Union Budget 2019: Although the companies operating in the infrastructure sector, such as roads, prefer to carry on business under the same entity, due to regulatory restrictions they are also mandated to form separate entities.
By Jimit Devani, Mukul Sharma and Dipashi Shah
Budget 2019 India: Most large corporations, whether of Indian origin or multinational corporations (MNCs), have different entities to focus on each business line separately. Further, as the business diversifies they explore the option to open more subsidiaries for each businesses. This is more in the case of sectors such as power production where multiple structures are adopted due to regulatory requirements.
Although the companies operating in the infrastructure sector, such as roads, prefer to carry on business under the same entity, due to regulatory restrictions they are also mandated to form separate entities. The Income-tax Act also does not provide the flexibility to consolidate the entities. This causes following issues for such business groups:
> Compliance burden – Significant cost and efforts by taxpayers for undertaking tax compliances for each special purpose vehicle (SPV) separately as each entity is required to file its respective return of income and handle litigation separately even though the issues could be common across the group.
> Administrative cost – Significant cost and efforts incurred by the internal tax department to keep track of multiple SPVs.
> High Effective Tax Rate (ETR) – Loss from one entity cannot be set-off against profits of another SPV leading to tax inefficiencies and high effective tax rate for the group as a whole.
A solution to the above issues could be a tax consolidation regime where the parent entity files a single consolidated tax return for the group and inter-group transactions are ignored. To avoid the above issues, many countries across the globe (USA, France and Australia) have adopted tax consolidation regime or similar regimes. This permits the business group to have the option of being treated as one individual entity for tax purposes.
The benefits of tax consolidation could be: Boost in investment in Power and Road sectors: The tax consolidation regime / group taxation regime will boost investments in Power / Road sectors and fuel tremendous growth in these sectors.
Competitive advantage: This alternative would provide level playing field to the companies for competing with international players. As tax consolidation regime / group taxation has been adopted in number of foreign countries, it has created a positive impact on businesses with significant reduction in compliance and litigation costs.
Administrative benefits for tax department: This would also reduce litigation across the nation. Currently, multiple entities of one group are audited by the tax department for similar issues. Once a consolidated return is filed, the tax officer can investigate only one entity. This will reduce the burden on the tax officers across the nation and save cost and time. There would not be the need to maintain multiple records. This will be a win-win situation for both taxpayers and the department.
Neutral from revenue perspective: In the end, the tax consolidation regime or group taxation may not affect the government as India currently allows carrying forward business losses for eight years and unabsorbed depreciation indefinitely, for setting off against future profits.
Therefore, a tax consolidation regime can prove to be beneficial for both the government as well as taxpayers, creating a win-win situation for both.
Since India is trying to bring in many laws practiced globally, the country could also actively consider the tax consolidation regime at least for sectors where the government has mandated companies to have a separate SPV even though they prefer to carry on activities under one company.
Tax consolidation has been the demand of India Inc. for over the last decade or so. However, it has not yet been accepted by the government. The last term of the government saw a huge jump in ease of doing business rankings to number 77. Improving this ranking remains one of the top priorities of the new government. Introduction of tax consolidation in Budget 2019 could boost the ease of doing business and send a correct and positive message to global investors.
Views expressed are personal.
Jimit Devani is a Partner, Mukul Sharma is a Deputy Manager and Dipashi Shah is an Associate with Deloitte Haskins & Sells LLP.