Tax & Accounting Blog

Indian Finance Bill May Have Chilling Effect on Investment

Corporate Income Tax, Global Tax Compliance, Global Tax Planning, ONESOURCE, Tax Provision, Transfer Pricing, Uncertain Tax Positions, WorkFlow Manager May 8, 2012

With economic growth running at an annual pace of more than 8 percent, the attraction of investing in India is obvious. And, for many companies, investing is India is no longer optional.

However, recently  proposed  legislation may force companies to reevaluate their investment posture. Governments around the world facing budgetary crises are tightening transfer pricing regulations and strengthening enforcement in order to generate new tax revenues and India is no different.  

In India, the finance minister wants to expand the scope of transfer pricing provisions to include domestic transactions for the first time, in addition to overruling established tax treaties.  One aspect of the change that many companies find extremely troubling is the legislation will impact transactions going back close to 40 years (1976). Specifically – potential re-characterization of payments to software payments as royalties, irrespective of the fact that no software was actually downloaded or delivered to the purchaser, (cloud computing).  

In addition, the legislation would authorize India’s Central Board of Direct Taxation to define  and over-rule many established tax treaties.  This sets the stage for conflicts with the tax authorities and uncertainty within companies.

 In response to this, several commentators within the financial community have called upon the Indian authorities to reconsider these contemplated actions in order to maintain an investment friendly business environment. What’s your company doing to prepare for these changes? Share your feedback below.

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