Government should defer the implementation of taxation rules for shell companies to next financial year as the POEM norms have been unveiled 10 months into the current fiscal and could lead to "confusion" over retrospective application, experts said today.
Targeting shell companies, the tax department today issued Place of Effective Management (POEM) rules requiring foreign firms to pay taxes in India if the effective control of business, management decisions and majority of board meetings take place within the country.
"The issue to be considered is how would one comply with these guidelines as they have been issued only now, while POEM is effective from April 1, 2016 and we are already 10 months down the line," KPMG in India, National Head of Tax, Girish Vanvari said.
"This certainly merits deferment of POEM by a year to April 1, 2017, else this retrospective application could lead to confusion," he said.
Grant Thornton Advisory Director Radhika Jain too said that given the rules have come 10 months into the current fiscal, the government could have considered deferring its effectiveness by a year to April 2017.
"Moreover, the notification lacks guidance on consequences of a foreign company coming into the POEM net such as whether it would need to comply with all compliances (e.G. Withholding tax and TP) as required under Indian domestic tax law," Jain said.
Nangia & Co Managing Partner Rakesh Nangia said that with POEM rules government has closed tax avoidance opportunities for companies which artificially escape the residential status by shifting insignificant or isolated events related with control and management outside India.
"This move, just ahead of the budget, shows government's conviction to set the rule book right for the tax officers to catch hold of those trying to avoid taxes in India by playing around with their residential status," Nangia said.
The Finance Act, 2015 amended the conditions for determining the corporate residency status by introducing the concept of 'Place of Effective Management'. It was deferred by the Finance Act 2016 to be effective from April 1, 2016.
"The intent of introducing POEM was to ensure that companies incorporated outside India, but controlled from India, do not escape taxation in India and to align the concept of residency of corporates with the globally accepted principles," PwC Partner (Direct Tax) Hitesh Sawhney said.
EY India Tax Partner Rajendra Nayak said the guideline strikes the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction.
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