Keen to win back investor confidence, the finance ministry is likely to dilute the proposed controlled foreign corporation (CFC) rules meant to target Indian corporates that defer tax payments by allowing their foreign subsidiaries to keep profits with themselves rather than transfer them to parent companies in India.
Sources close to the development said the ministry is reviewing the CFC provisions in the direct taxes code (DTC) pending before Parliament in the light of the government?s latest commitment to allay fears of regulatory over-reach and to ensure a stable and non-adversarial tax regime. ?We have been conscious about the concerns of genuine taxpayers. That emphasis stays,? said a finance ministry official, who asked not to be named.
CFC provisions are aimed at preventing Indian promoters of foreign companies from avoiding taxes here by not bringing back profits. These provisions, which have examples in most developed countries, are being introduced in the wake of Indian companies? overseas forays and the expanding list of India-born multinationals.
The proposal to deem such income to have been distributed and to tax it in the hands of the Indian shareholder as dividend had earlier led to criticism that it would lead to double taxation and litigation.
Experts said the ministry no longer views CFC as a revenue collection tool and is willing to be more sensitive to investor concerns. The likely relaxation would include changes in definitions to make the scope of CFC provisions narrower. Sections of the industry had earlier suggested that CFC rules should be limited to one level of overseas subsidiaries and that credits should be allowed on the taxes paid by the foreign subsidiary abroad. Finance ministry has been of the view that tax credits would be decided by double taxation avoidance agreements and are country-specific.
?CFC rules are relevant for countries that are net capital exporters. India is still a net capital importer. Now, the government is more sympathetic to the representations previously made by industry and professional bodies,? said Vipul Jhaveri, partner and head, M&A Tax, Deloitte Haskins & Sells. Experts also said CFC rules and its relevance to India need to be reviewed in its entirety. The problem of alleged tax deferral by some Indian companies could be solved by lowering the tax on dividend distributed by a foreign subsidiary, said Jhaveri.
The Parliamentary panel that examined the DTC had said that CFC norms may be necessary to protect the country?s tax base but cautioned that the original provisions vested too much discretion with the authorities. The US, Germany, UK and Japan have provisions to tax non-repatriated profits of a CFC.
The intention to make CFC norms more acceptable to businesses stems from the experience of general anti-avoidance rules (GAAR) introduced in Finance Act 2012 which attracted sharp protests from the investor community, forcing the government to refer it to a panel for widespread consultation before making guidelines. GAAR was originally envisaged in DTC, but former finance minister Pranab Mukherjee introduced it this year and later deferred implementation by a year. Mukherjee also introduced the advance pricing agreements envisaged in the DTC to reduce transfer pricing disputes.
