Taxation Trends and its impact on Indian Multinational Companies

By S. Mahalingam

Summary

This Forum of Free Enterprise booklet reproduces an inaugural address delivered by S. Mahalingam — Chief Financial Officer and Executive Director of Tata Consultancy Services — at the Forum’s August 2011 three-day residential programme on Current Issues in Direct and Indirect Taxation. Mahalingam opens with an extended personal tribute to the late Nani Palkhivala, recalling his work with him at TCS from 1968 onwards, Palkhivala’s interventions on tax matters during his ambassadorial years in the United States, and his charitable, civic and cultural philanthropy in Madras. He frames Palkhivala both as the architect of the Indian IT industry’s legal foundation and as a model jurist whose advocacy made a free India economically possible.

The central body of the speech surveys how India’s tax architecture is reshaping the operations of Indian multinationals, with TCS used as the running case study. Mahalingam describes how the IT industry effectively created the first generation of Indian multinationals — TCS now operates in forty-two countries, employs 200,000 people, and earns 55 per cent of its costs overseas — and walks the audience through the operational frictions this creates: transfer pricing audits across dozens of jurisdictions, the limited usefulness of the Dispute Resolution Panel, the appeal of bilateral Advance Pricing Agreements, and the role of Mutual Agreement Procedures. He warns that several provisions of the proposed Direct Taxes Code — the Controlled Foreign Corporation rules, the “Place of Effective Management” residency test, the withholding-tax provisions, and the silence on carry-forward of MAT credit — could inflict unintended hardship on Indian MNCs and require correction before enactment.

Mahalingam then turns to indirect tax reform and to the regulatory environment more broadly. He calls the Goods and Services Tax the most important indirect tax reform since Independence and reports on the state of the GST Bill before the Yashwant Sinha–led Standing Committee on Finance. On Special Economic Zones he criticises the retrospective extension of the Minimum Alternate Tax to SEZ profits and the shrinking of the Section 10A/10AA window, echoing Palkhivala’s complaint that “tinkering with a declared approach is wrong” because it destroys the basis on which long-horizon investment decisions are made. He closes with a programmatic claim that the IT revolution — requiring only the capacity to think clearly — is India’s best chance to lead a global transformation, and that the enabling environment for that revolution depends on a synchronised, internationally credible tax and accounting regime (including the migration from Indian GAAP to IFRS/Ind AS). The booklet ends with a memorial note on Shailesh Kapadia, in whose name the publication is sponsored.

Key points

• Booklet reproduces S. Mahalingam’s August 2011 inaugural address at the Forum of Free Enterprise’s annual residential programme on direct and indirect taxation; Mahalingam was then CFO and Executive Director of Tata Consultancy Services.

• Opens with an extended personal tribute to Nani Palkhivala — covering his service at TCS from 1968, his interventions on Indian tax issues while serving as Ambassador to the US, and his philanthropic and cultural work in Madras.

• Argues that the IT industry created India’s first true multinationals; TCS is offered as the running case — 42 countries of operation, ~200,000 employees, 14,000 expatriates, 55 per cent of costs incurred overseas, 24-country branch network and 54 subsidiaries.

• Catalogues the international tax frictions facing Indian MNCs: transfer pricing audits in 80 jurisdictions, weakness of the Dispute Resolution Panel (DRP), and the case for bilateral Advance Pricing Agreements (APAs) and Mutual Agreement Procedure (MAP) resolution.

• Critiques specific provisions of the proposed Direct Taxes Code — Controlled Foreign Corporation rules, the ‘Place of Effective Management’ residency test, withholding-tax mechanics, and silence on carry-forward of MAT credit — as creating unintended hardship for Indian multinationals.

• Treats the retrospective application of Minimum Alternate Tax to SEZ profits and the curtailment of the Section 10A/10AA holiday as a breach of policy stability that ‘negates the basis on which we have made these huge investment decisions’.

• Endorses GST as the most important indirect-tax reform since Independence and reports on the Constitution (115th Amendment) Bill before Yashwant Sinha’s Standing Committee on Finance, while flagging the unresolved Centre–State consensus.

• Calls for migration from Indian GAAP to IFRS / Ind AS so that ‘all arms of the government’ speak the same accounting language to international investors, framing fiscal credibility as a prerequisite for leadership in the IT-led global revolution.

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