While tax structuring has become a crucial approach for corporates to strengthen their business objectives, which may also culminate in optimising their taxes; it is important to recognise the emergence of a regulatory tool aimed at addressing tax avoidance – the General Anti-Avoidance Rule (GAAR).

The GAAR is a legislative provision that essentially aims to counteract tax avoidance arrangements that exploit loopholes, contravene the spirit of the law, or artificially reduce tax liabilities. Its purpose is to ensure that taxpayers do not undermine the fundamental principles of tax legislation through aggressive tax planning strategies. Distinguishing between tax avoidance and tax
planning is a critical consideration. Tax planning involves legitimate optimising of taxes using fiscal incentives, while tax avoidance means dodging to pay taxes without contravening the tax laws. Since virtually all business decisions have tax implications in today’s world, it follows that GAAR will radically affect the decision-making process across levels in organizations.

Certainly, it is imperative to comprehend the intricacies of the extant provisions of GAAR that are meticulously designed to serve as an instrument against taxpayers resorting to artificial or contrived arrangements to reduce their tax liability, essentially, it is to cover the transactions under its ambit that are inherently at odds with the spirit of tax laws.

Under GAAR, authorities have the power to determine certain transactions as impermissible avoidance arrangements, allowing them to impose the appropriate taxes and deny claimed benefits. GAAR incorporates several pivotal elements aimed at curbing the abuse of tax laws. By enforcing these tax avoidance rules, tax authorities ensure that businesses operate within the spirit of the law, promoting fairness, equity, and transparency in the taxation system.

Primarily, under these provisions, an arrangement can be considered ‘impermissible avoidance arrangement’ if the main purpose of the arrangement is to obtain tax benefit and it has one of these four elements:

1. It creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length.
2. It results, directly or indirectly, in the misuse or abuse, of the provisions of income tax law.
3. It lacks commercial substance.
4. It is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

In a nutshell, the provisions pertaining to GAAR enunciates that if the affairs of the business are arranged in commercial wisdom with bona fide intent, then the consequential tax benefits for the parties in an arrangement should not be the determinative factor to invoke GAAR. Therefore, businesses are required to demonstrate that the proposed transactions have strong commercial
substance and are not primarily driven by an objective to reduce taxes.

At our recent KReW Tech Talk at MCA Consulting, we examined specific case studies in the realm of business structuring that’s aligned with GAAR. Our analysis was centred on comprehending how GAAR can impact a transaction and can shape a corporates’ tax and financial landscape. We discussed that in the context of amalgamations and demergers, schemes of arrangements, placed before National Company Law Tribunal (NCLT) often face opposition from the Income-tax Department, who argue that these schemes are primarily designed to obtain tax benefits. Even though the Income-tax Act provides tax-neutrality and related benefits for qualifying amalgamations and demergers, there is ambiguity regarding the weight given to the objections raised by the Income Tax Department during the sanctioning of these schemes under the Companies Act.

For instance, in case 1 involving Gabs Investment Private Limited (“Gabs”) and Ajanta Pharma Limited (“Ajanta”), Gabs is the group holding company and primarily holds shares in transferee company that is Ajanta, which is a speciality pharmaceutical company engaged in development, production and marketing of branded and generic formulations. The philosophy for the subject scheme as canvassed by Gabs is that, the merger will result in direct holding of promoter shares in the transferee company instead of through Gabs. This will lead not only to simplification of the shareholding structure and reduction of shareholding tiers but also demonstrate the promoter’s group direct commitment to and engagement with the transferee company. The promoters would continue to hold the same percentage of shares in the transferee company, pre and post-merger and there would also be no change in financial position of the transferee company. Gabs stated that the scheme was approved by 99.99% shareholders of transferee company and unanimously consented by all its shareholders.

The Income-tax Department argued that the proposed scheme of arrangement was a round-trip financing tactic which includes transfer of funds among the parties to the arrangements through the series of transactions. The scheme of amalgamation is a deliberate measure to avoid tax burden by using the medium of NCLT and the rationale presented by Gabs is without any justification. By this scheme Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the ITD.

The NCLT affirmed the objections raised by the Income-tax Department, stating that the rationale behind Gabs’ scheme lacked justification.

In the other case 2 of Panasonic India Private Limited and Panasonic Life Solutions India Private Limited, the Income-tax Department objected to the scheme of amalgamation, claiming that it was a ploy to take advantage of accumulated losses eligible for set off in the future.

The Tribunal after considering the arguments distinguished this matter is different from the facts of Gabs (supra) and stated that the objective of the scheme under Gabs, was for simplification of shareholding structure, however, in this case, the petitioner companies has clearly made out of a case of operational synergy between the amalgamating companies.

Further, the NCLT emphasized that the provisions of the Income Tax Act, which govern the treatment of accumulated losses and unabsorbed depreciation allowance in amalgamation or demerger cases, adequately protect the interests of the Income-tax Department. Therefore, the NCLT held that there was no merit in the objections raised by the Income-tax Department and approved the scheme of amalgamation.

With these cases in picture, during our talk, we delved into the topic of how NCLT perceives the implications of the GAAR in compromise and arrangement cases. We discussed that the scheme can only be rejected by the NCLT if the Income Tax Department can prove that its sole purpose is tax evasion and if the department fails to provide such evidence, the NCLT is required to sanction the scheme. Given the wide scope of GAAR provisions and consequences of a transaction being declared as an IAA, it is imperative for businesses to evaluate existing as well as proposed arrangements and structures on the touchstone of GAAR. Despite GAAR being introduced in 2017, it might take at least a couple of years more to gauge how and when the tax authorities invoke GAAR and how far- reaching the implications would be.

It was a valuable discussion, as we sought to better understand the NCLT’s perspective and how it affects our clients and how we can help our clients achieve their business objectives while ensuring compliance with the GAAR.

Needless to mention, with the implementation of GAAR taxpayers should prioritize the genuine commercial purpose of their corporate structures, beyond merely obtaining tax benefits. The business decision-makers’ first and most important course of action following GAAR will be to review their tax positions since such positions will be evaluated for compliance with GAAR and will thus need to be changed on the corporate level.

The applicability of these provisions is very wide as it is intended to cover not only domestic transactions but cross border transactions too. Also, with active participation of G20 countries in the BEPS project, countries are adopting concentrated and systematic efforts towards establishing tax policies which will protect its tax base. Various anti-tax avoidance measures have been incorporated in the domestic tax laws of countries as well as in treaties.

To navigate this evolving landscape in cross border transactions, corporates are increasingly conducting in-depth assessments to determine their eligibility for treaty benefits. This involves closely examining specific conditions, such as the “limitation of benefits” clause, to ascertain whether they qualify for reduced withholding tax rates and other advantages under the treaty. Concurrently, companies are proactively engaging in transfer pricing risk assessments to identify and mitigate potential issues before they escalate. In doing so, they take into account the potential impact of BEPS-related measures on their transfer pricing arrangements. Thus, with the global attention corporate tax governance and tax risk management is receiving, now is a good time for corporates to reflect on their tax governance frameworks and tax controls and consider whether their current framework is robust enough in the current climate.

Further, it is well recognised that as the business landscape evolves, organizations adopt innovative corporate structures and adhere to best governance practices to thrive in a constantly changing environment. Human ingenuity being the driver of innovative corporate structuring plays a crucial
role in recognizing the need for change and innovation in corporate structures. Implementing best corporate governance practices helps organizations strike a balance between compliance and innovation. Best governance practices provide a framework within which human ingenuity can drive innovative solutions while ensuring ethical and legal conduct.

The interplay between human ingenuity, corporate structuring, and best governance practices is essential for organizational growth and success. By embracing human ingenuity and following best governance practices, companies can adapt to a changing business landscape, navigate complex regulations, achieve optimal tax outcomes, and foster an environment that promotes innovation.

Thus, the corporates should review whether their existing tax frameworks embrace the principles of transparency, substantiation, and economic substance and continue to be in line with and are integrated with broader business strategies. This will help organizations navigate the complexities of anti-avoidance regulations and achieve optimal tax outcomes. It is not uncommon for businesses to be missing opportunities or creating risks by inadvertently excluding tax considerations from their business strategy and decision-making processes. Thus, to steer this complex landscape of anti- avoidance regulations, comprehensive understanding, transparency, and a commitment to legitimate tax planning is essential and seeking professional guidance from the experts in the matter would be helpful. By adhering to this, corporates can responsibly optimise their tax liability within the confines of the law, ensuring both compliance and fiscal prudence.

¹2018 (12) TMI 739 – NCLT, Mumbai.
²[2022] 138 taxmann.com 570 (NCLT- Chd).

Illustrative events (key drivers of change) that underline the need for scenario planning:

1. The Pandemic and Economic Fallout:

The COVID-19 pandemic sent shockwaves through the global economy, illustrating how swiftly and severely unforeseen events can impact businesses. Companies that had scenario plans in place were better equipped to pivot in the face of adversity.

2. Geo-Political Unrest:

When the geopolitical landscape becomes increasingly volatile, with tensions between nations creating uncertainty for international businesses, scenario planning helps organizations prepare for the range of potential outcomes, mitigating risks associated with geopolitical conflicts.

3. Technological Advancements:

Rapid advances in technologies like Artificial Intelligence (AI) have the power to disrupt industries. Scenario planning enables companies to explore diverse futures shaped by technological innovations, ensuring they stay ahead of the curve.

4. Global Business Landscape Changes:

Initiatives such as the Carbon Border Adjustment Mechanism (CBAM) and Base Erosion and Profit Shifting (BEPS) are altering the global business terrain.
CBAM, in particular, is a prime example of how regulatory changes can affect industries across borders and it is relevant here as it’s mechanism has just commenced.

The CBAM, proposed by the European Union, seeks to combat climate change by imposing tariffs on imported goods based on their carbon footprint. Industries like Iron, Steel, Aluminium, Cement, Fertilizers, and Electricity in India stand to be significantly impacted.

Oct 2023: A transitional period for CBAM began on 1 October 2023 and will extend through 2025, during which time quarterly emissions reporting will be required.

Jan 2026: Indian exporters will potentially start paying carbon border tax on covered products

2026 onwards: New products will be brought under the CBAM

While the Indian government is actively taking measures to ease the matter, companies can harness the power of scenario planning to prepare for potential outcomes.

Scenario planning’s multi-stage process briefly outlined using the example of CBAM

⦁ Framing and Identifying External Parameters and Trends/ Key Drivers of Change:

In the case of CBAM, this involves considering global shifts and adoption rates, regulatory changes, technological advancements, and environmental and societal shifts.

⦁ Identifying Critical Uncertainties (Impact / Uncertainty Analysis):

Understanding variables that could significantly affect the outcome, such as which regions might adopt similar policies, how regulations may evolve, technological breakthroughs that reduce carbon footprints, and climate-related triggers.

⦁ Developing Multiple Scenarios:

Creating a range of plausible future scenarios based on critical uncertainties.

⦁ Analysing the Scenarios:

Evaluating each scenario’s potential impact on the organization.

⦁ Developing Strategies

Crafting strategies to thrive in each scenario or mitigate potential risks.

⦁ Continuous Monitoring:

Scenario planning is not a one-and-done exercise; it requires ongoing monitoring and adjustment as circumstances evolve.

Embracing Scenario Planning for Sustainable Growth

In a world marked by rapid change and unpredictability, scenario planning is no longer a luxury but a necessity for organizations that aspire to achieve sustainable growth. By adopting this strategic tool, businesses can proactively prepare for the unpredictable, seize emerging opportunities, and navigate the complex terrain of our modern age with confidence and resilience. As the saying goes, “Failing to plan is planning to fail,” and scenario planning is the key to ensuring that an organization is prepared for whatever the future may throw at it.

As the digital economy continues to thrive, the need for an equitable and sustainable international tax system has become increasingly evident. The Base Erosion and Profit Shifting (BEPS) project, initiated by the Organization for Economic Co-operation and Development (OECD), has addressed these challenges through the implementation of two pillars solution. ‘Pillar One’ focuses on profit relocation to market jurisdictions, while ‘Pillar Two’ Global Anti-Base Erosion (GloBE) rules introduce a global minimum tax of 15% that would apply to a multinational enterprise (MNE) group with consolidated financial statement revenue in excess of EUR750 million. Over the time, the OECD has released model GloBE Rules, commentary, guidance on GloBE safe harbours, administrative guidance and standardised GloBE information return.

Under the GloBE rules, an MNE group would be required to determine an effective tax rate (ETR) for all entities located in a jurisdiction. When the entities’ jurisdictional ETR is less than 15%, a top-up tax generally will be due to bring the jurisdictional effective tax rate to 15%. Where ETR is lower than the minimum tax rate of 15%, MNE would be liable to pay top-up taxes under Income Inclusion Rule (IIR) or Undertaxed Payments Rule (UTPR) mechanism. Top-up tax is calculated as difference between agreed minimum tax rate and ETR in each jurisdiction. The other vital component of the Pillar Two is Subject to Tax Rule (‘STTR’) which is a treaty-based rule granting source countries the right to tax certain cross-border payments if the recipient’s jurisdiction imposes a rate below 9%.

The 18th G20 Summit convened under India’s Presidency for the first time, with the underlying theme of ‘Vasudhaiva Kutumbakam’, has accomplished the major breakthrough on 9.9.2023, with the adoption of the G20 New Delhi Leaders’ Declaration. In it also, the G20 leaders have agreed for the swift implementation of the Two-Pillar international tax package.

Numerous jurisdictions have made significant progress in implementing the GloBE Rules, either through enacting final or draft legislation, or by expressing their clear intentions to do so. The implementation of the global minimum tax is well underway, with approximately 50 jurisdictions taking measures to incorporate it into their tax systems. According to estimates, by 2025, nearly 90% of global multinational enterprises (MNEs) generating revenues above EUR 750 million will be required to adhere to a minimum effective tax rate of 15% in all the jurisdictions where they operate.

Having said this, the implementation of the Pillar Two Model Rules will have a significant impact on organizations worldwide. In no time, the corporate groups have to gear up to assess the implications of global minimum taxation and keep the preparedness and readiness due to the extensive data requirements as well as the complex rules for determining the ETR. Reviewing and simplifying entity structure in the context of these emerging tax reforms is need of the hour, such that, corporate structures are aligned vis a vis Pillar Two world. Needless to mention, it is crucial for the multinational corporates to understand the implications and take proactive steps to ensure compliance and minimize tax risk.

Communiques from the department
Recently, the tax department has issued communiques to companies/employers responsible for tax deduction on payment of salaries. Broadly, these letters provide that:

1. Many employees in the states of Telangana and Andhra Pradesh 1 have been claiming refund of TDS on salaries by filing false income tax returns with exaggerated claims of deductions/exemptions. Such claims were being verified by the department.

2. The department urges that the employers may advise their employees:
a. To verify the correctness of their claims for past 3 assessment years (AYs) and voluntarily file a revised, belated or updated tax returns, as applicable; and

b. About the consequences of misreporting income (interest, penalty and additional tax payable).

Legal Provisions
The Income tax Act, 1961 (the Act) casts a responsibility on the
employer/deductor to procure evidence from the employee and on the employee to provide evidence to the employer/deductor. The relevant provisions are as follows:

1. Section 192(2D) reads as follows:
“The person responsible for making the payment referred to in sub-section
(1) shall, for the purposes of estimating income of the assessee or computing tax deductible under sub-section (1), obtain from the assessee the evidence or proof or particulars of prescribed claims (including claim for set-off of loss) under the provisions of the Act in such form and manner as may be prescribed.”

2. Rule 26C of the Income tax Rules, 1962 provides the assessee shall furnish to the person responsible for making payment section 192(1), the evidence or the particulars of the claims referred to in sub-rule (2), in Form No.12BB for the purpose of estimating his income or computing the tax deduction at source.

3. Circular 24/2022 dated 7 th December 2022 para 8 reads as follows:
“section 192(2D) provides that person responsible for paying (DDOs) shall obtain from the assessee evidence or proof or particular of claims such as House rent Allowance (where aggregate annual rent exceeds one lakh rupees); Leave Travel Concession or Assistance; Deduction of interest under the head Income from house property and deduction under Chapter VI-A as per the prescribed Form 12BB laid down by Rule 26C of the Rules.”
Thus, it is amply clear that the employer is responsible for collecting the requisite evidence for claims made by an employee, verify them to its satisfaction and thereafter, computed the TDS liability.

Matters of concern for employers
Although the department’s communiques to the employers sound soft or advisory in the nature, the future ones may not be so. Let’s look into some of the areas of concern for the employers.

1. The notices currently being issued may pertain to past AYs – 2023-24, 2022- 23 and 2021-22. The employers may proactively educate their employees about restrictions on claiming deductions under the Act, the monetary limits, the possibility of correcting errors, if any, by filing revised or updated tax returns.
For instance, employees may erroneously claim deduction under section 80D for medical expenses of parents up to Rs. 50,000, despite the fact that there is a health insurance in place for their parents. In such cases, employees may genuinely not be aware of the tax provisions and may be willing to file the correct tax return.There is a possibility that the department may issue a notice to the employer for wrongful deductions claimed by the employee and consequent lower deduction of TDS. In that case, the employer may be considered as an assessee in default under section 201 of the Act. The employer may however, take support of decisions 2 where courts have held that if the employer deducted lower TDS under a bona fide belief, it cannot be considered as an assessee in default under section 201. In certain decisions 3 however, the courts have upheld the applicability of section 201 even where the assessee had a bona fide impression for non-deduction of TDS.

2. India is gradually moving to a low/nil deduction tax regime for individuals. In that case, this issue may not be relevant for many employees opting for the default tax regime with almost NIL deductions for AY 2024-25 and onward.
However, the employer may be held responsible in certain cases, viz.
a. Where an employee claims deduction of interest or set-off of losses under the head ‘income from house property’;
b. Where employees exercise stock options or similar rights and TDS is deducted based on the valuation of shares of the company; or
c. Where residential status of inbound and outbound expatriates changes in the years of transition.
In such cases, it is imperative for the employer to procure and maintain relevant documentary evidence to justify its stand on deduction of TDS.

3. Practically, most employees may not understand taxation and the requirement to maintain/submit proofs for claiming deductions. It is the responsibility of the finance team of the employer to ensure that employees are allowed deductions only after they have submitted the relevant proofs of deductions/set-off of losses. The finance team as well as the employees must be educated about the requirements to maintain adequate proofs and evidence for claiming deductions. As it is rightly said, ignorance of law is not an excuse.

Conclusion
The onus of accurate tax computation and tax deduction on employee’s salary is cast on the employer. Hence, it is incumbent upon the employer to put in place the requisite infrastructure for collecting, verifying and maintaining records or documents to justify the claims/deductions of the employee and finally deduct the right amount of TDS.

What are carbon credits?

The necessity of reducing carbon emissions was first recognized at the Kyoto Protocol of the United Nations Framework on Climate Change signed in 1997 wherein the member countries, including India, committed to limit and reduce the greenhouse gas emissions. The Kyoto Protocol provides for trading of Carbon Credits, i.e., emission reduction units through Clean Development Mechanism (CDM).

Under CDM, specified parties engaged in project activities resulting in Certified Emission Reductions (CERs) may trade in such CERs. The purchasers of CERs may use such CERs to comply with part of their quantified emission limitation and reduction commitments. The unit associated with CDM is the CER; where one CER is equal to one metric tonne of carbon dioxide equivalent.

Developed countries with emission reduction targets can simply trade in the international carbon credit market. This implies that entities of developed countries exceeding their emission limits can buy carbon credits from those whose actual emissions are below their set limits. Carbon credits can be exchanged between businesses/ entities or can be bought and sold in the international market at the prevailing market price.

Whether carbon credits are considered as capital receipt or revenue receipt?

Taxation under the Income tax Act, 1961 (the ITA) depends on whether the income is a revenue receipt or a capital receipt. As a general rule, revenue receipts are chargeable to tax unless specifically exempted and capital receipts are exempted from tax unless specifically held to be chargeable.

Prior to FY 2017-18, there was a lot of uncertainty on whether ‘carbon credits’ are revenue receipts or capital receipts. The Revenue treated income from carbon credits as revenue receipt1 and sought to tax the same as business income. The taxpayers, on the other hand, succeeded in establishing that income from carbon credits are capital receipts. Consequently, the Revenue has not been able to tax the income from carbon credits till date.

Taxation of carbon credits under section 115BBG
To address the litigation on the taxation of carbon credits in India, the Finance Act, 2017 introduced section 115BBG under the ITA “in order to bring clarity on the issue of taxation of income from transfer of carbon credits and to encourage measures to protect the environment.”

On a plain reading of section 115BBG, the following points emerge:

• This is a specific provision applicable to the taxation of income from the transfer of carbon credits. Consequently, such income from carbon credits shall not be taxed under the general provisions of the ITA.

• The said income shall be taxed at 10%.

• Though the section uses the term income, which generally means revenue less expenditure, clause 2 specifically prohibits deduction of any expenditure / allowance in calculating the tax base under this section. This implies that the rate of 10% shall be applicable on the gross receipts on the transfer of carbon credits.

• The section does not specify whether it is applicable to a resident assessee or a non-resident assessee. Consequently, it is applicable to non-resident taxpayers as well. However, in the case of non- residents, taxability arises only to the extent it is attributable to the business connection/permanent establishment in India. Tax treaty benefits would also be available.

In the case of non-resident taxpayers, the OECD Publication on Tax Treaty Issues Related to Emissions Permits/Credits provides that:

• Income from carbon credits may be taxed as business profits or as capital gains.

• Business profits are taxed in the source country if the non- resident taxpayer has a permanent establishment in the source country (otherwise, in the country of residence). Further, business income must be determined as per the domestic law of the source country.

Section 115BBG was introduced to mitigate the tax litigation on taxability of income from carbon credits. Whether it has achieved the desired objective or not, is something only time will tell. As of date, all jurisprudence in the matter pertains to the years prior to the introduction of section 115BBG. Taxability under section 115BBG may be challenged on the following grounds:

• The section does not specifically categorize income from carbon credits as a capital receipt or a revenue receipt. In the absence of a clear categorization, the existing judgments in the matter, which have clearly established that income from carbon credits is a capital receipt, may still hold true.

• There is no amendment to the definition of ‘income’ under section 2(24) of the ITA. For instance, where the Revenue intended to tax the receipt of property for an inadequate consideration as income, a specific amendment was made to the definition of income. Alternatively, there is no amendment to section 28 of the ITA defining ‘Profits and gains of business or profession’. In other words, the computation mechanism under section 115BBG may fail in the absence of a charging mechanism under sections 2(24) or 28 of the ITA.

Recent judgements

Taxability of the carbon credits is still a contagious issue in India. In a well- reasoned Tribunal judgement of Shri Pramod Kumar in the case of Kalpataru Power Transmission Ltd., it was held that “the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor”. The decision has been approved by the Gujarat High Court.
A similar matter in the case of Lanco Tanjore Power Corporation Ltd. is pending for adjudication before the Apex Court. The Apex Court is pondering over the issue of taxability of the carbon credit in India as it would have a far-reaching impact on the future industries.

The entire process of relocation involves multiple things to be taken care of, including your own cherished business, which you may have established in India in your 20s or 30s. Selling your business and encashing its inherent value is certainly an option before you relocate. Yet, if you are passionate about your business with no intention to sell it, here are some tips that will help you navigate the different tax and regulatory aspects which must be taken care of while carrying on business in India post relocation. 

Continuity of the entity 

Your overseas relocation generally does not impact the continuity of the entities in India – be it a company, Limited Liability Partnership or a partnership firm. However, it may impact the operations and transactions with the entity. For instance, any further investment made by you in your company or LLP must comply with the sectoral and pricing guidelines applicable to non-residents making investments in an Indian entity. Further, any additional capital contribution in a partnership firm can be made only on a non-repatriation basis. 

Regulations further provide that an entity incorporated in India (a company or an LLP) must have at least one resident director or managing director. In case you are relocating overseas and become a non-resident in India, you must appoint a resident nominee to be in charge of the entity. 

Residential status and your Indian business 

Once you relocate overseas, your residential status in India changes. For the purpose of foreign exchange regulations or Foreign Exchange Management Act (FEMA), you would become a non-resident right from the day you leave India for permanent settlement overseas. As a non-resident, you can still continue to hold stake in your company as well as other investments in India. In the future, if you make any new investments in your company, including capital or debt infusion, you must check compliance with the Foreign Direct Investment (FDI) and External Commercial Borrowings (ECB) guidelines. For instance, investment in some sectors requires regulatory approval if it exceeds the sectoral cap (eg. 51% in multi-brand retail). 

The Indian income tax regulations have a different concept of residence. You may be considered as an ordinary resident, not ordinary resident or a non-resident based on the number of days you have spent in India – in a particular year and in the previous years. Your income is taxed in India based on (a) your residential status or and (b) the source of income in India. When you relocate overseas, there may be no change in taxability of income from your Indian business, i.e., your Indian business continues to be taxed in India as it is established in India. However, when you cease to be an ordinary resident in India, your foreign businesses are alienated from Indian and not taxed in India. Hence, you must maintain the status of a non-resident in India by restricting your Indian visits to 120 days in a year (182 days in certain cases). 

Residential status and overseas businesses

Many businesses have operations in multiple countries. These entities often function in tandem and have transactions with group entities across the world. Non-resident individuals are not taxed in India on their income from overseas businesses. However, if you are considered a not ordinary resident depending on your days of stay in India or your Indian citizenship, overseas businesses may be exposed to tax in India if they are controlled from India. This possibility can be mitigated by ensuring that business operations or directors’ meetings are not conducted during your Indian visits. 

Another important aspect is the reporting of foreign businesses, assets and investments in the Indian tax return. Ordinary residents must disclose their foreign assets and liabilities at the time of filing their tax return in India. Non-residents and not ordinary residents are not required to disclose their foreign assets in India. Thus, when you relocate overseas, and cease to be an ordinary resident (global income of an individual is taxed in India if he/she is an ordinary resident in India), your foreign assets and liabilities are alienated and are not required to be reported in India. 

Compliances in India

Your Indian business (company, LLP or a partnership firm) would continue to be governed by the applicable laws, i.e., all Indian regulations pertaining to direct and indirect tax, stamp duty etc. would continue to apply. There may be certain additional compliances to be taken care of. These include:

Reporting at the time of receipt of foreign investment and annual reporting under FEMA;

Transfer pricing study and reporting under income tax in respect of international transactions between the company and its related parties like promoters, directors or group entities. 

Beneficial tax rates

Your Indian business would continue to be taxed at the rates applicable to the entity – whether it is a company, LLP or a partnership firm. 

At a personal level, when you earn a dividend from your Indian company, you would be entitled to beneficial tax rates under the tax treaty between India and your new country of residence. For instance, if you are relocating to the US and become a non-resident, any dividend income from your Indian business will be taxed in India at 25% (15% in certain cases) as per the tax treaty, as compared to slab rates which could be as high as 42.74%. Similarly, tax treaties also provide beneficial tax rates for income in the nature of interest, royalty and technical or professional fees received from India. 

Besides the beneficial tax rates, you can also claim a tax credit for tax paid in India in your new country of residence. In most cases, the possibility of double taxation is mitigated.   

The way forward

As families expand, different branches of the family tree grow in different nations. Businesses scout for new markets for expansion. Needless to say, global spread is inevitable. You can make the transition smooth by choosing the right investment advisors who can support you in continuing your Indian business from overseas.