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No More Book-Cooking Games in the Underbelly of Corporate India

Union Budget 2018 has fueled up the crusade against underhand deals in India. Earlier, promoters and shareholders took advantages of lacuna in law and siphoned off money by amalgamating companies for fund diversion and tax evasion.

Finance Minister Arun Jaitley while presenting Modi Government’s fifth budget on February 1, has plugged the lacuna in law by taxing such payouts. Now, all firms, irrespective of tax liability, will have to file returns in order to put a check on shell companies.

Over the years, many Indian promoter-shareholders and directors had mastered the art of siphoning money from profitable companies through amalgamations. In the shadowy world of shell companies, which were primarily used for money laundering or tax evasion, promoters crafted accounts and cooked books to escape prosecution. These people now have to change the track, since the escape route eroded.

Modi government’s vigorous campaign against black money, fund diversion and use of cash explicitly shown in the Union Budget 2018.

A shareholder or director ran into a tax slab when the company they controlled gave generous loans or bloated divided from its reserves. According to the tax office, the loan was income (thus fully taxable), while the dividend could not be paid after coughing up the dividend distribution tax.

To overcome the tax obstacle, the company would be merged with another company that had no or fewer reserves. It was a loophole in the law that allowed the newly crafted entity (post amalgamation) to extend dividend without having to pay tax.

But, from next year, such amalgamation would be taxed, even it is less than the reserves of the profitable company.

Till now, a company with a tax liability less than INR 3,000 was spared from prosecution even if it didn’t file tax returns.  Shell companies used this gap in law to manipulate accounts and stay below the taxman’s radar.

Many finance consultants believe that It will hurt many companies as they can no longer freely distribute accumulated profit. Also, the shell companies will make them file returns and pay due taxes. This will end many litigations on deemed divided and ease the administrative burden.

For the first time, charitable trusts will require to pay tax on rent, salaries, fees, and other TDS items, failing which they cannot claim these as valid expenditure. Trusts have to spend 85% of earnings to avoid tax, and 30% of trust’s payments in cash would be disallowed as expenditure.

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