India may end its ambivalence on the minimum 15% corporate tax rule for multinational corporations, and include an enabling provision to comply with the relevant multilateral mechanism in the Income Tax Act, according to an official source.
The provisions of the I-T Act, 1961 are currently under a comprehensive review, with a view to making it simpler and more lucid, by removing redundant sections. The proposed “Pillar-2 under the OECD/G20 Inclusive Framework, which aims to stymie profit shifting among tax jurisdictions by MNCs to minimise their tax outgo, would be ushered in by India as part of the I-T Act review, which is under way, the source added.
“After the enabling provision (for Pilla 2 adoption) is added in the I-T Act, the CBDT (central board of direct taxes) will notify the rules after proper stakeholder consultation,” an official told FE. The government is likely to complete the I-T Act review by the end of January, and introduce the changes in the Budget for FY26, the person added, requesting anonymity.
The Pillar 2-GloBE Rules – which provides for a global minimum tax for multinational enterprises (MNEs), aims to deter profit shifting by ensuring that these firms maintain a minimum Effective Tax Rate (ETR) of 15% across all jurisdictions in which they operate. MNEs, as per the rules, are defined as those entities with a global turnover exceeding 750 million euros.
Currently, as many as 30 countries have embraced Pillar-2, among 130 that signed the relevant multilateral convention. The US is yet to implement the regime, but some European Union countries are already on board.
To be sure, the effective corporate tax rate in India is 25.17%, and this rate will remain unchanged even after the adoption of Pillar 2. The new regime will only allow the government to collect additional tax revenue, in the form of “top-up tax”, from companies who are artificially reporting profits in low tax jurisdictions.
Consider for instance, an MNE group headquartered in India, pays corporate tax at a rate of 9% in UAE through its subsidiary. The Pillar 2 would mean 6% it will have to pay as top-up tax, if both UAE and India have adopted Pillar-2 regime.
To make Pillar 2 operational, the government would have to amend the tax laws to include the four rules–namely Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Subject to Tax Rule (STTR)–which will enable India, to impose a ‘top-up tax’ on either the intermediate parent entity (IPE) or the ultimate parent entity (UPE) of the MNE.
Several big foreign multinationals that are operating in the Indian market have been awaiting India’s Pillar 2 rules, especially the design of India’s QDMTT, said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co. “Multinationals will need to tweak their internal systems and tax functions and be data ready to meet such QDMTT compliances in India. Foreign multinationals are also looking for clarity around the future of Indian tax incentives (specially the tax holiday in GIFT city) vis-à-vis the QDMTT,” she said.
Indian headquartered MNE groups – having presence in several such jurisdictions – will have to provide for top-up tax in the books of account, if applicable, in their financial statements for the year ended 31st March 2024, a report by Deloitte had said. The MNEs are required to comply with the rules even if India has not yet implemented them.
Essentially the Pillar-2 regime aims to prevent MNEs from shifting profits to low-tax jurisdictions. By ensuring these companies pay a minimum global tax rate, India can certainly protect its tax base from erosion, some experts say. This should lead to increased revenue as more profits are taxed within the country; but the actual revenue impact will depend on how effectively the rules are implemented and how MNEs respond to the new tax environment, they say.
Official sources say the design of Pillar-2 regime makes the possibility of revenue gains limited, because of one specific provision–the QDMTT, which curbs the country’s ability to benefit from the adoption of the tax package.
In the example cited above (of India and UAE), the top-up tax may either be paid to India or to the UAE, depending on whether the low tax jurisdiction (in this case UAE) has introduced QDMTT or not. In case, QDMTT is not invoked, India will have the right to collect the extra 6%.
But, in reality, India is unlikely to get any extra revenue as jurisdictions are likely to incorporate the global minimum tax rate into their domestic laws and collect taxes from entities located within their jurisdiction under the QDMTT mechanism only, say experts.
According to Yeeshu Sehgal, head of tax markets, AKM Global, MNEs will need to collect and analyse detailed financial data from their global operations, including revenue, expenses, and taxes paid in each jurisdiction for compliance. “Beyond data management, companies will also need to redesign internal processes to align with Pillar 2 requirements. This could involve changes in accounting policies, data collection procedures, and internal control frameworks,” he said.
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