The Indian government announced several changes to their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code on February 28th as part of the 2015-2016 budget. Along with a corporate income tax rate reduction, the budget attempts to remove many impediments to foreign investment. These measures are part of Prime Minister Narendra Modi’s “Make in India” campaign, which aims to increase manufacturing in India.
To achieve the goal, the new budget calls for:
- A two-year delayed of the General Anti-Avoidance Rules (GAAR), which were slated to start on April 1st of this year. The delay is one year less than the three-year delay recommended.
- Procedural changes in the courts, which includes updated bankruptcy rules and faster dispute resolution of public contracts.
- A restriction in the scope of the retrospective tax, an indirect transfer tax on the sale of Indian assets.
- Extending pass-through status to specific investment funds and modifies the permanent establishment rules for fund managers.
- An increase in the application amount of Advance Pricing Agreements (APA) from 50 million rupees (~US$810,000) to 200 million rupees (~US$3.25 million).
- A reduction of custom duties on raw materials and intermediate goods.
- Abolishing the patchwork of federal and state indirect taxes in favor of a unified goods and service tax (GST).
- Replacing the 1% wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. with a 7% surtax on income for companies with incomes between 10 million rupees (~US$163,000) and 100 million rupees (~US$1.63 million).
- A phased reduction of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 30% to 25%. For companies within the surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. range, the effective tax rate is 32%.
Many of the changes in the 2015 budget were recommendations from the Tax Administration Reform Commission (TARC), which was set up by the previous government in 2013. The TARC focused on lowering compliance cost for companies and streamlining tax disputes in the courts as a means of promoting foreign investment and economic growth.
These are much needed reforms according to the World Bank’s Doing Business report, which ranks India as the worst of the BRIC countries to conduct business. India was ranked 142nd in the world for overall easy of doing business and 156th for its tax code.
Prime Minister Narendra Modi is hoping the tax provisions in the new budget, along with increased infrastructure spending, will fix many of the structural problems in the Indian economy. Modi has been touting that the “Make in India” push will propel the country from the projected growth rate of 6.5% to 8%.
Although this is a step in the right direction, there are concerns about how the provisions will be implemented and how to deal with a considerable backlog of transfer pricing agreements. Although markets are betting on India, it remains to be seen if Prime Minister Narendra Modi will realize the additional 1.5% growth.
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