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India may take a step closer to the global tax deal

The Union budget for FY23 is likely to offer guidance on India’s adoption of a global deal endorsed by over 135 countries last year to check tax avoidance by businesses, a major milestone in the evolution of corporate taxation.

The finance ministry is examining the enabling legislative provisions needed to be incorporated into the Income Tax Act to adopt the new framework, and guidance on this is expected in the Union budget, said a person familiar with the discussions in the government. However, detailed provisions may come later, depending on the result of negotiations, said the person who spoke on condition of anonymity.

The proposed new framework entails India getting taxation rights over offshore tech firms serving domestic customers and a ‘top-up’ tax on parents of companies with arms in low-tax countries where the corporate tax rate is below 15%. India has agreed to roll back its equalization levy or digital economy tax on offshore tech firms serving local customers once the new global tax deal is in force.

A part of the model rules for the new regime relating to a global minimum tax rate was released by the Organisation for Economic Co-operation and Development (OECD) in December, but the proposed framework for the other part relating to reallocation of part of profits of large digital economy firms, which is of interest to New Delhi, is awaited.

An email sent to the finance ministry on Saturday seeking comments remained unanswered at the time of publishing.

Experts said the framework for a global minimum tax would be implemented through domestic tax laws of countries while reallocation of large digital economy firms’ profits would be done through a multilateral treaty. “Individual nations have about a year (that is, 2022) for making necessary legislative changes for implementation in 2023," said Gouri Puri, partner at law firm Shardul Amarchand Mangaldas & Co. Experts and multinational firms are looking forward to clarity on the transition to the new regime. “Taxpayers in general, and multinationals in specific, seek certainty and predictability in the policy. Therefore, it is useful if the government can specify both the income inclusion rule for the capture of global income, which is subject to minimum taxation and the sunset of the equalization levy," said Gokul Chaudhri, partner, Deloitte India.

Amit Maheshwari, a tax partner at consulting firm AKM Global, said the model rules on global minimum tax and the rules expected on profit reallocation early in 2022 set the stage for international tax reform. “The budget needs to put in the details about the respective positions on the practical application of this reform to allow multinational enterprises in India to evaluate their structure at a group level and to plan the related compliances in advance. This will require amendments to be made in the Indian Income Tax Act," said Maheshwari.

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