Global tax rules + continued policy reforms: Advantage India

The world GDP shrank by 3.3% last year as compared to 1% in 2009 (2008-09 Global Financial Crisis) and this has forced many countries to think and revaluate their tax and compliance legislations. The focus has now shifted towards levelling the playing field and creating compliance structures that are more inclusive.

The recent changes in the global tax rules proposed by OECD-G20 nations are likely to have a far-reaching impact on the way global companies are structured and the way they do business.

With the advent of digital and technological advancements, it has become possible for companies to be present in one country and operate in another, or for that matter across the world. Many a times organisations, especially companies that supply digital goods and service, have no brick-and-mortar presence in a location, yet they have a significant business presence in the form of number of consumers in that country. Such countries and their revenue authorities feel deprived of their fair share of tax collections.

The proposed global tax changes include a minimum corporate tax rate of 15% and allocation of taxation rights to countries where global companies have consumers. The proposed global tax framework consists of two Pillars. Pillar One focuses on the allocation of taxable profits to market jurisdictions, and Pillar Two focuses on global minimum tax rate.

Pillar One will apply to large multinational enterprises (MNEs) that have global sales of more than euro 20 billion and profitability greater than 10%. It seeks to allocate 25% residual profits of large MNEs above 10% to market jurisdictions. Prima facie, India with a large consumer base should eventually have a bigger share of the pie as compared to the other market jurisdictions.

It is pertinent to note that due to the high turnover threshold prescribed in Pillar One, many companies would still not be liable to pay tax in market jurisdictions. Accordingly, it will have to be seen if India withdraws its digital taxes for such companies as well or such withdrawl happens gradually with lowering of these limits. Currently, the thresholds for applicability of India’s Equalisation Levy are quite low and therefore, it is difficult at this juncture to estimate the impact in terms of revenue numbers for the Indian exchequer.

The proposed changes are likely to push global companies to review their existing business models in terms of their supply chain, housing of their IPRs, and intermediary holding company structures. Besides tax implications, various other business considerations including ease of doing business, protection of IPR rights, litigation and dispute resolution, time taken to enforce contracts, potential business opportunity / customers etc. play an important role in determining the size and scale of business operations in a particular country.

It is expected that the proposed changes will reduce ambiguity in the tax structures, especially on account of unilateral measures such as digital taxes. Further, the introduction of minimal corporate tax rate is likely to provide a level playing field in terms of tax arbitrage vis-à-vis various tax jurisdictions.

Another big change due to pandemic vis-à-vis global businesses has been to look for alternative countries to meet their manufacturing and other supply chain requirements. India with its vast spread and young educated population is best suited to meet this challenge and address the global demand.

In the last ‘Doing Business’ report, India ranked 63th on the list, improving its ranking by 79 positions in the five years between 2014 and 2019. Though these rankings are proposed to be discontinued, they do indicate significant improvement due to various policy initiatives like the establishment of an insolvency regime, introduction of GST, policy impetus to boost manfucaturing, etc.

The ongoing pandemic has forced the global companies to re-evaluate their business and supply chains, across the globe. This, coupled with major changes in international tax regimes, offer a unique opportunity for India to attract foreign investment in key sectors like infrastructure, manufacturing, fintech, e-commerce, IT & technology etc.

Thus, with continued policy rationalisation, and pro-business policies, it should be Advantage India!