cases. GAAR provisions are effective from April 1, 2017 

Issues 

• The clarification that GAAR may still be invoked where limitation of benefit (LOB) clause exists, if the anti-avoidance issues are not sufficiently addressed in the tax treaty, may lead to uncertainty
• The current GAAR exemption limit for tax benefit up to ~3 crore seems to be set at a modest level and the industry expectation is that it should be raised significantly 
• In the current challenging economic scenario, keeping investors’ sentiments into consideration, India Inc’s expected Finance Minister Arun Jaitley to defer GAAR implementation by at least a year 

Impact 

• The finance minister has not given into the industry representation for deferring implementation of GAAR provisions. In addition to this, he has proposed a number of specific anti avoidance rules (anti-abuse measures), such as transfer of listed-securities, which have been acquired after October 1, 2004, without payment of securities transaction tax will now not be eligible for long-term capital gain tax exemption. This may impact certain exits through bulk transactions on the stock exchange, while the said shares may have been originally acquired through an off-market transaction. Detailed guidelines in this regard are awaited
• The Budget has inter alia proposed exemption to foreign portfolio investor from indirect transfer provision. Accordingly, the recent concerns of the foreign institutional investors, relating to application of some anti-avoidance measures in the domestic law, have been addressed 

Ind-AS impact on MAT
Background

From financial year 2016-17, certain companies are mandatorily required to adopt Ind-AS (IFRS-compliant Indian Accounting Standards). A key feature of Ind-AS is recording of transactions based on economic substance which could result in recognition of notional benefits and expenditures, changes in the timing of revenue recognition as compared to previous accounting standards, fair valuation of certain financial assets and liabilities resulting in unrealised gains or losses
 
Issues

• Industry expects that an effective transitory mechanism is provided in law for first-time adopters, which recognises the concept of real income 
• Another issue that needs clarification is whether the notional income and expenses recognised as per Ind-AS will be considered for the purposes of tax computation, both for minimum alternate tax and the regular provisions of the Act 

Impact 

• The government has addressed industry’s concern in relation to adopting Ind-AS by excluding taxation of the revaluation of gains or losses on property, plant or equipment, intangible assets or those arising from investment in equity instruments, till actual disposal/realisation for MAT purposes
• In order to reduce the hardship anticipated by the first-time Ind-AS adopter, the Budget has also clarified that an entity may use fair value in its opening Ind-AS balance sheet, as deemed cost for investment in a subsidiary,  joint venture or associate in its separate financial statements without being subject to MAT levy

Amit Agarwal

Partner,  Deloitte Haskins & Sells 

A Budget to promote  digital economy,  enhance tax compliance, stimulate growth via public investment while sticking to fiscal consolidation

Vipul Jhaveri

Partner, Deloitte Haskins & Sells

The Budget focuses on long-term growth and development. No path-breaking tax reforms announced