India’s big tech companies facing various Competition Commission of India (CCI) probes will find it more expensive to settle these cases, as the Centre takes away tax incentives for such settlements.
The development assumes significance as leading technology companies including Amazon, Apple, Flipkart, Google and Samsung are facing CCI probes for alleged misuse of market dominance. Even listed companies looking to settle alleged securities market violations will find it expensive going forward.
In an April 23 circular, the Central Board of Direct Taxes (CBDT) said money paid by businesses to settle contravention of various regulations, including the Competition Act and the Securities Contracts Act, cannot be claimed as tax deductible. In other words, the settlement amount will be added to the taxable income.
“The taxpayers will not be able to reduce their tax liability by claiming tax deduction for settlement fees and charges after this change,” Amit Maheshwari, tax partner, AKM Global, said.
According to tax experts, the cost of settlement for corporates would face a 25.17 percent tax against the current practice of no such levy.
Settlement is a mechanism through which entities involved in an alleged violation can settle with the regulator by paying a fee and without an admission of guilt. The route helps companies avoid protracted legal proceedings.
Last week, Google settled a CCI case involving alleged abuse of market dominance in the smart TV category by paying Rs 20.24 crore as the fee.
Taxpayers might have to bear additional tax liability, which would be subject to the same rate of tax as otherwise applicable on respective taxpayer. “Further, there will be no direct impact on the cost of settlement of cases with SEBI or CCI, etc, however, overall profitability of business may be impacted due to additional tax outflow,” Maheshwari said.
‘Settlements are expensive’
The taking away of tax incentive for settlement assumes significance, as the fee arrived upon is already much higher than penalty that would be imposed if the same volition is not settled.
Speaking at an industry event in Mumbai last week, Kamlesh Varshney, whole time member Sebi, said, "You come for settlement you pay more than what you end up paying for litigation.”
Companies choose to settle many of the probes since it saves them litigation time and reputational damage, as settlement doesn’t imply admission of guilt.
Legal experts say the tax department needs to provide clarity on settlement fee paid by the companies just prior to notification of the new rule.
“CBDT notification under Section 37 of the Income tax Act, 1961 is helpful as it provides clarity on the deductibility of expenditure incurred settling the defaults. However, it is not clear if such expenses incurred prior to 23 April, 2025 will be deductible or not,” said Amit Singhania, founder, Areete Law Offices. “If the taxpayer is a company then the tax rate applicable will be 25.17 percent,” he said.
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