India and China resolve key business, tax issues to facilitate trade

India and China in the past couple of months have silently begun to iron out key business issues between them. In October and November, Chinese companies concluded 12 tax-related cases with India under what is known as the mutual agreement procedure (MAP). 

Except the US, no other country has brought such a large number of cases on the Indian tax table in such a short period.

It overshadows a remarkable offer made by China to open up its market for importing two key Indian products — fish products and rice — removing non-tariff barriers on them. The improvement in the regulatory climate for mutual business between the second- and sixth-ranked economies of the world by nominal GDP is a surprise since they court huge differences in other spheres, including on military and energy issues.

Even more important, to make life easy for Chinese companies, the Indian revenue department this month amended some protocols of the double-tax avoidance treaty between the two countries. While India and China signed the treaty in 1995, there was no revision to it till now, unlike the case with India’s other active trading partners.

Countries tweak tax protocols as a quick substitute for large-scale changes in tax treaties to bring them in line with international developments, particularly when they have remained dormant for a long time.

An Indian government release said “the (India-China) Protocol updates the existing provisions for exchange of information to the latest international standards”. 

lt had become necessary because plenty of Chinese companies are approaching the revenue department to get clarity on their tax treatment. It is understood that the changes were made on the basis of requests from both sides.
To put the MAP numbers in perspective, they take China to third position among India’s list of such partner countries. Only the US and the UK rank above China on the list, according to figures of the Organisation for Economic Cooperation and Development.

“The numbers are significant and are mostly for engineering, procurement and construction projects,” said Sanjay Kumar, senior director at Deloitte India. Companies doing business overseas resort to the MAP as an out-of-court settlement to ensure they do not have to pay double tax on their business. It is independent of any domestic law remedies available to them in the foreign country.

The MAP support is drawn upon by companies in sectors like information technology, construction or manufacturing because there are often wide divergences in the interpretation of tax laws in cases of imports of raw materials and semi-finished goods.

India’s largest MAP partners other than the US and the UK are traditionally Japan and Sweden. Even Denmark had more such cases than China till last year. The trend is in line with the flow of foreign investment into India. This picture has possibly begun to change. Instead of the overriding impression of Chinese companies in India as principally traders bunched in the FMCG sector, their rush for tax clarity shows they are emerging as large-scale investors in India, said Kumar. 

The update of the India-China tax protocol recognises this change in the environment. “The Protocol incorporates changes required to implement treaty-related minimum standards under the Action reports of the Base Erosion & Profit Shifting Project, in which India had participated on an equal footing. Besides minimum standards, the Protocol brings in changes in accordance with BEPS Action reports as agreed upon by the two sides.”

The tax simplifications have come about just after the two governments have signed another protocol to facilitate exporting fish meal and fish oil from India to China, again in November. The signing of the protocol formalises the consensus reached by both sides on hygiene and inspection requirements for fish meal and fish oil to be exported. Beijing imports fish oil worth $263.43 annually and India wants to muscle into the space.

In the past six months, this is the second product to get clearance from China after the signing of another protocol for exporting Indian rice.

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