Corporate tax is assessed on the income collected by companies under the Income Tax Act of 1961. A domestic corporation is registered under the Companies Act and has its location of effective management in India. A domestic company must pay corporate income tax on every cent of its revenue. Today's increasingly complicated economic and regulatory landscape makes managing compliances a difficult endeavor. Companies encounter various difficulties, including ongoing changes to tax and related legislation, adjustments to accounting standards, global trends toward centralizing compliance requirements, etc.
To bridge the gap, one should glance at the below-mentioned arenas for better tax planning.
The term "merger" is encompassed in the definition of the phrase "amalgamation," but it is not specifically defined in the Income Tax Act. Amalgamation is defined as the merger of one or more companies with another or the joining of two or more businesses to form a new business in such a way that all the assets and liabilities of the amalgamating company will become the assets and liabilities of the newly formed company/combined company, which is held for at least 5 years and has shareholders who own at least 75% of the value of the shares in the amalgamating company. The cost of purchase and holding term of the assets associated with the demerged company will be made accessible to the resulting company in the event of a demerger.
if the combined company is an Indian business, no capital gains tax is applied to transferring capital assets from the amalgamating company to the combined company. The situation is comparable if a demerged company merges with a resultant company.
There is no tax due when shares of an Indian company are transferred by a foreign company, a demerged foreign company, to another foreign company, or to a foreign company that results from the transfer, so long as certain requirements are met. In addition, the shareholder of the amalgamating or demerged company is exempt from paying capital gains tax on the exchange of shares with the merging or resultant firm pursuant to the merger plan.
The transfer of equity shares acquired through converting a company's bond or debenture is expressly exempt from capital gains tax. Furthermore, capital gains tax will no longer apply to the conversion of preference shares into equity shares. When calculating the cost of acquisition and the holding time for the preference shares, the cost of acquisition and holding period for the equity shares obtained on such conversion will also be considered. This will go into effect for the 2018–19 tax year.
To execute the Foreign Account Tax Compliance Act (FATCA) in India, the Indian government and the US have signed an inter-governmental agreement (IGA). The IGA mandates that foreign financial institutions (FFIs) in India send tax information on US account holders to the Indian government, which will then forward the information to the US Internal Revenue Service (US IRS) regarding Indian account holders. Additionally, the US IRS will disclose comparable data regarding Indian citizens with any accounts or assets in the country. Starting on 30.09.2015, information was exchanged automatically. After the IGA was signed, the Indian government developed regulations governing FATCA reporting in India.
The Finance Act of 2017 introduced GAAR provisions, which became effective on April 1, 2017. These provisions give the tax department the authority to deem an "arrangement," or any portion or step thereof, made with the primary intent of receiving a tax benefit to be an "Impermissible Avoidance Agreement" (IAA), with the result being a denial of tax benefits under the Income-tax Act or under the relevant tax treaty.
An IAA is one whose primary goal is to achieve a tax benefit under GAAR regulations, and it:
● establishes obligations and rights that are not fair or reasonable
● resulting in the direct or indirect abuse or manipulation of the provisions of the Income Tax Act
● does not have enough commercial substance, or
● is performed in a way that is not often used for legitimate purposes.
Consequences if an arrangement is deemed to be an IAA include the following:
● Redefine the arrangement.
● Disregard the corporate hierarchy.
● Disallow the tax treaty benefit.
● Change the residency or location of assets or transactions.
● Redistribute money for expenses, relief, etc.
● Recharacterize relief, income-expense, equity-debt, etc.
According to the Indian Transfer Pricing Regulations (ITPR), income from "international transactions" involving "associated enterprises" must be calculated with consideration for the "arms-length price." Furthermore, the arms-length price must be considered when determining any provision for costs or interest from any foreign transaction. The ITPR defines "international transactions" and " associated enterprises."
The ITPR also includes the concept of "deemed international transaction," whereby a transaction between a business and a third party (whether based in India or abroad) would be subject to transfer pricing regulations if there is a prior agreement regarding such a transaction between the third party and the associated business of the transacting business or if the terms of such a transaction are decided in substance between the third party and the associated business.
According to the ITPR, some transactions carried out by a taxpayer with domestically associated parties and having a combined value greater than INR 200 million are referred to as "specified domestic transactions" and are covered by the transfer pricing regulations.
The ITPR first recommended five ways to calculate arm's-length price. These generally follow the OECD Guidelines. In 2012, a sixth approach known as the "other method" was announced. Taxpayers must choose the best strategy for figuring out the arms-length price.
Additionally, taxpayers must keep a thorough collection of regulated information and records pertaining to international and domestic transactions between linked firms annually and within defined deadlines. As a constituent entity of an international group, taxpayers are required to keep and maintain these records (basically a master file and a country-by-country [CbC] report) with regard to the international group. Additionally, taxpayers must acquire an Accountant's Report (certified) from an independent professional accountant certifying the type and value of overseas transactions. The certificate must be filed one calendar month before the income tax return is due. The taxpayer is primarily responsible for demonstrating that the transaction was conducted at arm's length.
The CBDT announced a number of changes to the certificate's format on October 1, 2020, including the expansion of some domestic transactions' scope.
The taxpayer must adhere to the aforementioned rules each year.
With the flexibility of departure from the percentage that is notified by the Central Government as +/- 1% for wholesalers and +/- 3% for others, the ITPR uses the arithmetic mean of comparable prices as the arm's-length price.
Additionally, the CBDT has established guidelines for using a range to determine arm's-length pricing, which is explored further below. After giving the taxpayer a chance to be heard, the transfer pricing officer may recalculate the taxable income if they believe that the arm's-length price was not used. If the provisions of the ITPR are not followed, severe penalties are mandated.
A flawless tax system does not have a single design. Everyone must consider the unique conditions of the nation it is intended for. Additionally, all the stakeholders should be involved in the development process.
Regarding corporations, it is important to recognize that, on the one hand, business needs a strong, healthy society to which it should contribute and, on the other, that business pays much more than corporation tax and that the system needs to be designed to encourage investment and growth.