Finance Minister Nirmala Sitharaman stated on Wednesday that the upcoming Goods and Services Tax (GST) Council meeting, scheduled for October 7, will discuss process reforms under what she termed 'GST 2.0'. These reforms encompass issues related to e-invoicing and input tax credit rules.
In response to a query about including measures such as extending e-invoicing to all taxpayers, including composition scheme dealers, and rationalizing input tax credit provisions into 'GST 3.0', Sitharaman clarified that they have not yet reached level 3.0, but these are already being implemented within version 2.
Speaking at an event organized by the International Tax Research and Analysis Foundation (ITRAF) in Bengaluru, Sitharaman noted that the previous GST Council meeting focused on rate rationalization, while process reforms were deferred to the next meeting. She added that several issues raised at the conference would be considered in the agenda for process reform.
The Minister also urged the industry to submit specific proposals regarding anomalies in the GST system that the government might have overlooked. Furthermore, she strongly recommended that tax professionals, industry associations, and researchers move beyond merely seeking reductions in tax rates, exemptions, and concessions, contributing more actively to data-driven tax policy development by identifying provisions that may no longer serve the tax system.
Sitharaman emphasized that consultations should be more than just a mechanism for everyone to submit input to the minutes; it must be genuine research based on experience and ideas. She also asked industry associations to point out provisions that should be abolished, even if they benefit from them themselves.
She addressed ITRAF, an independent tax research organization, calling on it to make its work more visible and become a leading institution for tax policy research and analysis in India. ITRAF's stated goal is to conduct research and analysis in international taxation and provide recommendations to policymakers.
Sitharaman stated that India needs institutions capable of bringing together economists, tax lawyers, chartered accountants, scientists, and industry practitioners, lending greater weight to their work in the public policy process. Regarding the taxation of the digital economy, she cautioned against making decisions without studying their implications for India, other jurisdictions, and future investments.
She mentioned that issues concerning cloud services, digital products, and consumption of digital services raise complex questions about where and on whom tax should be levied. Sitharaman stressed the need to 'coldly study the complexity, the implications for India and external markets, and above all, the implications for future investment flowing into India.'
The Minister also discussed India's experience in global negotiations on two-tiered taxation. She reported that India withdrew two taxes on digital companies during these negotiations, partly to strengthen confidence in the emerging global agreement. However, she noted that two-tiered taxation 'awaits a decision, but it has not yet reached a conclusion.'
She warned that this issue cannot be viewed solely as a problem of lost tax revenue for India, as the taxation of digital business is part of broader global negotiations. On cryptocurrency matters, Sitharaman said the topic remains under discussion among stakeholders in India and with other countries. Currently, India levies a withholding tax on such transactions, which is then reconciled with the final tax liability.
Concerning the Supreme Court's ruling in the Tiger Global case and concerns over its impact on investments routed through Mauritius, Sitharaman mentioned that the notification from the Central Board of Direct Taxes (CBDT) issued on March 31 clarified the government's position on investments from treaty jurisdictions. She stated that this ruling must be 'fully implemented,' and further clarification can be provided if doubts arise.
The Minister also stressed that the government's litigation in the Tiger Global case was not intended to deter foreign investment in India, describing it as a matter concerning the conduct of a specific company. Sitharaman also announced the government's readiness to create an institutional mechanism to ensure greater clarity on whether digital transactions should be classified as goods or services under GST and income tax laws. When asked about the possibility of creating such a mechanism, she replied: 'Yes, why not?'
She invited the industry to submit suggestions and comments on this matter. Sitharaman noted that the distinction between goods and services in digital transactions has become increasingly complex as businesses operate across borders more frequently.
Regarding India's creation of a special tax regime for the space sector, Sitharaman stated that she would support a lenient approach to taxing research and innovation. 'As long as they are conducting research, as long as they are innovating... it is ideal to take a soft stance on taxation,' she said. However, once research is commercialized and scaled up commercially, tax authorities will have the right to tax the resulting income.
Sitharaman reported that the government has been gradually expanding Foreign Direct Investment (FDI) limits since 2014, with most investments now coming through the automatic route, except in areas related to security considerations. She noted that global investors are seeking to diversify supply chains under the 'China plus one' strategy, and India's macroeconomic fundamentals remain attractive to investors. She also highlighted the role of GIFT City in attracting offshore capital to India, mentioning sectors such as maintenance, repair, and overhaul, shipbuilding and ship repair, and fintech.
Sitharaman pointed to the significant expansion of the country's digital payment infrastructure, but its adoption remains uneven. She pointed out small shops and street vendors who continue to prefer cash payments despite the wider availability of digital payment infrastructure. The government, she said, cannot solve this problem entirely through incentives, and broader participation in the digital economy will require encouragement from customers, specialists, and businesses.
Looking ahead, Sitharaman stated that tax discussions will increasingly need to address issues such as significant economic presence, virtual permanent establishments, taxation of artificial intelligence and robotics, the gig economy, global mobility, virtual digital assets, global centers of excellence, and the accounting of goods and services in digital transactions. She emphasized that Bengaluru is particularly relevant for these debates due to the concentration of technology companies and global centers of excellence.