Global Minimum Tax and India’s Response: A Double-Edged Sword?

[Aratrik Banerjee]

Abstract

The global minimum tax (GMT) initiative, championed by the Organisation for Economic Co-operation and Development (OECD) under Pillar Two, aims to curb tax avoidance by multinational corporations (MNCs) by ensuring they pay at least a 15% tax rate regardless of where they operate. While this initiative seeks to address tax base erosion and profit shifting (BEPS), its impact on India is multifaceted. As a growing economy with a mix of tax incentives and competitive corporate tax structures, India must navigate the benefits and challenges of aligning with the GMT. This article critically examines India's response, weighing the advantages against the risks to assess whether the GMT truly serves India's best interests.

Introduction

The world of international taxation has long been a battlefield where countries compete to attract multinational corporations (MNCs) by offering low tax rates and lucrative incentives. However, this competition has often led to aggressive tax planning, where large corporations shift profits to tax havens, eroding the tax bases of many nations. In response, the Global Minimum Tax (GMT), a landmark initiative led by the Organisation for Economic Co-operation and Development (OECD) and the G20, seeks to put an end to this practice by ensuring that large MNCs pay at least 15% of taxes, regardless of where they operate.

The GMT is one of the most significant tax reforms in modern history, aiming to curb tax avoidance and promote a fairer distribution of corporate tax revenues. While developed economies largely view the initiative as a way to level the playing field, emerging economies like India face a unique dilemma—how to align with the global tax order without compromising their economic growth and investment attractiveness. India, with its complex yet evolving tax regime, has historically used tax incentives, lower tax rates for new manufacturing, and special economic zones (SEZs) to draw in foreign investment. But with the 15% minimum tax floor, these tools may lose their appeal, potentially altering India's investment landscape.

So, where does India stand in this global tax revolution? Will the GMT enhance India’s tax revenues, or will it drive away much-needed foreign investment? Can India strike a balance between adhering to global tax norms while retaining its competitive edge?

This article delves into the intricate implications of GMT on India's corporate tax regime, analyzing the policy shifts, strategic adjustments, and long-term consequences for businesses and the economy. By comparing India's response with that of other economies, we seek to unravel whether the GMT is a boon or a bane for India—a double-edged sword that could either fortify India’s tax system or undermine its economic ambitions.

Understanding the Global Minimum Tax

The Global Minimum Tax (GMT) represents a paradigm shift in international taxation, aiming to curb profit shifting and tax base erosion by imposing a minimum effective tax rate of 15% on large multinational corporations (MNCs) with annual revenues exceeding €750 million. This initiative, developed under the OECD’s Pillar Two framework, is a response to long-standing concerns over tax competition and corporate tax avoidance, particularly in the digital economy.

At its core, the GMT operates through two principal mechanisms:

• Income Inclusion Rule (IIR): Grants the parent jurisdiction of an MNC the right to impose a top-up tax if the subsidiary's effective tax rate (ETR) falls below 15% in any jurisdiction.
• Undertaxed Profits Rule (UTPR): Serves as a secondary measure, allowing other jurisdictions to impose additional taxes on the MNC’s low-taxed profits if the IIR is not applied effectively.

The objective of these rules is to ensure that corporate profits are taxed at a fair rate, reducing incentives for companies to exploit low-tax jurisdictions. However, for emerging economies like India, the implications of the GMT are complex and multifaceted.

The Global Race to Adapt

Countries have long engaged in tax competition, using low corporate tax rates and generous tax incentives to attract foreign direct investment (FDI). This strategy has led to a race to the bottom, where nations continually lower tax rates to outcompete others. The GMT seeks to put an end to this practice by ensuring that corporate tax liabilities are more equitably distributed across jurisdictions.

For developed economies, this framework is a step towards greater tax fairness, ensuring that large corporations contribute their fair share. However, for developing nations like India, which have relied on tax incentives to stimulate industrial growth, foreign investments, and job creation, the GMT could limit their ability to offer attractive tax benefits.

Why Does GMT Matter for India?

India has historically used tax incentives to attract investment in sectors like IT, manufacturing, and research & development (R&D). Special Economic Zones (SEZs) and newly established manufacturing units have benefited from effective tax rates well below 15%. With the GMT in place, these incentives may become redundant, as the top-up tax would be collected by foreign jurisdictions if India does not implement its own version of the tax.

Moreover, the GMT also signals a broader shift in international tax diplomacy. Countries that fail to implement a Qualified Domestic Minimum Top-Up Tax (QDMTT) risk losing tax revenues to other jurisdictions that do. Therefore, India faces a strategic choice: either adapt its tax policies to the new global framework or risk losing a portion of its tax base to wealthier nations that will enforce the top-up tax on Indian-based subsidiaries of MNCs.

While the GMT is positioned as a step towards greater tax transparency and fairness, its real impact depends on how India aligns its corporate tax policies, investment strategies, and economic priorities with the evolving global tax order. Whether the GMT will ultimately be beneficial or detrimental to India’s economic interests remains an open question, requiring careful planning and strategic adjustments by policymakers. The GMT under Pillar Two mandates a 15% effective tax rate on large MNCs with annual revenues exceeding €750 million. The framework consists of two key rules:

• Income Inclusion Rule (IIR): Allows a country to tax the income of a foreign subsidiary if its effective tax rate is below 15%.
• Undertaxed Profits Rule (UTPR): Acts as a backstop to the IIR by allowing other jurisdictions to impose top-up taxes if the parent entity's country does not.

The objective of the GMT is to reduce tax competition among countries and prevent a "race to the bottom" in corporate taxation. However, for India, which has leveraged tax incentives to attract FDI and boost its industrial sectors, the implications are significant.

India's Corporate Tax Regime and Its Alignment with GMT

India's corporate tax regime underwent a major overhaul in 2019, reducing the base corporate tax rate to 22% for existing companies and 15% for new manufacturing entities. Additionally, tax holidays and incentives offered to SEZs and IT firms have played a crucial role in attracting investments.

Under the GMT framework, tax incentives that reduce the effective tax rate below 15% could become less attractive. Countries implementing the IIR and UTPR would have the right to collect the top-up tax that India currently forgoes. This raises concerns about the viability of India's current tax incentives and necessitates a recalibration of its tax policies.

Benefits of GMT for India

The introduction of the Global Minimum Tax (GMT) presents a unique opportunity for India to strengthen its tax base, enhance revenue collection, and promote a fairer global tax system. While the initial concern revolves around the potential loss of tax incentives that attract multinational corporations (MNCs), the broader economic and fiscal benefits of GMT could significantly outweigh these drawbacks.

One of the most immediate advantages is the reduction in profit shifting and base erosion by large MNCs. India has long faced challenges with corporate tax avoidance, where businesses structure their operations in ways that allow them to shift profits to low-tax jurisdictions, thereby reducing their tax liabilities. With the implementation of GMT, such practices become less viable, as all large MNCs would be subject to a minimum tax rate of 15% regardless of where they operate. This levels the playing field for Indian businesses, ensuring that foreign corporations do not gain an undue tax advantage by shifting profits offshore.

Additionally, GMT strengthens India’s tax revenue collection. By ensuring that MNCs operating in India pay a fair share of taxes, the government stands to gain significant additional revenue. These funds can be redirected toward developmental projects, infrastructure expansion, and social welfare programs, thereby promoting sustainable economic growth. Given that India is a rapidly developing economy with substantial public expenditure needs, the additional revenue stream from GMT could provide much-needed fiscal support.

Furthermore, the introduction of GMT encourages greater transparency and cooperation in international taxation. India has actively participated in the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives, advocating for equitable tax reforms that benefit emerging economies. By aligning with GMT, India reinforces its commitment to international tax fairness and positions itself as a leader in global tax reform discussions. This fosters better diplomatic and trade relations, reducing instances of tax disputes and enhancing investor confidence.

From an economic perspective, the GMT framework could also help India attract quality foreign investment. While some argue that losing tax incentives may deter MNCs from setting up operations in India, the reality is more nuanced. Businesses today consider multiple factors beyond tax rates, such as market potential, infrastructure, ease of doing business, and regulatory stability. By shifting its focus from tax-based incentives to non-tax advantages—such as improved logistics, robust digital infrastructure, and policy consistency—India can continue to attract global investors. Moreover, the government’s push towards reducing bureaucratic hurdles and streamlining compliance mechanisms will make India a more attractive destination for business operations.

Another crucial benefit lies in protecting domestic businesses from unfair tax competition. Currently, many Indian firms struggle to compete with MNCs that exploit tax loopholes to reduce their effective tax rates. By ensuring that all large businesses are taxed at a fair minimum rate, the GMT creates a more balanced corporate environment where Indian enterprises are not at a disadvantage compared to global giants.

Lastly, the GMT presents India with an opportunity to reform and modernize its tax policies. Instead of relying heavily on tax holidays and exemptions to lure investments, India can now focus on building a competitive economy driven by efficiency, innovation, and regulatory clarity. With the introduction of a Qualified Domestic Minimum Top-Up Tax (QDMTT), India can ensure that any top-up tax revenue remains within the country rather than being collected by foreign jurisdictions. This would allow India to comply with the GMT while safeguarding its fiscal autonomy.

In essence, while GMT does present challenges, it also offers India a chance to strengthen its tax framework, enhance revenue collection, and foster a more equitable business environment. By adapting its policies strategically, India can transform global tax reform into a powerful tool for economic growth and sustainability.

Challenges of GMT for India

While the Global Minimum Tax (GMT) presents several benefits for India, it also introduces a series of challenges that could reshape the country’s tax and investment landscape. Given India’s reliance on tax incentives to attract foreign direct investment (FDI) and stimulate industrial growth, aligning with the GMT framework necessitates careful policy adjustments. The biggest concerns revolve around the potential loss of tax competitiveness, the impact on foreign investment, compliance complexities, and the administrative burden associated with implementing the new tax rules.

One of the most pressing challenges is the erosion of India’s tax incentives. Over the years, India has strategically used tax breaks, such as concessional tax rates in Special Economic Zones (SEZs), exemptions for research and development (R&D), and sector-specific reliefs to draw in multinational corporations (MNCs). These incentives have played a pivotal role in making India an attractive manufacturing and service hub, especially under the "Make in India" and "Digital India" initiatives. However, the GMT framework dilutes the effectiveness of such incentives, as any company paying below the 15% threshold in India could be subject to a top-up tax in another jurisdiction under the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR). This could deter companies from setting up operations in India solely for tax advantages, forcing the government to rethink its investment strategies.

Moreover, the GMT could affect India's FDI inflows, particularly in industries that have historically benefited from lower effective tax rates. India competes with countries like Vietnam, Indonesia, and Bangladesh for manufacturing investments, many of which offer tax-friendly regimes. If tax incentives are neutralized by the GMT, India may face stiffer competition in attracting global businesses. To maintain its appeal, India will need to shift from tax-based incentives to non-tax factors, such as ease of doing business, policy stability, infrastructure development, and workforce skilling.

Another significant challenge is the complexity of implementation and compliance. The GMT introduces intricate tax calculations, requiring corporations to determine their global effective tax rates across multiple jurisdictions. Given India's already complex tax structure, integrating the GMT provisions with existing domestic laws will demand significant administrative effort. Multinational enterprises (MNEs) operating in India will need to align their financial reporting, comply with additional disclosures, and navigate the interaction between Indian tax laws and the GMT framework. This could increase compliance costs for businesses and pose difficulties for tax authorities in ensuring seamless enforcement.

From a sovereignty perspective, the GMT raises concerns about India's control over its tax policies. While India has actively participated in OECD discussions on BEPS and tax transparency, adopting the GMT means ceding a degree of fiscal autonomy to global tax rules. This limits India’s ability to unilaterally introduce tax measures tailored to its developmental priorities, particularly in sectors requiring state support for growth and expansion. The potential redistribution of tax revenues to other jurisdictions under the UTPR also poses a risk, as India could lose tax collections to foreign governments if certain MNCs operating in India fall under the rule.

Additionally, the impact on digital and technology companies remains a grey area. India has implemented measures like the Equalization Levy to tax digital giants that operate in the country but do not have a significant physical presence. However, the GMT could overlap with such measures, raising questions about whether India will need to modify its digital taxation approach to avoid conflicts with the global framework.

Lastly, the transition to the GMT regime requires significant policy recalibration. India must introduce a Qualified Domestic Minimum Top-Up Tax (QDMTT) to ensure that any additional taxes arising from the GMT are collected within India rather than being forfeited to foreign jurisdictions. While this measure would help retain tax revenues, it still demands legislative and administrative clarity to avoid legal ambiguities and potential disputes with corporations.

In conclusion, while the GMT aims to establish a fairer tax system, India must navigate its challenges carefully. The government will need to balance global tax commitments with domestic economic priorities, ensuring that India remains a competitive and business-friendly destination. By focusing on structural reforms, ease of doing business, and infrastructure development, India can mitigate the risks posed by GMT and turn this global shift into a strategic opportunity for long-term economic resilience.

 

India’s Policy Response and Strategic Adjustments

India’s response to the Global Minimum Tax (GMT) is not merely a regulatory adaptation but a strategic overhaul of its taxation and investment policies. Recognizing the profound implications of the GMT on its economic framework, India has been proactive in shaping policies that balance fiscal sovereignty with global cooperation.

One of the most critical measures India is considering is the introduction of a Qualified Domestic Minimum Top-Up Tax (QDMTT). This policy ensures that if Indian-based multinationals are subject to top-up taxes due to an effective tax rate below 15%, the additional tax is collected domestically rather than ceded to foreign jurisdictions. By doing so, India can safeguard its tax revenue while maintaining a stable fiscal environment.

Furthermore, India has been actively reviewing its tax incentive structures. Traditional tax benefits, such as those granted to Special Economic Zones (SEZs) and the IT sector, may no longer provide the same advantages in a post-GMT world. Instead, India is shifting towards non-tax incentives to maintain its investment appeal. This includes streamlining compliance procedures, enhancing ease of doing business, investing in infrastructure, and fostering research and development (R&D) initiatives.

Another key strategy involves bilateral and multilateral engagements. India is leveraging its position in international forums such as the G20 and OECD discussions to ensure that the GMT framework is implemented in a manner that considers the interests of emerging economies. Policymakers are advocating for transitional relief measures that prevent sudden capital flight and allow developing economies like India to adjust to the new tax landscape without compromising their economic growth.

In addition, India is exploring alternative investment incentives beyond taxation. Countries like Singapore and the UAE have successfully attracted foreign investment through robust financial ecosystems, technology parks, and superior business environments. India can take a similar approach by enhancing its fintech capabilities, promoting digital infrastructure, and fostering innovation hubs that attract businesses regardless of tax incentives.

Moreover, Indian policymakers are closely examining how GMT compliance can coexist with its domestic corporate tax policies. The government may consider rationalizing existing tax laws to ensure uniformity while retaining the country’s competitive edge. This includes evaluating whether to maintain a dual corporate tax structure—where companies can choose between a concessional tax regime with minimal exemptions and a standard regime with available deductions.

Lastly, India’s policy response must also address potential sectoral impacts. Industries such as pharmaceuticals, information technology, and renewable energy, which have historically benefited from lower tax rates and government incentives, may require customized strategies to remain globally competitive. Developing tailored financial support programs, industry-specific R&D grants, and sector-focused infrastructure investments can help India maintain its stronghold in these critical sectors despite the tax changes.

Comparative Analysis: Responses from Other Economies

The implementation of the Global Minimum Tax has triggered varied responses from different economies, reflecting their unique fiscal priorities and economic structures. Countries such as the United States, the European Union, Singapore, and China have approached the GMT differently, each tailoring their strategies to balance competitiveness with compliance.

The United States, a key proponent of the GMT, has been at the forefront of its implementation. However, domestic political challenges have led to a complex rollout. The U.S. already has a form of minimum tax under its Global Intangible Low-Taxed Income (GILTI) regime, but aligning it with the OECD framework has sparked debate among policymakers. The country is exploring modifications to ensure that American businesses remain competitive without undermining the global tax agreement.

The European Union (EU) has broadly embraced the GMT, with member states working towards consistent implementation. However, certain nations like Ireland, known for their historically low corporate tax rates, have faced a dilemma. Ireland, which previously offered a 12.5% corporate tax rate to attract multinational investment, has had to recalibrate its tax policies to conform to the GMT while maintaining its reputation as a business-friendly destination.

Singapore and Hong Kong, both recognized as global financial hubs with attractive tax regimes, have been exploring ways to remain competitive. Singapore, for instance, has been emphasizing non-tax incentives such as grants, research subsidies, and infrastructure development to sustain its investment attractiveness.

Meanwhile, China, a major economic powerhouse, has been cautiously evaluating the impact of GMT on its economic strategy. While China supports the initiative in principle, it remains focused on ensuring that its domestic industries, particularly in manufacturing and technology, continue to thrive under the new tax environment.

India's response, therefore, must be viewed in the context of these global shifts. By learning from the strategies of other economies and adopting best practices, India can position itself as a formidable player in the evolving international tax landscape.

 

The Road Ahead: Navigating a New Tax Landscape

As India stands at the crossroads of global tax reform, its approach to the GMT will be pivotal in shaping its economic trajectory. The path forward requires a strategic recalibration of policies to harness the benefits of GMT while mitigating potential drawbacks. The government must proactively address the impact of tax incentives, ensuring that India remains an attractive investment hub despite a changing tax environment.

India can achieve this by shifting its focus from tax-based incentives to non-tax benefits such as improved infrastructure, streamlined regulatory frameworks, and investment-friendly policies. Strengthening domestic tax collection mechanisms, such as the introduction of the Qualified Domestic Minimum Top-Up Tax (QDMTT), will be crucial in retaining tax revenues that might otherwise be claimed by foreign jurisdictions under the GMT framework.

Additionally, India must continue engaging in global tax negotiations to ensure its interests are adequately represented. A collaborative approach with international partners will help India influence future modifications to the GMT framework, ensuring it remains conducive to its economic aspirations. By fostering innovation, supporting domestic industries, and reinforcing its position as a leading emerging market, India can turn the challenges of the GMT into an opportunity for sustainable growth.

Conclusion: A Delicate Balancing Act

The global minimum tax represents a paradigm shift in international taxation, and India’s response to it will have far-reaching implications for its economic landscape. While the GMT offers the promise of curbing tax avoidance and increasing government revenues, it also challenges India’s traditional approach to attracting foreign investment through tax incentives.

To thrive in this new era of tax governance, India must strike a delicate balance between aligning with global tax norms and safeguarding its economic competitiveness. By embracing strategic tax reforms, enhancing non-tax incentives, and ensuring effective domestic tax collection, India can position itself as a resilient and adaptive player in the evolving global tax ecosystem. The coming years will be critical in determining whether GMT catalyzes India's economic growth or is a roadblock to its ambitions. With a well-calibrated policy response, India can navigate this double-edged sword and emerge stronger on the global stage.