US' Plan to Impose Higher Tax on MNCs Could Hinder India's New Tax Regime

The United States is planning to roll out a new regime whereby global profits of multinationals, that includes US tech giants, would be slashed with additional domestic tax. This applies if the companies aren’t paying a minimum of 28 percent taxes from anywhere in the world. With this new tax proposal from the world's largest economy is expected to hit India's new tax regime that has been introduced in 2019 to attract fresh investments in manufacturing sector.

The Biden administration's new proposal would clash with India’s new tax regime that offered a 15 percent tax rate to any firm that sets up a new manufacturing facility in India. A key point to note would be how the additional levies would be calculated.

Ajay Rotti, partner, Dhruva Advisors states, “While the normal corporate tax rate in India is not low, this could impact any US MNC if its Indian subsidiary is availing India’s 15 percent tax regime (available for new manufacturing companies). Also, the larger question will be whether these companies will get the credit for Indian taxes even if they end up paying under SHIELD (Stopping Harmful Inversions and Ending Low-tax Development) in the US or not.”

According to tax experts, some of the largest US firms have either set up new manufacturing facilities in India, or are looking to do so, to avail the lower tax regime.

On the other hand, tax experts are still not clear on how US would impose this additional levy. And would the companies have to pay the difference (between 28 percent and 15 percent) or the US levy (28 percent) could be over and above Indian tax rate?

In 2019, the Modi government slashed corporate tax rates to 22 percent from 30 percent for existing companies and to 15 percent from 25 percent for new manufacturing companies.

Now, the firms have the choice to either opt for higher tax rates, or the new tax regime but without any tax benefits and incentives. The latest rate for new manufacturing companies is one of the lowest in the world, the business daily has mentioned citing tax experts. This also comes at a time when the US and India are already at loggerheads over the latter’s digital taxation on companies such as Google and Facebook.

As per to earlier reports, India was set to approach the USTR with an appeal to drop the proposed ‘retaliatory’ taxes, or tariffs, that is applicable to shipments of some Indian products to US.

However, USTR has proposed a retaliatory trade action of up to 25 percent tariffs on sea foods, basmati rice, and gold against India for imposing equalisation charge over some American companies.