GLOBAL MINIMUM TAX SERIES – PART 22 ,Global Minimum Tax in India: An Analysis

[Amit Jalan]

Friends,

Global Minimum Tax is all set to be effective from 2024 with over 138 countries around the world agreeing to implement of which over 50 have already either enacted / substantively enacted or come out with draft laws. India has agreed to this global pact to ensure that in-scope large corporations pay a 15% Global Minimum Tax. In this article we will look at as to how would MNEs with operations/entities in India could be impacted with this.

We hope this bulletin adds Value in your professional Sphere.

Corporate Tax

The standard corporate income tax rate for an Indian company is 30% plus surcharge of 7% or 12% depending upon turnover threshold and health/education cess of 4% on income tax and surcharge (resulting in an ETR of over 30% as all of this would be covered taxes for GloBE purposes). Certain smaller companies (whose turnover is under $ 48 million at an exchange rate of INR 83 to $) are taxed at 25% plus surcharge and cess.

A PE of a foreign company in India is taxed at 40% (plus surcharge and cess).

The Income Tax Act also provides for some concessional tax rates, as below:

A beneficial CIT rate of 22% (plus 10% surcharge and 4% cess) under section 115 BAA for companies in SEZ, where the companies have not claimed SEZ or any other exemptions, incentives, or deductions (e.g., SEZ tax holiday, accelerated depreciation, deduction for scientific research costs, etc.). These companies are also not subject to MAT and MAT credit.

A beneficial CIT rate of 15% (plus 10% surcharge and 4% cess) under section 115 BAB, to new manufacturing companies and companies engaged in generation of electricity. Companies exercising this option are not granted any other exemptions, incentives, or deductions and are also not subject to the MAT.

Therefore, the standard CIT rates in India are generally higher. Even the lowest rate of 15% (plus surcharge and cess) comes with certain conditions and restrictions that other tax incentives and exemptions cannot be used in conjunction with this low rate which would prevent a company to have an extremely low ETR.

Further, as this reduced rate of 15% applies to new manufacturing companies and companies engaged in generation of electricity, for an MNE taking advantage of this rate, it is likely to result in significant tangible assets and payroll costs. As such, even if there was an ETR below 15%, the effect of the substance-based income exclusion under the GloBE Rules will reduce, if not eliminate any top-up tax. Nevertheless, reduced rates could potentially see certain Indian companies having an ETR of under 15% which could trigger top-up-tax in foreign jurisdictions (subject to any local QDMTT being enacted).

Minimum Alternate Tax (MAT)

Section 115 JB of the Income Tax Act provides for a minimum tax of 15% of book profit (as adjusted, plus surcharge and Cess). If the tax liability is less than 15% of book profit, MAT applies which would increase the domestic tax payable to 15% of book profit. Any excess tax payable is then carried forward for future offset as a MAT credit. However, MAT would not qualify to be a QDMTT under the GloBE Rules as essentially it is does not mirror the GloBE Rules (it does not provide for jurisdictional blending, or the adjustments to book profit are not on lines of the GloBE Rules). For GloBE purposes, therefore, MAT (plus surcharge and Cess) will be simply a covered tax, considered for calculating Pillar Two ETR.

Withholding Tax

Withholding taxes are applicable for payments made to a non-resident in the form of interest, royalty, fees for technical services or dividend payments, subject however to any specific Treaty benefits. Withholding taxes on dividends are at 20% of the gross dividend and are allocated to the Indian entity distributing the dividends (hence treated as covered taxes). Withholding tax on interest, royalties and technical service fees to a non-resident is generally at 10% and are allocated to the recipient, subject to any Treaty benefits. However, where no withholding taxes are paid, the expense is not deductible for tax purposes under section 40 of the Income Tax Act. This would mean an overall higher ETR due to higher taxes (on account of lower deductible expenses) as well as higher Taxable Income.

Tax Incentives

India has a number of tax incentives that are relevant for Pillar Two purposes, e.g.

i) Expenditure based incentives such as the additional 30% deduction for new employees under Section 80JJAA of the Income Tax Act are particularly attractive in a post Pillar Two environment. They are highly targeted and encourage direct investment. Whilst they will reduce the GloBE effective tax rate (ETR) and potentially could give rise to top-up tax, the enhanced deduction Section 80JJAA also needs to be considered in terms of the substance-based income exclusion. Encouraging the employment of new employees increases the payroll carve out and reduces any potential top-up tax. Such incentives are therefore attractive going forwards.

ii) The 20% deduction for investments in newly established industrial undertakings or hotel business in deprived areas in Section 80 HHA. This would increase the tangible asset carve out component of the substance-based income exclusion. The amount of the substance-based income exclusion feeds directly into the Pillar Two top-up tax calculation as it reduces excess profits which are then used to calculate the initial top-up tax based on the top-up tax percentage. Even in a very low-taxed entity, this could eliminate any potential top-up tax if the profits were low but there was significant investment in tangible assets and payroll.

iii) Income-based incentives which are generally not as favorable under GloBE Rules are generally limited in scope in India. The Patent Box under Section 115BBF of the Income Tax Act for instance applies a 10% tax rate to royalty income in respect of the exploitation of patents. However, this is narrow in scope and given jurisdictional blending the impact on the jurisdictional ETR would be offset by any higher-taxed income of other group entities in India. NB: Income-based incentives with a wide tax base bear the risk of substantially reducing the ETR. In-scope companies would gain no benefit from this as they would suffer top-up tax in any case, and India would be administering a tax incentive that was ineffective and potentially lose tax revenue to a foreign jurisdiction (unless a qualifying domestic top-up tax (QDMTT) was enacted).

Jurisdictional Blending

This is particularly relevant in India for a number of reasons. For e.g., tax incentives that could reduce the entities’ ETR below 15% can be compensated with the taxes paid by other group entities in India at a higher rate. Given that a PE of a foreign company in India is taxed at 40% (plus surcharge and Cess), MNE’s with a mix of PEs and domestic entities will benefit from jurisdictional blending.