The US Senate Wednesday passed US President Donald Trump’s Tax Cuts and Jobs legislation, arguably the biggest tax reform in the country over the last three decades. Trump’s Republican party, which enjoys a majority in US Congress and the House of Representatives, had earlier given its nod to the legislation. Once enacted, the monumental tax reform entails a $1.5 trillion in tax cuts and is expected to impact global economies including India. The highlight of the new legislation is slashing of corporate tax to 21 per cent, effective from January 1, 2018. It also features incentives to draw capital back into the country and, possibly, making it more financially unfeasible to move capital to offshore sites. To promote manufacturing and stop companies from moving their operations to cheaper production hubs like south Asia, China, south east Asia, Brazil etc. by allowing companies to write off the cost of equipments that they purchase. The major Indian sectors that are likely to feel the impact are IT-ITES, pharma and contract manufacturing. The legislation makes the US a more attractive option to make gains and could also leave an impact on the transfer pricing policies. The legislation basically brings in a territorial system of taxation. The basic principle behind this system is that corporates are not obligated to retain profits in subsidiaries in foreign lands. Corporations can bring the profits back into the US after paying a one-time tax. For India, the federal tax outflow will reduce for the companies that have US operations. The sectors which are likely to feel the impact are IT, services and BPO, pharmaceuticals and textiles. Indian business now have an opportunity to increase investment in US business, as well as setting up manufacturing units in the US. However, the opposite may be more difficult as it ends tax advantages for companies that move abroad from US’ shores. Trump has pushed his reforms on the slogan of “Jobs, jobs, jobs and jobs.” The legislation obviously seeks to generate jobs in the US but make outsourcing difficult. "I campaigned on the fact that we're not going to lose our companies anymore. They're going to stay in our country. They have tremendous enthusiasm right now in this country. And we have companies pouring back into our country. That means jobs, and it means really, the formation of new young, beautiful strong, companies. So that's going to be very, very important," Trump said after the bill was passed in the US senate, adding that the law will bring in at least $4 trillion that is frozen overseas. "Some of them don't even like us, and they had the money. Well they're not going to have the money long," he said. Over four million NRIs in the US stand to benefit from the personal tax cuts but analysts, however, warn about the fine print. The tax cut will end after 10 years and personal income taxes will rise for 57 per cent of America's middle-income class. The legislation retained the seven income tax brackets but they have been revised to 10, 12, 22, 24, 32, 35 and 37 per cent. The highest earners currently pay 39.6 per cent tax. The $1 million cap will be dropped to $600,000 per married couple. The reductions in income tax rates are also temporary and will end in 2018. It nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples. The personal exemption clause, which is currently set at $4,050, was dropped from the new legislation. It also brings to an end the unlimited federal deduction offered for state and local income and sales taxes. It will only allow deductions totalling a maximum of $10,000 in combined property, income or sales taxes. Another factor to consider is the move to allow maximum deduction of dividends that are received by a US stakeholder from foreign firms including in India. This would encourage the subsidiaries of US companies in India to remit larger dividends to the US with only the Indian Dividend Distribution Tax of over 20 per cent working as a deterrent.
