A Niti Aayog proposal to introduce a Presumptive Tax regime for India’s Multi-national companies (MNCs) may provide a much-needed solution to mounting tax litigation problem faced by foreign companies in India, say market participants.
The development assumes significance as transfer pricing is a contentious issue for foreign companies in India, often leading to litigation. For instance, last week FMCG giant Hindustan Unilever (HUL) told stock exchanges it had received a tax notice of about Rs 2,000 crore involving a transfer pricing dispute where the Indian Tax Department had made some adjustments. Samsung and LG, amongst other MNCs, too have faced similar litigation with the tax department, public filings showed.
According to the proposal, presumptive tax would be an optional scheme allowing foreign companies to be taxed on a fixed, industry-specific percentage of their gross receipts from Indian operations. Companies opting for this regime will be exempt from litigation related to transfer pricing and permeant establishment (PE) matters. However, companies may continue to choose the current tax rules if they find it more beneficial but would then continue to be subject to PE and transfer pricing rules.
PE and transfer pricing have been contentious issues between MNCs and tax regulators across the world. For instance, many technology companies including Google are alleged to have employed the so “Double Irish with a Dutch Sandwich” method to avoid getting taxed in major jurisdictions including the US. This strategy involved attributing substantial profits from worldwide sales of intellectual property (IP), like ad revenue, to Irish-registered subsidiaries that were tax-resident in a tax friendly jurisdiction like Bermuda, where the corporate tax rate was zero. This process minimised taxable income in higher-tax jurisdictions.
“A presumptive tax regime can significantly reduce uncertainty and compliance burden for foreign businesses. By offering fixed profit attribution rates for specific sectors, it simplifies tax filings and minimizes disputes over PE status—one of the most contentious issues in cross-border taxation. If implemented well, these proposals could enhance ease of doing business and reduce litigation,” said Kunj Vidya, Partner, PwC India.
Implemented in some cases
Tax experts say the government has already implemented presumptive taxation in a limited form for foreign companies. For instance, there is currently presumptive tax for shipping, oil and gas services, and airline companies.
“NITI Aayog’s current proposals largely follows a similar scheme. More importantly, what also works quite well is the option proposed to ‘rebut’ the deemed profitability where the foreign taxpayer envisages the actual profits to be lower, thus rendering the much-needed flexibility,” an tax expert said.
“At the very fundamental level, presumptive taxation regime is intended to bring about simplicity and enhanced degree of predictability to tax outcomes for foreign taxpayers, making it easier for businesses to plan their long-term strategy,” he added.
Tax experts say, globally a presumptive tax regime is viewed as a practical alternative when profit attribution proves too complex. Countries like US, European Union (EU) and Brazil have been offering presumptive tax options. Other nations, including Indonesia, China, and France, also support using these schemes in specific cases, via domestic law or tax treaties, say tax experts.
