In what is being seen as a significant policy shift, the Finance Minister, Mr Pranab Mukherjee, said on Saturday that India will look to align with the OECD model for taxation in full measure in the coming days.
This intent to align with the OECD model is also a signal that India is getting closer to the Organisation for Economic Cooperation and Development (OECD), a club of rich nations.
India had traditionally been following the UN model of taxation. But it had set its sight on the OECD model in the recent years, especially after it decided to lift Article 26 (clause on exchange of information) from the OECD model convention and incorporate it in all the revised double taxation avoidance agreements and the new tax information exchange agreements entered into by the country.
“Now that India has been included as 34th member of Financial Action Task Force, we will accept the OECD model. Earlier, it was difficult for us to accept the OECD model because we were not member of the task force,” Mr Mukherjee said at a post-Budget meeting organised by FICCI.
OECD does not push the boundaries on source-based taxation and relies largely on residency-based taxation, tax experts said.
Although OECD does maintain that residency-based tax principle should be adopted, India as part of developing countries garnered tax revenues by largely relying on source-based tax principles.
“How India will be able to align itself with OECD tax principles in coming years is something that needs to be seen considering that it will require radical shift in its tax policy. Currently, India is adopting aggressive source-based taxation philosophy,” Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas, told Business Line here.