Pillar Two tax regime unlikely soon as India moves with caution

The Union government is expecting to rake in Rs 100-200 crore in additional revenue from Pillar Two, only under specific circumstances, a senior finance ministry official said requesting anonymity.

It is proceeding cautiously, and is unlikely to implement rules anytime soon, the source said.

Pillar Two, also known as the Global Base Erosion (GloBE) rules, is a global tax system that requires multinational enterprises (MNEs) to pay a minimum tax on their profits in each country where they operate.

The rules are designed to prevent MNEs from shifting profits and to ensure that they pay an appropriate rate of tax.

“An internal analysis indicates that the government is likely to see only an additional revenue of Rs 100-200 crore after implementing Pillar Two, and that’s only under certain conditions,” an official said.

“The gains are not much, and losing the right to make laws for such a small amount is a big price to pay,” the source added.

The Union government believes it may have to give away its “sovereign right” to frame laws on corporate taxation, if it implements the Pillar Two tax regime, the source added.

“Adopting Pillar Two could potentially restrict India’s tax policy autonomy.

"It sets a 15 per cent minimum tax on multinational corporations, diminishing the country’s ability to offer competitive tax rates to
attract foreign investment,” said Raju Kumar, tax partner, EY India.

“It also necessitates adherence to specific rules like Income Inclusion and under taxed payment rules, potentially limiting India’s flexibility in customising tax laws according to its economic objectives,” India, along with 130 other countries, has signed the Organisation for Economic Co-operation and Development’s (OECD’s) Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting.

The Indian government will eventually enforce the associated regulations.

These rules are designed to curb profit shifting by multinational corporations to low-tax jurisdictions, thereby minimising their tax liabilities.

“Pillar Two is consistent with existing treaties and may not require a multilateral convention (except for STTR).

"Therefore, the government may not lose its sovereign right to tax,” said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co.

“However, the tax rules that are implemented such as qualified domestic minimum top-up tax (QDMTT), Income Inclusion Rule (IIR), undertaxed profits rule (UTPR) have to meet the Pillar Two set standards given this is a consensus-based multilateral tax reform,” said Puri.

Kumar added that the adoption may enhance India’s global standing and provide a more predictable investment climate, suggesting a strategic advantage in aligning with international tax norms.