Adopt Tax consolidation Scheme
In India, separate entities are incorporated based on their specialisation in various lines of businesses (like manufacturing, trading, retail, infrastructure etc.) by the parent company. Separate companies are incorporated to attract investors which suits their needs. Investors are more likely to invest in a well-structured organisation.
Because of commercial compulsions, the business houses are forced to have many subsidiaries under one parent. The group as a whole and the tax Department face many challenges. Some of them are:-
- Each Entity is considered as separated entity and therefore required to file a separate income tax return, involving huge cost of Income Tax compliance by tax payer.
- Each entity is assessed/ scrutinized separately resulting in litigation cost for each entity. Significant administrative costs are incurred by the Income tax Department in keeping track of records and assessing multiple subsidiaries.
- Apart from cost, a lot of efforts are required by both tax payer as well as Income tax Department for undertaking compliance.
Tax consolidation or combined reporting is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities (such as trusts and partnerships) as a single entity for tax purposes. The head entity of the group is responsible for all or most of the group’s tax obligations such as paying tax and lodging tax returns.
In terms of mechanics, all transactions between the group companies of the consolidated group are ignored for tax purposes.
i. Tax consolidation scheme would help to centralize the planning and payment of tax by the parent company.
ii. It is common in India that the parent company engaged in various lines of businesses incorporate many subsidiary companies. Since the market is volatile, it may happen that one company is incurring losses and other is earning profits. At a group level, the tax outgo would be more as under the Income-tax Act at present, there are no provisions to set off loss of one group company with another profit making group-company.
Under tax consolidation, the company can set off the losses of one inter group company with the profits of another company.
Tax consolidation would take care of such situations which facilitate development of new businesses of challenging nature such as retail or telecom. Where financial risks are isolated in a new company but at the same time tax revenues and losses can be consolidated.
iii. Any unused foreign tax credit by one company can be used by the other affiliates within the group.
v. Currently, in the Income- tax Act, 1961 the Domestic Transfer Pricing provision requires all the inter company transactions to be at Arm’s Length Price and need to be reported. Under the consolidated tax scheme such intra group transactions would be net off and thereby will reduce the time and compliance cost of the tax payer and administrative cost of the Income-tax Department.
v. In group taxation all transactions between group companies are ignored for tax purposes. This will help in tax free movement of assets across the group which would aid in internal restructuring.
vi. In India, each company is individually liable for separate tax assessments. By introducing the tax consolidation scheme, the parent company would act as an agent in all the tax matters.
vii. The number of litigations pending with the tax department would also reduce and thereby reducing the administrative cost of the Income-tax Department.
viii. In the long run such a regime would not negatively impact the overall tax revenues as tax offset of carry forward losses/depreciation is already allowed under the Income-tax Act, 1961, accordingly any tax offset claimed by the individual taxpayer would be offset when the aggregate approach for the economy as a whole is considered.
ix. Member of the group companies obtaining for tax consolidation can enter into an arrangement with Income Tax Department/ CBDT for a nominated member of the group to be in liaison with Income Tax Department/ CBDT, such that all payments of tax flow through that nominated company.
x. It is believed that for capital intensive sectors like infrastructure and financial services introduction of such a progressive tax regime would be beneficial and fair to the taxpayer.
xi. The tax consolidation regime has been adopted in tax legislations of a number of foreign countries like Australia, France, Germany, Italy, Japan, Korea, Spain, USA etc. These countries have not only successfully implemented the said regime but also created a positive impact on business with significant reduction of compliance and litigation cost.
xii. This will create a positive impact on business and provide a level playing field to the Indian companies. The tax consolidation regime also endorses the Government’s efforts of “Ease of doing business in India” and assist in aligning the business and tax objectives of the industry.
xiii. No. of tax exemptions are being reduced and very soon, no deduction/ exemption will be allowed in computing taxable income. It is very logical to introduce tax consolidation scheme. Many mergers, demergers which are being done only to take advantage of tax losses will not be required.
A snapshot of the tax consolidation regime in various jurisdictions is summarised in Annexure A.
In view of the aforesaid benefits it is suggested that a tax consolidation scheme may also be adopted in India. This would create a positive impact on business with significant reduction of compliance and litigation cost.
Introduction of Group consolidation tax
Section 129(3) of the Companies Act 2013 requires the preparation of a consolidated financial statements where a company has one or more subsidiaries.
Further, countries like United States, France, Australia and New Zealand have adopted a tax consolidation or combined reporting regime. Tax consolidation, or combined reporting, is a regime adopted in the tax or revenue legislation which treats a group of wholly owned or majority-owned companies and other entities as a single entity for tax purposes. The head entity of the group is responsible for all or most of the group’s tax obligations (such as paying tax and lodging tax returns).
The aim of a tax consolidation regime is to reduce administrative costs for government revenue departments and to improve the quality of tax assessment.
The regime also reduces compliance costs for corporate taxpayers. For companies, consolidating can help reduce taxable profits by having losses in one group company reduce profits for another. Assets can be transferred between group companies without triggering a tax on gain for the company receiving assets, dividends can be paid between group companies without incurring tax liabilities.
It is suggested that on similar lines, the tax consolidation regime may be introduced in India as well.