India is carefully evaluating the OECD-led Pillar 2 tax framework, which proposes a minimum 15% corporate tax for multinational enterprises (MNEs) with global revenues over €750 million. Despite support for global tax reform, the Indian government is likely to delay the Pillar 2 implementation due to its limited revenue benefit and potential impact on sovereign tax policy.
The Pillar 2 framework, developed by the OECD, introduces a minimum tax rate to ensure that MNEs pay a fair share of taxes regardless of where they operate. For India, joining this framework comes with both opportunities and challenges.
Why India is Considering Delaying Implementation
Although India supports fair tax practices, internal analyses reveal that implementing Pillar 2 might yield minimal additional revenue, approximately ₹100-200 crore. Given this limited benefit, the government is wary of sacrificing legislative control over tax policy for a relatively small fiscal gain.
Key Factors Influencing India’s Decision
- Revenue Impact Assessment
- The primary reason for India’s hesitation is the modest revenue increase expected from Pillar 2, which is insufficient to justify potential sovereignty trade-offs.
- Preserving Sovereignty in Taxation
- Pillar 2’s “top-up tax” mechanism allows home countries to impose additional taxes if MNEs pay less than 15% in foreign jurisdictions. India, however, is cautious about relinquishing control over its tax rates.
- Complex Revenue Collection Issues
- If, for example, an Indian MNE pays only 9% in the UAE, India could impose a 6% “top-up” tax. However, if the UAE enacts a Qualified Domestic Minimum Top-up Tax (QDMTT), India might lose this opportunity, complicating revenue projections.
How Pillar 2 Affects Sovereignty and Tax Policy
Balancing Global Alignment with National Interests
India’s commitment to multilateral tax reform is evident in its endorsement of the OECD’s inclusive framework. However, concerns linger over the potential loss of national control over tax policies and the implications for India’s fiscal independence.
Qualified Domestic Minimum Top-up Tax (QDMTT) Challenges
With QDMTT in place, low-tax jurisdictions can retain revenues that would otherwise go to high-tax countries. This scenario poses a challenge to India’s goal of securing additional taxes from MNEs operating within low-tax countries.
Benefits of Delaying Pillar 2 Implementation
- Strategic Legislative Autonomy
- Delaying the adoption of Pillar 2 allows India to assess the impact on its sovereignty, especially in light of potential legislative changes.
- Time to Monitor Global Developments
- Observing how other nations handle Pillar 2 implementation will help India make informed choices.
- Avoiding Complicated Compliance Processes
- Delaying provides additional time for stakeholders to adjust to the new compliance landscape, minimizing disruptions.
India’s Legislative Path Forward
India is in the process of overhauling the Income Tax Act of 1961, with expected updates by January. This review is likely to include provisions for Pillar 2 but will likely stop short of full adoption until revenue and sovereignty impacts are more fully understood.
Potential Inclusions in the Income Tax Act
- An enabling clause to facilitate future Pillar 2 adoption.
- Provisions for international tax agreements.
Impact on MNEs in India
MNEs operating in India must stay informed as the government’s cautious stance on Pillar 2 could affect future tax obligations. They may need to navigate both India’s tax policies and Pillar 2 compliance as the framework evolves.
Arguments in Favor of Adopting Pillar 2
1. Preventing Profit Shifting and Base Erosion
- By setting a minimum tax rate, Pillar 2 curbs the practice of MNEs shifting profits to low-tax countries, fostering fairer competition globally.
2. Aligning with Global Standards
- Adopting the framework would bring India’s tax system in line with international norms, enhancing its appeal as a compliant and stable business environment.
Challenges and Considerations for India’s Tax Policy
Complex Compliance Requirements
The Pillar 2 framework’s intricate rules can add layers of complexity to the tax filing process, especially for MNEs operating in multiple jurisdictions. Ensuring accuracy and compliance might require additional resources, impacting companies’ operational efficiency.
Limited Financial Gains
As internal studies suggest, the projected revenue from implementing Pillar 2 is marginal compared to the legislative autonomy India might compromise.
Will India Eventually Adopt Pillar 2?
While India may delay the full adoption of Pillar 2, it is expected to move towards compliance over time, balancing global obligations with national interests. The government’s caution underscores a preference for strategic sovereignty and a prudent approach to revenue generation.
India’s likely delay in implementing Pillar 2 reflects a balanced approach, prioritizing fiscal autonomy over limited revenue gains. The government’s caution highlights a commitment to protecting national interests while aligning with global tax practices. Moving forward, India will continue to evaluate Pillar 2’s impact, ensuring that its legislative framework serves the country’s economic and fiscal goals.