India Budget 2014 – Measures in Right Direction

By Vishal Nanavati, India Desk Lead, PwC Singapore

India’s Union Budget 2014 was announced on Thursday 10 July 2014 by the Hon’ble Finance Minister (FM) Arun Jaitley. Contrary to past Budgets, this year’s broad spectrum of remedial measures bring tax certainty and address wide-ranging concerns of foreign investors, making the routine post-Budget question of whether the announcements match up to foreign investor expectations redundant.

Previously, I had stated that a categorical mention of remedial measures around Indirect transfers, General Anti Avoidance Rules (GAAR), Goods & Services Tax (GST), and Dispute Resolution in the Budget Speech accompanied by concrete measures will go a long way to boost investor confidence. To my pleasant surprise, the FM made specific reference in relation to Indirect transfers, a GST roadmap and Dispute resolution and announced positive steps around each of these areas.

Among the various measures announced, there are some that I believe will significantly boost global investor confidence, which in turn will help boost India’s economic growth.

Retrospective amendments: Whilst on one hand the FM acknowledged the sovereign right of any Government to make retrospective amendments, on the other he instilled confidence by confirming that the current Government should not ordinarily introduce any retrospective changes that create fresh liability. This is a welcome statement as it was probably the single largest expectation from the FM to help India regain its image as an investor friendly destination. Further, the FM took a step forward and assured the global investor community by stating that any fresh cases arising out of retrospective amendments made in 2012 in respect of Indirect transfers shall be scrutinised by a High Level Committee which will be constituted soon. We will have to wait and see what the possible outcomes of such review could be, but it provides some certainty that foreign investors engaged in such overseas transfers would not be called in by the field officers at random. However, it would have been more helpful if some clarity was provided around the current controversies viz: what is “substantial”, whether group reorganisation can be kept out of the tax net, steps to resolve current litigation around this issue, etc.

Goods & Services Tax (GST) implementation: FM has laid out the intention to follow through on GST and hopes to find a solution by end of this year. This brings in all the delight required by the global investor community.  Hopefully, a clear road-map and definitive timeframe will follow. It is worthwhile to note that the introduction of GST will not only result in higher revenue collection for the Government but also avoid unnecessary harassment to businesses that may arise due to multiple taxes levied at different points of time from production to consumption.

Dispute Resolution: To my mind, this area has been given reasonable attention given the introduction of significant measures on transfer pricing and by expanding the scope and functioning (number of benches) of the Authority for Advance Rulings.  A couple of significant measures introduced in relation to Transfer Pricing merits special attention:

  • Allowing the Roll Back provision in the Advance Pricing Agreement (APA) scheme that permits to apply the APA to similar transactions entered into in the past four years,
  • Strengthening the current APA team to expedite the disposals of more than 400 applications filed so far,
  • Introduction of “range” as against “arithmetic mean” (except in specific cases) to determine whether the international transactions between the group entities (related parties) are at arm’s length,
  • Allowing multiple year data of uncontrolled comparables for comparability purposes.

Transfer Pricing has been a major source of litigation in India and the aforesaid measures will not only help in reducing the litigation to a great extent but also help give the necessary assurance to foreign companies operating in India.

Another important area covered by FM was to provide tax clarity around the characterisation of securities investment income earned by foreign portfolio investors in India. This area has been the source of litigation for many years regarding whether such income should be treated as capital gains or business income. The FM has clarified that the same shall be treated as capital gains. This brings a great sigh of relief to portfolio investors who are tax residents of a country which India has a favorable tax treaty with, as they will be able to reap the benefits and thereby mitigate their tax exposure in India. Treaty access will of course be permitted subject to meeting relevant conditions.

In my mind the aforesaid measures will certainly help to achieve the three key objectives of 1) bringing certainty to India’s tax environment; 2) significantly reducing tax litigation; and 3) changing the mindset of tax administrators so that they treat taxpayers as customers.

Apart from above, the FM has also clarified the tax implications for Real Estate Investment Trusts (REITs) as well as Infrastructure Investment Trusts (together referred to as business trusts) by giving them a pass through status for tax purposes, or more precisely, by introducing a single stage taxation framework.

Amidst several positive measures highlighted above, one critical expectation around the deferment of General Anti-Avoidance Rules (GAAR) has not been met. Considering the current litigious climate in India, it was the need of the hour to have deferred GAAR. It will now be very important to see how the current provisions will be implemented, effective from 1st April 2015.

The Government’s commitment to provide a stable, predictable and investor friendly tax regime is quite evident from the steps taken. In my opinion, the FM was quite modest in his speech when he said that it would not be wise to expect everything that can be done in the first budget when in reality he has taken significant positive measures that will boost investor confidence and, in longer run, put the Indian economy on a high growth trajectory. As rightly stated by the FM, this is just the beginning of the journey towards a sustained growth of 7-8% or above within next 3-4 years and we wish him All the very Best!