- May 14, 2020
- Posted by: IBA LLP
- Category: Articles, Direct Tax
We all are well aware of the current situation and its impact across the globe. The wrath of pandemic novel Corona virus (Covid – 19) has affected many lives taking the number of positive cases to 2.5 million while more than 78000 cases in India. Considering the seriousness of the crisis, our honourable Prime Minister Narendra Modi has taken various steps to control the spread of this virus by imposing a nationwide lockdown from March 26 –April 14, then imposing a second nationwide lockdown from April 15 –May 3 and finally we are in third phase of lockdown from May 4 to May 17 thereby forcing a unity amongst all Indians to fight against this pandemic.. Most of the corporates would have not anticipated such a crisis in their business. Thus, in this article, we have tried to explain the difficulties or challenges that tax officials or taxpayers are facing in the current crises.
As per Nitin Sood, CFO, PVR, “the biggest problem haunting them is that their business continuity plans (BCPs) are being tested and reworked every day”. For any organisation, the biggest challenge right now is business continuity. A company like PVR, which garners revenue in the range of Rs 300 crore per month, is staring at a situation where revenue is NIL because all theatres are shut. So, the question is how to sustain the fixed cost. Nobody knows how long it will last and how soon India will bounce back. So, CFOs will have to play a very active role and work with business teams to figure out business continuity plan.
Here we have explained what the major tax challenges from the Direct tax perspective could be.
Residential status of Internationally Mobile Employees :
The scope of income that may be subject to tax in India for individuals is dependent upon their residential status in India. The residential status of an individual is determined on the basis of the period of stay in India for each financial year. An individual would qualify to be resident in India during a financial year, if any one of the following conditions are satisfied:
- Stay in India is 182 days or more during the financial year; or
- Stay in India is 60 days or more during the financial year and 365 days or more within 4 years preceding that financial year.
If none of the above conditions are satisfied, an individual qualifies as non-resident (NR) and only paying taxes in India for the income received in India.
The current situation has restricted the ability of individuals to travel. This has resulted in following situations:
- Inability of resident temporarily overseas to come back to India; and
- Inability of foreign employees temporarily in India to go back to their home country
It will create uncertainty for individuals and their employers with specific reference to their residential status, tax position to be taken etc.
This might result in income being taxed in both the countries and may result in unnecessary hardships hardship to the taxpayers. Thus, the government should consider providing relaxation in relation to this aspect. Stay in India as a consequence of a force majeure event as referred to above, will be excluded while counting the number of days the individual has been present in India. As an alternative, the government may consider indicating that where an individual was supposed to leave India during the suspension period say, starting 19 March 2020, the same may be excluded from the count of number of days in India.
The government of many countries like Australia, united Kingdom have already acted upon this issue
Residential Status of companies (Place of Effective Management):
A company is said to be a resident in India if:
- It is an Indian company
- Its place of effective management (‘PoEM’) is in India
PoEM means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are, in substance made.
In the context of determination of POEM in cases where company are not engaged in active business outside India, then the following two-steps test is done:
- identification of the persons who make the key commercial or management decisions of such company, involves determining the place where such decisions are made.
Thus, the Management personnel/CEO may not be able to travel to the habitual workplace due to COVID-19 restrictions and may have to attend board meetings from India via telephone or video conferencing. This may result in the creation of POEM in India.
Thus, a clarification would be required in this regard also from the Government of India.
Risk of creation of Service Permanent Establishment (PE) :
The employees of home country traveling to foreign country for an assignment had to extend their stay in foreign country due to lockdown and travel restriction. As a result , the companies may be concerned that their employees will create a PE for them in another jurisdiction because of a change in working location, which would trigger new filing obligations and tax obligations
For example: working from home for a considerable period of time in another jusidiction might lead to creation of Fixed place PE treating the home as a fixed place from where the business is carried on partly or wholly .
Similarly , due to the extended period of stay in another jurisdiction, it might also lead to creation of Service or Construction PEConsidering the above issues, though Organization for Economic Cooperation & Development (OECD) issued guidance on April 3,2020 but it would not be binding on India as India is not a member country.
Thus, the government is required to come out with some guidelines to avoid creation of PE due to COVID-19 and reduce future litigation.
Extension of statutory filing due dates :
Many developed nations like USA, UK, Australia, Canada have extended the due date for statutory filing considering the current situation of global crisis. Thus, Indian Government should also think of extending due date for filing returns by individual taxpayer and corporate.
More so because the forms are not yet notified by the government for individual tax payers which are otherwise notified in April. Also, the date of issue of form 16 by the employers have been extended. Companies are facing challenges in getting their audits completed.
Thus, considering all these, it would be a welcome move if the government of India also extends the due date of statutory filings.
Transfer pricing Implication :
In the current situation the Indian subsidiaries are faced with cash flow issues. In such situation, these companies may not only resort to banking loan but also ask their overseas parent to extend financial help to them in form of inter company loans and advances. Thus, the interest charged on these loans has to be at arm’s length price. Also, there can be a situation that the parent overseas company ask its subsidiary to reduce the margin charged on the international transaction.
This might also lead to number of transfer pricing litigation in India and thus again, government would need to issue some guidelines for these special transactions.
There is no denying that world is passing through one of the most difficult and unprecedented times. Social distancing and locking down of major economic activities are adversely impacting citizens of all countries, most importantly the poor. Businesses, across the spectrum are badly affected. They are facing several challenges, most notably keeping supply going on, retaining employees and supporting their financial situation, and ensure regulatory compliances. The challenges posed by this pandemic will definitely have long-term impact on businesses and its taxability. However, changes to tax policies to address these long-term issues, is something which we will have to wait and watch.
The governments across the world has come out with various tax relief measures for its taxpayers to reduce the hardship caused to those taxpayers because of this pandemic. Indian Government have also given some tax relief due to COVID-19. However, the Indian taxpayers are expecting a lot more from the government.
Author: Yashish Sharma