In an attempt to tighten loopholes to deter tax evasion by Indian multinational companies, the government is set to come out with guidelines on place of effective management (POEM) in the coming few days. This will consider companies with effective control in India a resident liable to pay tax in the country. The norms will affect companies in sectors like pharma, energy, manufacturing, software.

Meanwhile, companies have started restructuring operations to ensure that key decision-making is done outside the country and decision-makers are out of the country at the time of decision-making to ensure compliance with POEM.
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"The POEM guidelines are almost ready. They should be out in the coming few days. We are aware of industry concerns. All new things have some complications, but the guidelines will offer sufficient clarity to companies regarding compliance. We have incorporated suggestions from industry. This is an effort to plug tax evasion methods," said a government official.

In the 2015-16 Budget, the government had announced POEM, where it modified the condition of residence of companies by including the concept of effective management as a measure to deal with cases of creation of shell companies outside India that are controlled and managed from the country.

The guidelines would be a set of principles for assesses and tax officials for determining the tax residence of a company in India.

"Companies have started putting line of authority empowered in a manner so they don't create needless risk of POEM," said Gokul Chaudhri, leader, Direct Tax, BMR & Associates LLP. "In the past few months, companies have been extremely careful with their outbound planning. Once the guidelines are out, they will do a check and adhere to them," he added.

Sunil Shah, partner, Deloitte Haskins & Sells, said in the past few months companies have been ensuring that decision-making takes place outside India. "Also, to ensure compliance with POEM, companies are ensuring that decision-makers are outside India when decision-making takes place," he said.

With the guidelines being issued eight months down the financial year, tax consultants argue that the government should make it applicable from April 1 next year, giving companies enough time to adjust.

"It will be more sensible to allow industry to deal with the environment of certainty and predictability and defer it to next financial year," said Chaudhri of BMR & Associates.

Other deductions

This year, Finance Minister Arun Jaitley has increased the limit of deduction a person can get for health insurance under Section 80D. Now, one can claim a Rs 25,000 deduction, compared with Rs 15,000 earlier for health insurance that covers self, spouse and children. Also, if your parents are senior citizens and you pay for their mediclaim, you can get a deduction of Rs 30,000, against Rs 20,000 earlier.

Taxpayers can also claim a deduction on tuition fees for a maximum of two children. Husband and wife can separately claim the deductions and, therefore, the maximum deduction a couple can claim here is for four children. This can be claimed for tuition fee paid for full-time courses at a recognised institution within India.

Less-known deductions

Archit Gupta, founder and chief executive of ClearTax, an I-T return filing website, says those who earn less than Rs 5 lakh annually can claim a maximum deduction of Rs 2,000 under Section 87A. In the case of parents over 80 years, who might not be eligible for insurance, medical expenses up to Rs 30,000 can be claimed. The maximum deduction which can be claimed for both parents is limited to Rs 30,000. Gupta also notes that taxpayers can claim additional deductions for parents over 80 years for medical treatment if they are suffering from specified diseases (such as cancer and neurological diseases). In the current Budget, it's been raised from Rs 60,000 to Rs 80,000.

Instruments to avoid

Experts say those doing tax planning at the last moment usually end up putting money in unit-linked insurance plans (Ulips) or traditional insurance policies. These are instruments they should avoid. Steven Fernandes, a certified financial planner, says rather than investing in the Sukanya Samridhi Scheme, a person can look at ELSS for the same purpose, as the latter can earn better returns over the long term.

Malhar Majumder, a certified financial planner, says one should avoid using a credit card to pay for instruments such mediclaim that would help in tax deduction. If the person does not pay back on time, the interest charged will be much higher than the tax saved.