Budget 2017: Tax consolidation regime for ‘ease of doing business in India‘

Deloitte Haskins and Sells LLP “Ease of doing business in India” and “Make in India” have been the central theme of major policies announced by Central government in the last two years. Along these lines, Infrastructure sector has been demanding for tax consolidation regime for quite some time now.Owing to the regulatory / business requirements, an infrastructure company can no longer operate through single entity. This scenario of multiple special purpose vehicles (‘SPVs’) is predominant in power and road sector leading to significant increase in compliances and tax inefficiencies. Such structure not only hampers the “Ease of doing business” in India but also adversely impacts the growth of infrastructure sector. The tax principles may not always be aligned to business compulsions / realities under various scenarios (power and road sectors are the examples of such scenarios). However, it is imperative to evaluate system / regime which can aid to align business and tax objectives in order to provide requisite boost to the sector and endorse the government’s efforts of “Ease of doing business in India”.  Reasons for multiple SPV structure and drawbacks thereofBeing public-private-partnership (‘PPP’) sector, one of prominent reasons for having multiple SPVs is various central / state government policies which necessitate infra companies to incorporate separate SPV for each project. That’s not the only reason, bankers also derive comfort and prefer to stay close to the assets against which lending is provided for and therefore, insist on forming separate SPVs.As a consequence, significant cost and efforts are incurred by taxpayer for undertaking tax compliances for each SPV separately. In spite of single / same line of business, creation of multiple SPVs results into business inefficiencies and hampers growth of capital intensive sector. As the laws stands today, losses of one SPV cannot be set off against profits of another SPV. It also results into cash trap situations for the parent infrastructure company in moving funds from one SPV to another, causing undue harshness.Sometimes, projects are stalled for years due to adverse social / regulatory / political issues (such as clearances / approvals required for land acquisition, environment study etc.). Unfinished projects result into sunk costs and shortage of working capital for the companies. Inadvertent result of government policies has not only surged the compliance costs of taxpayer but at the same time, significant cost and resources are also committed by Revenue department in keeping track of and assessing multiple SPVs.Tax Consolidation regime – Global experienceInternationally, tax consolidation legislation is introduced primarily by way of following two approaches:Alternative 1: Tax consolidation regime: Consolidated group tax filing approach treats a group of wholly owned or majority-owned companies as a single entity for tax purposes and requires filing of a single consolidated tax return post disregarding intra-group transactions. The above approach is followed in countries like Algeria, Australia, Denmark, France, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Republic of Korea (i.e. South Korea), USA, etc.Alternative 2: Group taxation regime: This regime allows the offsetting of losses incurred by one or more group company against the profits of other companies in the group and each entity is responsible for its own return. It is followed in countries like Austria, Germany, Ireland, Japan, Malaysia, New Zealand, Singapore, United Kingdom, etc.In the long run, tax consolidation regime would be revenue neutral as it is only timing difference but it would definitely provide advantage to corporate taxpayers due to utilization of tax losses and mitigation of tax inefficiencies. While advocating for ‘make in India’, Government shall also consider to provide level playing field for competing with international players as tax consolidation regime have been adopted in number of foreign countries and created a positive impact on businesses. By introduction of consolidation regime, it would help to reduce on-going tax compliances cost, litigation and administrative cost of the tax department.Thus, it becomes quite imperative to introduce such progressive tax regime for boosting the sector. Last but not the least, tax consolidation regime would endorse the Government’s efforts of “Ease of doing business in India” and assist in aligning the business and tax objectives of infrastructure sector.