India’s economic reforms since 1991 in terms of trade & industrial policy, liberalisation of FDI norms, and so on, have paved the way for increased participation from private and foreign players.

This resulted in greater investment by foreign entities led to an increase in complexities relating to international tax matters, which necessitated change in tax administration in India.

There has been a paradigm shift in the focus of tax department from domestic to international taxation.

The ongoing global economic recession has impacted almost every economy of the world including India.

Consequently, the governments of various countries are on the hunt for new avenues to augment their revenue collections.

At present, to increase the country’s tax collections and prevent tax base erosion, the Indian IRS is keeping a vigilant eye on various international transactions, including those within group entities, payments of royalty and management fees, attribution of income to permanent establishments in India for business carried on by foreign entities in India, and so on. The aggressive stand being adopted by the tax authorities is evident from the fact that while conducting Transfer Pricing (TP) audits concluded recently in January, the adjustments are estimated at Rs 66,000 crore vis-à-vis adjustments of Rs 7,000 crore in first three rounds of TP audits up to FY 2007-08.

Certain developments over the past one year or so, from various retrospective amendments in law last year including overriding Supreme Court judgment in Vodafone’s case to the recent jaw-dropping TP adjustment in Shell and the adverse Tribunal ruling in LG’s case on AMP expenses, have dampened India’s image as an investor-friendly jurisdiction.

A number of adverse decisions recently from the Authority for Advance Rulings (AAR) on international tax matters, besides frequent appeals against AAR decisions seem to defeat the basic purpose for which this authority was set up.

Now, the Government is wooing the foreign investor community through various measures such as permitting FDI in retail, setting up Shome Committee to review GAAR & taxability of indirect transfer, postponing applicability of GAAR to April 2016, and so on.

To provide an environment of tax certainty, the Union Government has been keen to provide a suitable mechanism to foreign entities for tax dispute resolutions. Besides constituting Dispute Resolution Panel, special benches of the Tribunal to handle international tax & TP disputes in the past, the recent rolling out of mechanism for Advance Pricing Agreements is a step being taken in this direction.

Foreign investors will be looking forward to a Budget that would reassure them of the government’s commitment towards reform-led growth.

A bold step would be bringing out clarity on certain debatable international tax and TP issues, which would reduce tax litigation and provide certainty in the minds of foreign investors.

( With input from Arvind Singal, Director Tax, KPMG in India.)

(The author is Partner, Co-Head of Tax, KPMG in India.)

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