Key Points from India’s 2017 Budget Announcement
By Prateek Dhingra, Consultant, Transfer Pricing, Radius
While the tax system in India undergoes an overhaul with the introduction of a goods and service tax, finance minister Arun Jaitley presented the government’s budget to the Indian Parliament. Jaitley made the announcement on February 1, 2017 for fiscal year 2017-2018, which starts April 1.
For businesses operating in India, the new budget’s messages are mostly positive. India’s corporate tax rate for smaller companies will be reduced to 25 percent by 2020. Not only will this bring welcome relief to existing businesses, it will likely further induce foreign companies to enter India’s large economy, which is currently growing at a robust rate of about seven percent.
Despite this trend, the area of speedy dispute resolution still needs improvement. The World Bank currently ranks India 130 out of 190 nations in ease of doing business, which is up 12 spots from 2015 but is still not a great advertisement for prospective multinationals.
India’s market promise still far outweighs its bureaucratic challenges for many multinationals. Apple, for example, has reportedly struck a deal to manufacture phones in India. For those multinationals operating in or considering expanding into India, here is a summary of key points from its new budget.
Key Points for Businesses
- Though there was an expectation in the corporate world that tax rates would be reduced across board, only smaller companies will get relief. Companies with a turnover of up to INR 500 million (about $7.4 million) will now be taxed at the corporate rate of 25 percent instead of the present rate of 30 percent. According to the government, such companies form 96 percent of the total companies filing returns.
- The government has decided to abolish a body that examines large foreign investment proposals called the Foreign Investment Promotion Board (FIPB). This move should reduce red tape and make it easier for overseas investors to establish operations in India. It is proposed that FIPB will be phased out in FY2017-18. In addition, the Foreign Direct Investment Policy (FDI) will be liberalized.
- India’s Minimum Alternate Tax (MAT) will likely continue. The budget notes that although “there is a strong demand for abolition of MAT … it is not practical to remove or reduce MAT at present.” Jaitley proposes that companies be allowed to “carry forward … MAT [credit] up to a period of 15 years instead of 10 years at present.”
- In line with BEPS Action Plan 4 and the introduction of thin capitalization rules, interest deduction is proposed to be restricted to 30 percent of EBITDA in case of payment of interest to related parties or even unrelated parties (if the amount is guaranteed by an associated enterprise/related party). While debt funding in India has always been subject to limitations of an external commercial borrowing (ECB) framework, such disallowance will require multinational companies to rethink their funding plans for Indian operations.
Key Point for Startups
- In order to promote startups in India, the condition of holding 51 percent shareholding has been done away with for eligible startups. This proposal to allow startups to carry forward losses should provide considerable relief.
Key Point Related to Transfer Pricing
- In keeping with OECD guidelines on transfer pricing, the budget proposes that the assessee must make a “secondary adjustment where the primary adjustment to the transfer price has been made in certain cases.” Many countries already provide for secondary adjustments, which may apply to deemed dividends, equity contributions or loans.
Key Points for Individuals
- The government has halved the tax rate on incomes of individuals between INR 250,000 and INR 500,000 to 5 percent.
- To make up for the tax-revenue loss from the above cut, individuals with incomes between INR 5 million and INR 10 million will be levied a surcharge of 10 percent of tax payable.