The budget of 2024 is most likely to announce India’s commitment to Pillar 2. Several key countries whose investment flows in and out of India have also done the same.
The upcoming budget of 2024 will plausibly announce India’s commitment to Pillar 2. It seeks implementation of the global minimum effective corporate tax rate (GloBE) of 15%. The Organization for Economic Cooperation and Development (OECD) has spearheaded this project which is also backed by the G20 and applies to the large multinational enterprise groups. These MNE groups need to have a minimum annual consolidated group revenue of EUR 750 million. The aim is to make sure the enterprises pay this minimum rate in every jurisdiction where they operate. If this is not met, a top-up tax mechanism comes in to capture the tax.
A number of key companies through which investments flow in and out of India have either introduced or announced their own commitment to Pillar 2. These are the companies that have headquarters on Indian soil but set up operations overseas. The foreign countries include the UK, Australia, Japan, Switzerland, and more recently Singapore, – a wide majority of EU countries. The US, China, and India are one of the few countries that have yet to implement the Pillar 2.
Akhilesh Ranjan, advisor, Price Waterhouse & Co, and former CBDT member said, “There are more than a hundred Indian headquartered MNEs that would be in scope of the GloBE rules. Since several countries are in the process of implementing the new rules, India should also consider its introduction at the earliest.” “Indian business would be grateful for an opportunity to offer comments on a draft legislation,” Ranjan further adds. The government officials, on the other hand, have acknowledged that there might be two kinds of approaches that could be adopted in this case. One approach is related to the 2024 budget as it could launch provisions of the Income-tax (I-T) Act that would come into effect later. The other approach is that there could be a draft in the near future which would be released for comments from the stakeholders.
A government official said that this top-up tax might not help the country get revenue as 15% or higher is the minimum tax rate in India. However, the other prospects of the GloBE could prove to be fruitful. “Introduction of GloBE rules is vital. While the top-up tax (in case of a tax rate low than 15%) is available to the country where the entity operates, the norms of Income Inclusion Rule (IIR) or Undertaxed Profit Rules (UTRP) could help India garner tax, if it implements Pillar 2. IIR gives the right to the country of the ultimate parent entity to collect tax in case where operating entities are situated in countries that do not levy a minimum corporate tax of 15%. If the country where the ultimate parent company is situated has also not introduced Pillar 2, the countries of other operating entities get this right (provided they implement UTPR)”, says the partner and leader of MSKA & Associates, Jiger Saiya.
“The headline corporate tax rate in India, including tax rate for newly set up manufacturing entities, is more than currently proposed minimum tax rate of 15%. Even with Minimum Alternative Tax, it is anticipated that foreign MNE’s having subsidiaries in India may not be impacted. As regards, investment-based incentives or past year losses the timing difference may get addressed by way of deferred tax which is duly considered in computing the effective tax rate,” Saiya further says. “Entities operating in GIFT city will need to take a hard look at the Pillar 2 norms. The substance-based income exclusion rule is effectively a carve-out for expenditure on tangible fixed assets and payroll costs. Top-up on the balance could apply,” says Ranjan.
