INDIA Law and Practice Contributed by: Raj Ramachandran, Kartik Jain, Mannat Nirola and Anmol Mahajan, JSA Advocates & Solicitors
5.4 Tax Consolidation Direct Tax
Benefit : Deduction for qualifying in-house scientific research expenditure, excluding land and building Indirect Tax The principal tax credit and incentive mechanisms available to businesses in India under the indirect tax regime may be summarised as follows: • Input tax credit under GST : This is a credit mecha - nism whereby a registered person is entitled to avail themselves of credit for GST paid on inputs, input services and capital goods procured in the course or furtherance of business, and to utilise such credit towards discharge of output tax liability on outward supplies. Certain categories of inward supplies are statutorily excluded from the purview of input tax credit. • Central value - added tax : Credit under excise law is allowed in respect of excise duty paid on inputs, capital goods and service tax paid on input ser - vices, to utilise such credit towards discharge of excise duty payable on manufactured goods which are not subsumed under the GST regime. • Credit / incentive mechanisms under customs law : Customs law read with the FTP provides for certain export promotion schemes designed to neutralise the incidence of customs duty on inputs used in goods meant for export, including: (a) the Advance Authorisation scheme; (b) the Export Promotion Capital Goods scheme; (c) the Duty Drawback scheme; (d) preferential trade agreements (PTAs), free trade agreements (FTAs), etc with various countries to eliminate or reduce customs tariff and non- tariff barriers; and (e) to promote international and domestic trade and create competitiveness, India provides fis - cal incentives by allowing companies to set up units in Special Economic Zones, Free Trade Zones, Export Oriented Units, software tech - nology parks or the GIFT International Financial Services Centre, or for undertaking manufac - ture and other operations in customs ware - houses, etc, along with required infrastructure, utilities and services in such areas.
Under Indian tax law, tax consolidation for corporate groups (where a parent and its subsidiaries are treat - ed as a single taxable entity) is not permitted. Each company within a group is treated as a separate legal entity and must independently file its tax returns and meet its tax obligations. This means that the losses of one group company cannot generally be offset against the profits of another group company. Indirect Tax The position under GST law is similar. Each legal entity is required to be assessed and taxed independently. 5.5 Thin Capitalisation Rules and Other Limitations Thin capitalisation rules (interest deduction limita - tion rules) are applicable in India, aligning with OECD BEPS Action Plan 4 to prevent base erosion through excessive interest deductions on debt from related parties. They apply where an Indian company or a permanent establishment of a foreign company in India incurs deductible interest or similar expenditure exceeding INR1 crore (approx. USD106,000) payable to a non- resident associated enterprise (AE). The deduction for such interest paid to AEs is limited to the lower of (i) 30% of the company’s EBITDA and (ii) the total inter - est paid or payable to AEs. 5.6 Transfer Pricing India’s income tax laws provide for transfer pricing regulations applicable to international transactions between AEs. Transfer pricing regulations also apply to certain specified domestic transactions. The Indian tax authorities are empowered to adjust income arising from such transactions where the price charged is not at arm’s length, as determined under the prescribed methods. Taxpayers are required to maintain appropriate documentation to substantiate the arm’s length price. Taxpayers may also enter into unilateral or bilateral Advance Pricing Agreements and, in specified cases, opt for safe harbour provi - sions, and are required to maintain appropriate docu -
447 CHAMBERS.COM
Powered by FlippingBook