India’s international taxation regime

Abstract

Amidst a deteriorating economic environment due to multiple factors, certain direct tax related developments during 2012 led to an outcry among the international investor community. US multinational enterprises (MNEs), by virtue of their large presence, joined this chorus, fearing major adverse consequences for the cost of doing business in India. While issues of permanent establishment and transfer pricing under international tax regimes have been a sore point for MNEs for some time, the introduction of the General Anti-Avoidance Rules (GAAR) and retrospective amendments of tax law in 2012 were seen as unprecedented and adversarial for business and industry. Although India‘s tax policy and law is generally in line with that in other tax jurisdictions, its implementation is not in tune with the international best practices followed by successful tax administrations globally. The Indian government has since taken certain steps to soothe investor sentiment but a lot more needs to be done for India to become an attractive destination for investors in a highly competitive international environment. With the advent of era of globalization, India has undergone a series of changes in the context of foreign participation and investment. Subsequent to the economic reforms of 1991, which was followed by removal of regulatory and trade restrictions and barriers, India emerged as a pleasing pivot for foreign direct investment. This led to the extension of sphere of business operations giving rise to increase in cross-border transactions. Among the developing economies, India has adopted liberal mechanism for foreign investment so as to become an attractive hub for FDI. However, the opening of national economy and widening of integration of trade with other nations, have paved way for new obstacles to the current tax regime. The balance between the domestic tax regime and international standards is required in order to promote investment in the financial system of the country. One of the mechanisms to encourage foreign investment is International Taxation. International Taxation addresses the international features and aspects of income tax laws and regulations of a specific country. Though, India has made significant achievement in lowering its tax structure for foreign investors, yet, there are wide number of issues that are yet to be resolved. They range from aspects of foreign investors engaged in business in India through permanent establishment, the various facets of Double Taxation Agreements, Transfer Pricing, taxing royalties for technical services, and the nature of income accrued. The various aspects of these issues affect the foreign investment and taxation regime in India. Another issue that affects the international taxation regime of India is the redressal of disputes arising in the context of above-mentioned issues. These disputes take years to resolve owing to the uncertainty of grievance forums, litigation costs, and compliance costs which affects the international growth of the country. The Income Tax Act, 1961 contains provisions that addresses the transactions that have extra-jurisdictional effect like the incomes that are earned abroad by resident tax payers or incomes that are earned in India by NRI‗s and foreigners which are taxable in India under specific circumstances. Therefore, an attempt has been made in the dissertation to address analytically the laws and legislations that govern the taxation regime of foreign investors in India in order to reflect the major consequences, challenges and drawbacks of various issues involved in various components of International Taxation in Indian regime and propose suggestions.