Government may be deferred Pillar-2 Tax Rules citing Limited Gain

India is taking a cautious approach to implementing the OECD-led Pillar 2 tax regime, which requires a 15% minimum corporate tax rate for multinational enterprises (MNEs) with global revenues of more than €750 million. Though the government may soon incorporate an enabling provision in the Income Tax Act as part of a larger legislative overhaul, full implementation could be postponed due to low predicted income increases, according to official sources.

Key Highlights

Internal study shows that implementing Pillar 2 would yield only Rs.100-200 crore in increased revenue, an insignificant amount compared to the potential loss of sovereign taxation powers. The government is nonetheless concerned about sacrificing legislative authority for minor financial gains.

While India is one of 140 countries that have ratified the global convention, there are still fears about losing control of its tax policy. The scheme includes a “top-up tax,” which allows home countries to tax MNEs who pay less than 15% in foreign jurisdictions. However, the presence of the Qualified Domestic Minimum Top-up Tax (QDMTT) in low-tax jurisdictions may impede India’s capacity to collect these taxes.

Under the regime, if an MNE headquartered in India pays a 9% tax in the UAE, India may levy an additional 6% top-up tax. However, if the UAE implements QDMTT, India may lose the ability to collect this additional tax, affecting revenue projections.

Tax experts claim that, while Pillar 2 may not significantly increase revenue, it does connect India’s corporate tax structure with worldwide standards and helps to reduce profit shifting. The measures eliminate a “race to the bottom” among countries and promote equitable tax allocation for multinational corporations operating in multiple regions.

With the Income Tax Act of 1961 being reviewed for a comprehensive overhaul by January, India is expected to include an enabling clause for Pillar 2. However, the actual adoption of implementation rules may be delayed as the government weighs its financial independence against international tax commitments.

Conclusion

As India navigates global tax reforms, officials are concerned with protecting the country’s legislative rights while keeping up with international tax norms. While Pillar 2 implementation may eventually occur, the government’s cautious stance demonstrates a preference for strategic sovereignty over marginal financial increases.