How Can a Shell Company be tax compliant? Part II

It was reported recently that markets in India drove into panic after news of SEBI listing over 2 lakh companies as suspected tax offenders emerged. A careful look at the procedures that went behind this classification shows, however, that it’s too early to draw conclusions for the direction that prices of these stocks will take. Capital gains may still be had by investing in securities of businesses that may yet recover.

Tax Compliant

One of the criteria used to blacklist such non-operational entities was an “abnormal price rise that is not commensurate with financial health and fundamentals”. Obviously, this includes bookkeeping, PE ratios, profits, net worth and so on. Investigations have yet to be commenced according to an expert at the National Institute of Public Finance and Policy.

Having said that, we must add: The number of companies filing income tax returns is much less than the number registered. Now let’s look at the tax liabilities that fall upon registered companies.

Taxes applicable to Companies:

According to the official income tax website:

• • The income tax rate on domestic companies is 30% of their net earnings from business profits, rented assets and capital gains.

• • Dividends paid to investors are taxed at the rate of 15% for the tax assessment year 2017-2018.

• • Where last year’s turnover for the company did not exceed Rupees 5 crore, the tax rate would be 29%.

• • In addition, include surcharge on tax on income, education cess and secondary and higher education cess.

• Foreign companies, where some control lies in entities registered outside India and who obtain royalties in exchange for sharing technical know-how with an Indian concern must pay 50% of this earning and 40% of income from other sources as tax and file returns for the same.

The effective tax rate on the other hand is the tax that actually goes into government coffers. The difference consists of subsidies and incentives given by the government to certain industries such as steel or power, given their essential role in the economy.

What Tax Reliefs are Available to Companies

• • If your company earns dividends from a domestic company, you suffer no tax because the other has already paid Dividend Distribution Tax to the authorities. If the annual earnings from dividends exceed Rupees 10 lakh, however, then taxes will be levied at the rate of 10% of the excess amount over Rupees 10 lakh.

• • Net profits of Venture Capital Funds, registered with the Securities and Exchange Board of India are not subject to tax when invested in such an undertaking.

• • Tax Exemption schemes can be co-opted by exporters and start-ups to save tax.

• • Tax rebates are available to certain infrastructure and non-conventional energy firms in India.

• • In accounting terms, losses arising from business can be set off against income under the same head. But there exist certain exceptions. Get in touch with a Personalised Tax Expert to find out exactly which part of taxable income may be adjusted against loss.

• You can also adjust liabilities arising out of interest payable on loans against income, set off capital losses against capital gains etc.

Forming a shell company may be a very aggressive taxes planning strategy but is perfectly legitimate. As any certified CA would tell you, creating such an inoperative entity during lean times helps to restructure your debts and makes the business sale-worthy. A shell company exists because there is a market of entrepreneurs looking to buy assets that are cheap and ready to go.

The CBDT and the Ministry of Corporate Affairs have now agreed to share company audit data and financial details of companies on a regular basis. They would now have access to the PAN details, incometax returns and statements of account, details of financial transactions etc. received in the name of the business by key management personnel, directors of the company and other officials directly responsible for tax compliance.

Shell companies need to have their bookkeeping in order so that they are not suspected of taxevasion. Technology assisted taxes solution platforms today offer tax compliance services at significantly reduced rates to sort out regular issues such as TDS and ITRs.