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Budget 2017: Tax consolidation - improving the ease of doing business

Due to existence of multiple SPVs under one large parent, one of the major compliance challenges faced is significant cost incurred for undertaking income-tax compliance.Apart from enormous compliance efforts and cost for the taxpayer, this also results into significant administrative cost for tax department in keeping track of and assessing multiple SPVs.

union budget Updated: Jan 30, 2017 19:45 IST
Finance minister Arun Jaitley attends a seminar on the Goods and Services Tax (GST) issues during the Vibrant Gujarat investor summit in Gandhinagar.
Finance minister Arun Jaitley attends a seminar on the Goods and Services Tax (GST) issues during the Vibrant Gujarat investor summit in Gandhinagar.(Reuters file photo)

Infrastructure companies, owing to legal or commercial requirements, are forced to have multiple subsidiaries i.e. separate SPVs for each project. This is primarily to meet the bid requirements and the financing arrangements for suchprojects. Similarly, in financial services banking, investment banking, brokerage, insurance business are many a time housed in separate companies.

Due to existence of multiple SPVs under one large parent, one of the major compliance challenges faced is significant cost incurred for undertaking income-tax compliance.Apart from enormous compliance efforts and cost for the taxpayer, this also results into significant administrative cost for tax department in keeping track of and assessing multiple SPVs.Under the current tax regime, each SPV is regarded as an independent tax entity and, therefore, required to undertake separate income-tax return filing. It may also be considered that in this challenging economic environment compliance and litigation costs directly impact the margins of low margin business like infrastructure and negatively impact the ease of doing business in India

Tax Consolidation-Global experience

Consolidated group tax filing approach treats a group of wholly owned or majority-owned companies as a single entity for tax purposes. This generally means that the parent company is responsible for the entire group’s tax obligations. In terms of mechanics, all transactions between the group companies of the consolidated group are ignored for tax purposes. In other words, the parent company removes the impact of intragroup transactions from the aggregated group data to give a consolidated position as if the group companies / SPVs are divisions of the parent company. The tax obligations are required to be met by single parent entity and each SPV will not be required to undertake separate tax filing.

The objectives and aim of tax consolidation regime is to reduce the on-going tax compliances cost, promote business efficiencies, reduce litigation and reduce the administrative cost of the tax department. 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.

A snapshot the tax consolidation regime in various jurisdictions is summarized below:

Country Tax Consolidation Regime- Overview

Australia

Australian resident holding (head) companies and their wholly owned Australian resident subsidiary members of the group are taxed on a consolidated basis. The parent company assumes the income tax compliance obligations of the group.

FranceRelated companies subject to corporate tax may elect to form a tax consolidated group.
JapanThe Consolidated Tax Return System (CTRS) applies to a domestic parent corporation and its 100% domestic subsidiaries. A consolidated group must elect the application of the CTRS, subject to the approval of the National Tax Agency.
USA

The net operating losses of some members of the group can be used to offset the taxable income of other members of the group, and transactions between group members, such as intercompany sales and dividends, are generally deferred or eliminated until there is a transaction outside the group.

The tax consolidation regime has been adopted in number of countries, in our experience it will create a positive impact on business and provide a level playing field to the Indian companies. Group taxation would help to reduce the on-going tax litigation and administrative cost of the tax department as well.It may be argued that in the long run such a regime would not negatively impact overalltax revenues as tax offset of carry forward losses/depreciation is already allowed under the domestic tax code, accordingly any tax offset claimed by the individual taxpayer would be offset when the aggregate approach for the economy as a whole is considered.

Way forward

Fiscal measures play a vital in the development of industry. While most of the advanced economies provide tax consolidation relief mechanism, these provisions are not yet incorporated under the Indian tax laws.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.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 for the industry.

The author is partner at Deloitte Haskins & Sells LLP