BDO India: Countdown to the Budget 2022_Vol-2
27 January 2022
As we begin the run-up to the India Union Budget 2022, BDO India is pleased to share key expectations from this year’s Budget announcements, in our Pre Budget campaign: Countdown to the India Union Budget 2022 (a two-volume series)
Taxing the digital economy has been a challenging task for several countries. However, with 136 nations reaching a consensus under OECD’s (Organisation for Economic Co-operation and Development) Inclusive Framework, there seems to be some light at the end of the tunnel.
The rolling back of the retrospective applicability of taxing indirect transfer by India will boost investors’ confidence and help in attracting more foreign investment. The following measures may be expected in the Union Budget 2022 (Budget) from an international tax perspective:
Challenges surrounding the Digital economy
Equalisation levy (EL) and Significant Economic Presence (SEP)
- With enlarging the scope of EL (i.e., EL 2.0), a situation has arisen wherein a non-resident seller communicating over an email (say order confirmation or receipt of payment) may be subjected to EL. EL may be attracted even if the involvement of digital media forms an insignificant part of the entire transaction. Hence, an amendment may be brought in to exclude transactions where digital media has not played a significant role.
- SEP provisions are made applicable from FY 2021-22 onwards. However, the Rules on attribution of profits/income to an SEP of a non-resident in India are yet to be enacted. To avoid unwarranted uncertainty and litigation, it is expected that rules on the attribution of profits to SEP may be announced. Also, clarity may be provided to remove the overlap between the current provisions of SEP and EL.
- The enlarged SEP’s scope may be restricted to provide that only specified services or activities carried out by a non-resident through digital means will constitute SEP in India.
- With the Pillars proposed to be in place by the end of 2023, the roll-back of EL and SEP provisions in a gradual manner may be initiated.
Implementing OECD’s Two Pillar solution
- The OECD recently came out with a template to implement a global agreement on imposing a 15% tax on MNE Groups exceeding a turnover of over €750mn. It is expected that the budget session may provide clarity with respect to the timelines for implementing the Two Pillar Solution.
- In November 2021, India and the USA had agreed on the transitional approach on EL during the interim period before Pillar One Rules come into effect. It is expected that the final terms of the agreement between India and the USA may be announced.
Challenges surrounding the Digital economy
- Many questions emerge on the levy of GST on Online Gaming activities offered by overseas service providers. The current GST law and judicial precedents leave room for doubts regarding its taxability in India.
- E-commerce platforms, Online Information Database Access and Retrieval (OIDAR) services, online Intermediary services, etc. are also major participants in digital transactions and taxed under the indirect tax law. Since these are early days in GST legislation, they are not free from challenges, right from registration to compliance.
Transfer Pricing (TP)
- The current threshold of INR 10mn to maintain detailed TP documentation is very low and has been unchanged since the last two decades. The threshold limit may be increased for easing compliance requirements for small taxpayers and also to align Indian TP regulations with global best practices.
- The provisions of thin capitalisation were introduced to restrict the base erosion of profits. Therefore, where both the lender and the borrower are residents in India, there will be no base erosion. However, since the provision plainly mentions lenders without distinguishing between resident and non-resident lenders, even the cases where a loan is provided by a resident lender and guarantee is provided by the Associated Enterprise fall within the ambit of thin-capitalisation rules. To clear this anomaly, a clarificatory amendment to this effect may be announced.
- The Government may consider putting in place a maximum time limit for the conclusion of APAs involving a smaller number of transactions, say up to two transactions. For example – If the APA is filed only for obtaining the certainty on a transaction pertaining to payment of brand usage fees, the Government may consider putting in place a maximum time of 18/24 months for the conclusion of such APAs, except under exceptional circumstances, which may be prescribed.
- In the extant Transfer Pricing Regulation, there is no specific mention or recognition of ‘tested party’ concept. The Government may consider incorporating the definition of tested party and its application while selecting the most appropriate method in the Indian TP Regulations.
- Profit attribution to a PE is also marred with litigation. To reduce litigation, the CBDT had issued, in April 2019, a public consultation paper proposing “fractional apportionment” approach for profit attribution. It is expected that this Budget may pave way for PE attribution rules to see the light of the day.
Cross border taxation
Indian regulations viz., the Companies Act, 2013 and Foreign Exchange Management Act, both permit cross border merger i.e. merger of an Indian company into a foreign company. We have also seen a lot of transactions involving Special Purpose Acquisition Companies. While the Indian tax laws provide for a tax exemption in case of mergers of Indian entities, it is time that the tax laws are amended to extend the exemption to cross border mergers as well.
As India inches towards achieving a milestone of vaccinating the majority of its population and rating agencies forecasting a healthy growth rate for the Indian economy in the coming years, it is expected that this year’s Budget may have amendments to make India an investment destination hub.