‘Flipping’ refers to the transfer of an Indian entity’s ownership and key assets, like intellectual property, to a foreign entity despite having most of their market, personnel, and founders in India. This move is often motivated by the desire to tap into larger pools of venture capital, specific investors’ terms and conditions, benefit from more favourable tax frameworks and enhance market penetration opportunities.

Reverse flipping is a counter-narrative to the flipping trend that involves relocating the company’s domicile and/or assets back to India after previously moving its headquarters overseas. Recently, there has been a notable rise in this trend, within the corporate landscape.

The prevailing techniques for reverse flipping typically include:

In an inbound merger, a foreign entity merges into an Indian entity, resulting in the Indian entity owning and controlling the assets and operations of the foreign entity. As consideration, the shareholders of the foreign entity receive shares of the Indian entity. In India, the process of obtaining approvals for such inbound mergers is lengthy and typically takes between 6 to 9 months for such transactions.

Transactions involving mergers and demergers are generally tax-neutral under Section 47 of the IT Act, exempting them from capital gains tax, including inbound mergers, provided certain conditions are met. Fintech start-up Groww has chosen to reverse flipping (from the USA to India) through this route.

In the case of a share swap, shareholders of the foreign entity exchange their shares in the foreign entity for shares in the Indian entity which takes very less time as compared to Inbound mergers. Foreign shareholders are taxed in India based on the difference between the value of the Indian entity’s shares during the reverse flip and the original cost of the foreign entity’s shares. Walmart backed PhonePe, and completed its reverse flipping (from Singapore to India) through a share swap, incurring approximately $1 billion in taxes in India, while no tax was paid in Singapore due to the absence of Capital Gains tax.

In our perspective, companies are opting for this strategic maneuver due to two primary motivations:

1. Initial public offerings and attractive valuations – Despite the significant tax outflow during the domicile shift, companies are still considering relocating their headquarters to India due to the attractive valuations in the Indian startup ecosystem. Late-stage Indian startups, too small to attract institutional investor interest abroad, are particularly drawn to this trend. Last year, PhonePe and its investors paid $1 billion in taxes to India on its $5.5 billion valuation. Subsequently, PhonePe raised funds in India, achieving a valuation of $12 billion. Given the substantial presence of 8 crore retail investors in the Indian market, initial public offerings (IPOs) emerge as the preferred exit route for investors. This trend presents favourable exit opportunities for investors.

2. Regulatory requirements – Reverse flipping is often pursued by companies based on the specific needs of the sector in which they operate. In the fintech sector, regulations set by financial authorities such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) play a significant role. These regulations favour fintech entities being domiciled in India due to stricter scrutiny and comprehensive disclosure requirements regarding fund sources and domiciles. This regulatory environment has led many fintech firms to reverse-flip their holding structures to ensure compliance. Notable examples include companies like PhonePe and Groww, which have adjusted their domiciles to align with these regulatory demands. It will be interesting to observe if there are any other sectors that will be required to relocate their domicile back to India due to regulatory requirements.

It is imperative to consider potential concerns from foreign investors regarding tax assessment risks and the nuances of the Indian taxation system, as they transition to being subject to Indian tax laws.

Additionally, the availability of tax treaty benefits for foreign shareholders in the new Indian entity may depend on whether a Double Taxation Avoidance Agreement (DTAA) exists between India and their home country. Furthermore, careful timing of the reverse flip is crucial to mitigate potential tax costs.

While it’s possible for the company to realize a valuation increase in the future, potentially offsetting the initial tax costs—as seen with PhonePe—it’s crucial to remember that the tax dynamics of reverse flipping add a layer of complexity to corporate decisions and transactions, underscoring the importance of tax planning, compliance, and risk management in navigating this strategic maneuver.

At the heart of this transformation are several pillars aimed at expediting dispute resolution within the corporate realm. The arbitration law, commercial courts, the Insolvency and Bankruptcy Code (IBC), and the National Company Law Tribunal (NCLT) constitute the core of India’s corporate litigation ecosystem. Their collective objective is ensuring swift adjudication of cases and fostering a conducive environment for business operations. All these judicial courts are mutually exclusive and have independent ruling powers within their ambit.

CORPORATE JUDICIAL ECOSYSTEM

Corporate disputes often revolve around the exercise of board powers, actions, or their failure to act. They can manifest in conflicts between boards and shareholders, directors, and executive management, or even among directors themselves. When these disputes spill into the public domain or escalate into litigation, they signal governance lapses within the company—a critical aspect in maintaining investor confidence and market stability.

Recognizing the pressing need to streamline India’s litigation framework, policymakers embarked on a journey to alleviate the burden on high courts and the Supreme Court. Specialized tribunals like the NCLT and the National Company Law Appellate Tribunal (NCLAT) were established under the Companies Act to handle core company litigation, replacing erstwhile bodies like the Company Law Board (CLB) and the Board for Industrial and Financial Reconstruction. The NCLT or “Council” is a quasi-legal position made under the Companies Act, 2013 to deal with corporate common questions emerging under the Act. Furthermore, the Companies Act endeavours to strike a balance between the rights of majority and minority shareholders. While acknowledging the rule of the majority, it also safeguards minority interests through well-defined minority rights, thus ensuring equitable treatment and protecting minority shareholders from potential exploitation. Judicial courts play a pivotal role in maintaining this equilibrium and addressing the concerns of stakeholders.

The Insolvency and Bankruptcy Code stands as another testament to India’s commitment to expedited dispute resolution. By enforcing a time-bound insolvency process, the code aims to facilitate a faster turnaround and smoother bankruptcy proceedings. This, in turn, enhances investor confidence and provides a conducive environment for business growth and investment. The fastest resolution so far in an IBC case, the insolvency resolution of Bhushan Steel was completed in just 10 months flat. The case was admitted for resolution in July 2017 and got the approval in May 2018. The bidding war between Tata Steel and JSW Steel fetched lenders a 63 percent recovery, where Tata Steel bid INR 35,200 crore against Bhushan Steel’s debt of INR 56,051 crore.

Despite these commendable efforts, challenges in implementation persist. The success of these reforms hinges on effective execution and institutional capacity building. As per the latest information available, 21,205 cases were pending with NCLT benches as of 31.01.2023, including 12,963 cases under the Insolvency and Bankruptcy Code (IBC), 1,181 cases of Merger and Amalgamation (M&A), and 7,061 other cases.

The NCLT benches are burdened with large number of cases, leading to delays in the disposal of matters. The infrastructure and manpower at various benches need further improvement to handle the increasing workload effectively. Nevertheless, the courts have played a crucial role in promoting a more streamlined and efficient resolution process for corporate disputes and insolvency cases. The decisions of these courts have a significant impact on the corporate sector, shaping jurisprudence and providing clarity on various legal provisions.

Alternative Dispute Resolution (ADR) methods like conciliation, mediation, and Lok Adalats have shown promise in addressing issues in India’s traditional court system but have not scaled widely. COVID-19 restrictions have further limited their effectiveness and that paved way for Online Dispute Resolution (ODR) or e-ADR as a key alternative. However, it is crucial for ODR platforms and courts to collaborate, share data, and build a cohesive dispute management system.

In conclusion, India’s corporate disputes ecosystem has undergone a remarkable evolution, driven by the imperative of efficiency and governance. While significant strides have been made, continued vigilance and concerted efforts are necessary to realize the full potential of these reforms. By fostering a robust dispute resolution framework, India can bolster investor confidence, attract foreign investment, and propel its economy towards sustained growth and prosperity.

Despite challenges such as high-interest rates, macroeconomic uncertainty, regulatory scrutiny, and geopolitical risks plaguing the global market, India’s M&A activity demonstrated remarkable resilience throughout 2023. Optimistic projections for 2024 indicate that the country is poised to maintain its momentum in deal-making, further underscoring its attractiveness in the M&A sector. This buoyancy solidifies India’s status as a premier destination for strategic acquisitions and corporate consolidations, reaffirming its enduring appeal in the foreseeable India.

In India, the Competition Act, 2002 (as amended) (“the Act”) serves as an important legislation that regulates M&A activities. This Act prohibits anti-competitive agreements that may significantly adversely affect competition within India. The Competition Commission of India (CCI) is empowered under this act to investigate anti-competitive agreements and instances of dominant positions, such as predatory pricing, and declare them void. Moreover, the Act prohibits any person or enterprise from engaging in a combination that would result in or likely result in a significant adverse impact on competition within the relevant Indian market. Such combinations shall be deemed void. A combination, in this context, encompasses mergers, amalgamations among enterprises, or the acquisition of control, shares, voting rights, or assets of an enterprise by another entity.

Not all M&A activities necessitate notification to the Competition Commission; only combinations surpassing specified thresholds require prior notification and approval. The act delineates thresholds for enterprises and groups based on assets and turnover. If these thresholds are surpassed, it necessitates notifying the CCI. Presently, the thresholds stand as follows:

On March 7, 2024, the Central Government extended the de minimis clause, exempting acquisitions, mergers, or amalgamations involving target enterprises with assets not exceeding Rs. 450 crores or turnover not exceeding Rs. 1,250 crores in India from the purview of the Act. This exemption is applicable for 2 years from the date of notification in the official gazette.

Reliance & Disney Merger:

On February 28, 2024, Reliance Industries Limited and Walt Disney finalized a merger agreement, creating a media giant valued at US$ 8.5 billion (Rs. 70,352 crore). Nita M Ambani is slated to chair the combined entity’s board, with Reliance and its affiliates holding a majority 63.16% stake (16.34% by RIL, 46.82% by Viacom18), while Disney retains 36.84%. Given this merger exceeds the threshold, notifying the CCI and obtaining approval is imperative. Post-merger, the entity secures exclusive rights to distribute Disney films in India and access over 30,000 Disney content assets, enhancing its entertainment offerings. With a collective total of 120 TV channels and two digital streaming platforms, Disney and Reliance aim to reach 750 million users in India. Reliance and Disney’s TV viewership share in the top 10 channels is estimated to be 40% as per the Broadcast Audience Research Council (BARC). Disney+ Hotstar maintained its dominance in the Indian OTT market with a 24% market share in Q4 2023, while Jio Cinema held a 6% share. Together, the joint venture is poised to capture a significant 30% market share in the OTT sector, surpassing Prime Video’s 22% and Netflix’s 13%. The proposed merger is subject to obtaining regulatory, shareholder, and customary approvals, with an expected completion timeline in either the fourth quarter of the calendar year 2024 or the first quarter of the calendar year 2025.

The CCI may scrutinize the proposed merger entity’s ability to increase prices for advertisers, Distribution Platform Owners (DPOs), and viewers, particularly in channels with substantial market share. Additionally, the CCI might express apprehensions regarding potential discriminatory pricing practices with DPOs.

Over the past two to three years, the CCI has shown a readiness to consider alternative forms of remedies, if they adequately tackle competition concerns. The CCI has indicated its departure from a one-size-fits-all approach, instead opting to tailor remedies meticulously to address the specific harm identified in each case.

Since its inception, the Competition Commission of India (CCI) has reviewed more than 1,000 transactions, successfully resolving 99% of them. Notably, only eight cases, accounting for less than 1% of the total, have advanced to a comprehensive Phase II investigation, while the majority have been cleared during Phase I. Importantly, there hasn’t been a single instance of a transaction being blocked thus far. Instead, approvals have been granted in certain cases following the implementation of structural or behavioural remedies, determined in consultation with the involved parties to address potential anti-competitive impacts on markets. This underscores the CCI’s predominantly pro-business stance.

In October 2022, the CCI approved the consolidation of specific entities within the Sony Corporation group and Zee Entertainment Enterprises Limited. However, this approval was subject to certain conditions, including voluntary structural modifications such as divesting three Hindi general entertainment and film television channels. The CCI expressed concerns about the potential emergence of the resultant entity as the largest broadcasting house in India. Alongside divestment, the CCI imposed additional conditions to ensure fair market practices.

In March 2023, the CCI granted conditional approval for the 100% acquisition of Hindustan National Glass & Industries Limited (HNG) by AGI Greenpack Limited. However, this approval was contingent upon the divestiture of a manufacturing plant owned by HNG.

In August 2022, in the case of Umang Birla/Aditya Marketing, the CCI conditionally approved the merger. This approval was subject to voluntary behavioural remedies, including refraining from interference with the board of directors and management of certain affiliates of Umang Birla, which exhibited significant horizontal and vertical overlaps with Aditya Marketing. Additionally, the remedies required Umang Birla to reduce its shareholding in one of its affiliates to below 25%.

Given the similarities between the Reliance Disney merger and the Sony-Zee Merger and drawing from past precedents, the CCI may impose conditions such as divestment of certain business segments or other restrictions to address potential anti-competitive concerns and uphold fair market practices. These conditions serve to protect competition and consumer interests in the broadcasting sector, in accordance with the regulatory framework established by the CCI.

Further, any person or enterprise intending to enter into a proposed merger must submit a notice in the prescribed form within 30 days of the approval of such proposal by the directors or the execution of any agreement or other documents for such combination. Failure to provide notice to the commission may result in the imposition of a penalty by the commission, amounting to up to 1% of the total turnover or assets, whichever is higher, of such combination.

In the past, the CCI has imposed penalties in several cases including Bharti Airtel Limited with a penalty of Rs. 1 Crore, Hindustan Colas with Rs. 5 Lakh, Adani Transmission with Rs. 10 Lakh, Adani Green Energy with Rs. 5 Lakh, Chhatwal Group Trust with Rs. 10 Lakh and Zuari Fertilisers and Chemicals Limited and Zuari Agro Chemicals with Rs. 3 crores.

Looking ahead, as India’s M&A activity continues to evolve, adherence to regulatory requirements and cooperation with regulatory authorities will remain paramount. The CCI has demonstrated its effectiveness as a competition regulator in India, particularly as the country’s competitiveness has surged in recent years.

Through its open-door approach, in contrast to other regulatory bodies, the CCI maintains accessibility to address inquiries and apprehensions from stakeholders engaged in mergers. This approach fosters a more transparent and foreseeable regulatory framework for businesses navigating India’s emerging M&A landscape.

The structure of acquisition finance varies depending on the geographical regions and borders. Acquisitions can be broadly classified into domestic and cross-border categories. Cross-border acquisitions are typically segmented into two: Inbound and Outbound acquisitions.

In recent times, notable acquisition transactions have occurred in India. In June 2023, Tata Communications announced its intention to acquire the US-based enterprise messaging firm Kaleyra for US$ 100 million in an all-cash deal (Outbound acquisition). Following this, in July 2023, the Indian arm of the French advertising and public relations company Havas revealed its acquisition of PivotRoots (Inbound acquisition). Additionally, in August 2023, the jewellery retailer Titan expanded its stake in CaratLane by acquiring an additional 27.18% for Rs. 4,621 crore (US$ 556.01 million) (Domestic acquisition). These instances highlight the dynamic landscape of acquisition activities, showcasing diverse sectors and moves within the Indian market.

Inbound acquisitions refer to instances where a foreign entity directly purchases a company incorporated in India or does so through foreign owned and controlled operating company (FOCC) incorporated in India as a subsidiary of an offshore entity

Outbound acquisitions refer to instances where an Indian acquirer directly purchases a company incorporated outside India or does so through a special purpose vehicle incorporated outside India.

Commonly, the financial options available for such types of acquisitions are summarised in below table:

Disclaimer: The above table only outlines commonly used acquisition finance options based on our secondary research.

Some important factors that must be taken into account when domestic entities engage in different types of acquisitions are:

1. For domestic acquisitions, the guidelines set forth by the Reserve Bank of India (RBI) limit the capacity of Indian banks to provide financing for the acquisition of equity shares in an Indian company, except in exceptional circumstances.
2. For outbound acquisition, acquiring entity has the option to secure loans from banks, financial institutions, and other lenders, provided it adheres to specific qualitative and quantitative regulatory constraints.
3. Considering the limited availability of global funds for small to medium scale domestic companies, acquisition financing through GIFT City is facilitated by leveraging its status as an IFSC, which opens avenues for accessing global financial markets, engaging with international banks and investors, and utilizing a regulatory framework tailored for cross-border financial activities.

Adherence to regulatory frameworks established by the RBI and FEMA under FDI and ODI regulations is imperative for both Inbound and Outbound acquisitions. The RBI regulations play a crucial role in acquisition financing, and the introduction/ modification of any regulations hold the potential to usher in transformative changes in the acquisition financing landscape. This, in turn, may lead to heightened dynamism and structural shifts in the overall scenario.

In the face of elevated global inflation and economic uncertainties, Indian corporations with a solid foundation haves potential to sustain continued growth in domestic acquisitions. We believe that the need of the hour is to facilitate equity finance from Indian banks within the established regulations.

A staggering 2.68 crore disputed tax demands, including Income Tax, wealth tax, and gift tax, totalling Rs. 35 lakh crores, are pending across various legal forums as confirmed by Shri. Sanjay Malhotra, Revenue Secretary at the Department of Revenue, Ministry of Finance. Among these, 2.1 crores have demands up to Rs. 25,000/-, with cases dating back to 1962. Furthermore, approximately 58 lakh demands qualify for relief up to FY 2009-10, and 53 lakh demands are eligible for the period spanning FY 2010-11 to 2014-15. The image below depicts the rising trend of the direct tax collection under dispute.

*Amounts in INR lakh crores Data available only till 2020-21

The budget announcement lacked clarity regarding the withdrawal of demands, leading to significant uncertainty. Questions arose regarding whether the relief amounts of Rs. 25,000/- and Rs. 10,000/- would also encompass the interest component or only the principal. Furthermore, it remained unclear if taxpayers with demands exceeding Rs. 25,000/- or Rs. 10,000/- would receive partial relief, and if there would be an upper monetary limit for demand withdrawal.

Addressing these concerns, the Central Board of Direct Taxes (CBDT) issued a detailed explanation on February 13, 2024. According to it, outstanding demands under the Income-tax Act, 1961, Wealth-tax Act, 1957, and Gift-tax Act, 1958 as of January 31, 2024, will be withdrawn from the date such demands were raised or modified for the respective Assessment Year. However, there is a cap of Rs. 1,00,000/- per taxpayer on the principal component of tax demand under these Acts. The order excludes any outstanding demands related to Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) under the Income-tax Act, 1961.

Regarding the computation of the monetary limit of Rs. 1,00,000/-, it is specified that the limit will apply from earlier assessment years to subsequent assessments, provided the demand does not exceed the ceiling of Rs. 1,00,000/-. Additionally, demands exceeding Rs. 10,000/- or Rs. 25,000/- will be disregarded for the purpose of this calculation.

It is emphasized that the withdrawal of the claim does not grant taxpayers the right to claim credit or refunds for taxes prior to withdrawal. Moreover, it does not impact any ongoing criminal proceedings under any law and does not confer any benefit or immunity to the taxpayer or assessee in such proceedings.

Following the CBDT’s order, the Income-tax E-filing portal of taxpayers displayed “Extinguished Demand” highlighted in red under the outstanding tax demand tab as under:

The Government’s decision is welcome move as:

1. Many outstanding demands date back to as early as 1962 and when taxpayers attempted to rectify or contest these demands with tax authorities, the income-tax officers, at various instances lacked sufficient information to verify their claims.
2. The government typically also incurs significant costs in pursuing small demands and this move will reduce such spends.
3. This has offered relief to taxpayers, as many tax refunds were previously withheld due to unresolved demands from previous years.

This move is likely to benefit 1 crore tax payers and, in our view, this action solidifies the Government’s assertion of recognizing and honouring taxpayers, as well as underscores the importance of fostering a favourable business environment in India. By addressing unresolved tax demands and facilitating the release of withheld tax refunds, the government has initiated a positive message to both domestic and international investors regarding its commitment to a fair and consistent regulatory framework.

While tax structuring has become a crucial approach for corporates to strengthen their business objectives, which may also culminate in optimising their taxes; it is important to recognise the emergence of a regulatory tool aimed at addressing tax avoidance – the General Anti-Avoidance Rule (GAAR).

The GAAR is a legislative provision that essentially aims to counteract tax avoidance arrangements that exploit loopholes, contravene the spirit of the law, or artificially reduce tax liabilities. Its purpose is to ensure that taxpayers do not undermine the fundamental principles of tax legislation through aggressive tax planning strategies. Distinguishing between tax avoidance and tax
planning is a critical consideration. Tax planning involves legitimate optimising of taxes using fiscal incentives, while tax avoidance means dodging to pay taxes without contravening the tax laws. Since virtually all business decisions have tax implications in today’s world, it follows that GAAR will radically affect the decision-making process across levels in organizations.

Certainly, it is imperative to comprehend the intricacies of the extant provisions of GAAR that are meticulously designed to serve as an instrument against taxpayers resorting to artificial or contrived arrangements to reduce their tax liability, essentially, it is to cover the transactions under its ambit that are inherently at odds with the spirit of tax laws.

Under GAAR, authorities have the power to determine certain transactions as impermissible avoidance arrangements, allowing them to impose the appropriate taxes and deny claimed benefits. GAAR incorporates several pivotal elements aimed at curbing the abuse of tax laws. By enforcing these tax avoidance rules, tax authorities ensure that businesses operate within the spirit of the law, promoting fairness, equity, and transparency in the taxation system.

Primarily, under these provisions, an arrangement can be considered ‘impermissible avoidance arrangement’ if the main purpose of the arrangement is to obtain tax benefit and it has one of these four elements:

1. It creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length.
2. It results, directly or indirectly, in the misuse or abuse, of the provisions of income tax law.
3. It lacks commercial substance.
4. It is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

In a nutshell, the provisions pertaining to GAAR enunciates that if the affairs of the business are arranged in commercial wisdom with bona fide intent, then the consequential tax benefits for the parties in an arrangement should not be the determinative factor to invoke GAAR. Therefore, businesses are required to demonstrate that the proposed transactions have strong commercial
substance and are not primarily driven by an objective to reduce taxes.

At our recent KReW Tech Talk at MCA Consulting, we examined specific case studies in the realm of business structuring that’s aligned with GAAR. Our analysis was centred on comprehending how GAAR can impact a transaction and can shape a corporates’ tax and financial landscape. We discussed that in the context of amalgamations and demergers, schemes of arrangements, placed before National Company Law Tribunal (NCLT) often face opposition from the Income-tax Department, who argue that these schemes are primarily designed to obtain tax benefits. Even though the Income-tax Act provides tax-neutrality and related benefits for qualifying amalgamations and demergers, there is ambiguity regarding the weight given to the objections raised by the Income Tax Department during the sanctioning of these schemes under the Companies Act.

For instance, in case 1 involving Gabs Investment Private Limited (“Gabs”) and Ajanta Pharma Limited (“Ajanta”), Gabs is the group holding company and primarily holds shares in transferee company that is Ajanta, which is a speciality pharmaceutical company engaged in development, production and marketing of branded and generic formulations. The philosophy for the subject scheme as canvassed by Gabs is that, the merger will result in direct holding of promoter shares in the transferee company instead of through Gabs. This will lead not only to simplification of the shareholding structure and reduction of shareholding tiers but also demonstrate the promoter’s group direct commitment to and engagement with the transferee company. The promoters would continue to hold the same percentage of shares in the transferee company, pre and post-merger and there would also be no change in financial position of the transferee company. Gabs stated that the scheme was approved by 99.99% shareholders of transferee company and unanimously consented by all its shareholders.

The Income-tax Department argued that the proposed scheme of arrangement was a round-trip financing tactic which includes transfer of funds among the parties to the arrangements through the series of transactions. The scheme of amalgamation is a deliberate measure to avoid tax burden by using the medium of NCLT and the rationale presented by Gabs is without any justification. By this scheme Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the ITD.

The NCLT affirmed the objections raised by the Income-tax Department, stating that the rationale behind Gabs’ scheme lacked justification.

In the other case 2 of Panasonic India Private Limited and Panasonic Life Solutions India Private Limited, the Income-tax Department objected to the scheme of amalgamation, claiming that it was a ploy to take advantage of accumulated losses eligible for set off in the future.

The Tribunal after considering the arguments distinguished this matter is different from the facts of Gabs (supra) and stated that the objective of the scheme under Gabs, was for simplification of shareholding structure, however, in this case, the petitioner companies has clearly made out of a case of operational synergy between the amalgamating companies.

Further, the NCLT emphasized that the provisions of the Income Tax Act, which govern the treatment of accumulated losses and unabsorbed depreciation allowance in amalgamation or demerger cases, adequately protect the interests of the Income-tax Department. Therefore, the NCLT held that there was no merit in the objections raised by the Income-tax Department and approved the scheme of amalgamation.

With these cases in picture, during our talk, we delved into the topic of how NCLT perceives the implications of the GAAR in compromise and arrangement cases. We discussed that the scheme can only be rejected by the NCLT if the Income Tax Department can prove that its sole purpose is tax evasion and if the department fails to provide such evidence, the NCLT is required to sanction the scheme. Given the wide scope of GAAR provisions and consequences of a transaction being declared as an IAA, it is imperative for businesses to evaluate existing as well as proposed arrangements and structures on the touchstone of GAAR. Despite GAAR being introduced in 2017, it might take at least a couple of years more to gauge how and when the tax authorities invoke GAAR and how far- reaching the implications would be.

It was a valuable discussion, as we sought to better understand the NCLT’s perspective and how it affects our clients and how we can help our clients achieve their business objectives while ensuring compliance with the GAAR.

Needless to mention, with the implementation of GAAR taxpayers should prioritize the genuine commercial purpose of their corporate structures, beyond merely obtaining tax benefits. The business decision-makers’ first and most important course of action following GAAR will be to review their tax positions since such positions will be evaluated for compliance with GAAR and will thus need to be changed on the corporate level.

The applicability of these provisions is very wide as it is intended to cover not only domestic transactions but cross border transactions too. Also, with active participation of G20 countries in the BEPS project, countries are adopting concentrated and systematic efforts towards establishing tax policies which will protect its tax base. Various anti-tax avoidance measures have been incorporated in the domestic tax laws of countries as well as in treaties.

To navigate this evolving landscape in cross border transactions, corporates are increasingly conducting in-depth assessments to determine their eligibility for treaty benefits. This involves closely examining specific conditions, such as the “limitation of benefits” clause, to ascertain whether they qualify for reduced withholding tax rates and other advantages under the treaty. Concurrently, companies are proactively engaging in transfer pricing risk assessments to identify and mitigate potential issues before they escalate. In doing so, they take into account the potential impact of BEPS-related measures on their transfer pricing arrangements. Thus, with the global attention corporate tax governance and tax risk management is receiving, now is a good time for corporates to reflect on their tax governance frameworks and tax controls and consider whether their current framework is robust enough in the current climate.

Further, it is well recognised that as the business landscape evolves, organizations adopt innovative corporate structures and adhere to best governance practices to thrive in a constantly changing environment. Human ingenuity being the driver of innovative corporate structuring plays a crucial
role in recognizing the need for change and innovation in corporate structures. Implementing best corporate governance practices helps organizations strike a balance between compliance and innovation. Best governance practices provide a framework within which human ingenuity can drive innovative solutions while ensuring ethical and legal conduct.

The interplay between human ingenuity, corporate structuring, and best governance practices is essential for organizational growth and success. By embracing human ingenuity and following best governance practices, companies can adapt to a changing business landscape, navigate complex regulations, achieve optimal tax outcomes, and foster an environment that promotes innovation.

Thus, the corporates should review whether their existing tax frameworks embrace the principles of transparency, substantiation, and economic substance and continue to be in line with and are integrated with broader business strategies. This will help organizations navigate the complexities of anti-avoidance regulations and achieve optimal tax outcomes. It is not uncommon for businesses to be missing opportunities or creating risks by inadvertently excluding tax considerations from their business strategy and decision-making processes. Thus, to steer this complex landscape of anti- avoidance regulations, comprehensive understanding, transparency, and a commitment to legitimate tax planning is essential and seeking professional guidance from the experts in the matter would be helpful. By adhering to this, corporates can responsibly optimise their tax liability within the confines of the law, ensuring both compliance and fiscal prudence.

¹2018 (12) TMI 739 – NCLT, Mumbai.
²[2022] 138 taxmann.com 570 (NCLT- Chd).

Illustrative events (key drivers of change) that underline the need for scenario planning:

1. The Pandemic and Economic Fallout:

The COVID-19 pandemic sent shockwaves through the global economy, illustrating how swiftly and severely unforeseen events can impact businesses. Companies that had scenario plans in place were better equipped to pivot in the face of adversity.

2. Geo-Political Unrest:

When the geopolitical landscape becomes increasingly volatile, with tensions between nations creating uncertainty for international businesses, scenario planning helps organizations prepare for the range of potential outcomes, mitigating risks associated with geopolitical conflicts.

3. Technological Advancements:

Rapid advances in technologies like Artificial Intelligence (AI) have the power to disrupt industries. Scenario planning enables companies to explore diverse futures shaped by technological innovations, ensuring they stay ahead of the curve.

4. Global Business Landscape Changes:

Initiatives such as the Carbon Border Adjustment Mechanism (CBAM) and Base Erosion and Profit Shifting (BEPS) are altering the global business terrain.
CBAM, in particular, is a prime example of how regulatory changes can affect industries across borders and it is relevant here as it’s mechanism has just commenced.

The CBAM, proposed by the European Union, seeks to combat climate change by imposing tariffs on imported goods based on their carbon footprint. Industries like Iron, Steel, Aluminium, Cement, Fertilizers, and Electricity in India stand to be significantly impacted.

Oct 2023: A transitional period for CBAM began on 1 October 2023 and will extend through 2025, during which time quarterly emissions reporting will be required.

Jan 2026: Indian exporters will potentially start paying carbon border tax on covered products

2026 onwards: New products will be brought under the CBAM

While the Indian government is actively taking measures to ease the matter, companies can harness the power of scenario planning to prepare for potential outcomes.

Scenario planning’s multi-stage process briefly outlined using the example of CBAM

⦁ Framing and Identifying External Parameters and Trends/ Key Drivers of Change:

In the case of CBAM, this involves considering global shifts and adoption rates, regulatory changes, technological advancements, and environmental and societal shifts.

⦁ Identifying Critical Uncertainties (Impact / Uncertainty Analysis):

Understanding variables that could significantly affect the outcome, such as which regions might adopt similar policies, how regulations may evolve, technological breakthroughs that reduce carbon footprints, and climate-related triggers.

⦁ Developing Multiple Scenarios:

Creating a range of plausible future scenarios based on critical uncertainties.

⦁ Analysing the Scenarios:

Evaluating each scenario’s potential impact on the organization.

⦁ Developing Strategies

Crafting strategies to thrive in each scenario or mitigate potential risks.

⦁ Continuous Monitoring:

Scenario planning is not a one-and-done exercise; it requires ongoing monitoring and adjustment as circumstances evolve.

Embracing Scenario Planning for Sustainable Growth

In a world marked by rapid change and unpredictability, scenario planning is no longer a luxury but a necessity for organizations that aspire to achieve sustainable growth. By adopting this strategic tool, businesses can proactively prepare for the unpredictable, seize emerging opportunities, and navigate the complex terrain of our modern age with confidence and resilience. As the saying goes, “Failing to plan is planning to fail,” and scenario planning is the key to ensuring that an organization is prepared for whatever the future may throw at it.

As the digital economy continues to thrive, the need for an equitable and sustainable international tax system has become increasingly evident. The Base Erosion and Profit Shifting (BEPS) project, initiated by the Organization for Economic Co-operation and Development (OECD), has addressed these challenges through the implementation of two pillars solution. ‘Pillar One’ focuses on profit relocation to market jurisdictions, while ‘Pillar Two’ Global Anti-Base Erosion (GloBE) rules introduce a global minimum tax of 15% that would apply to a multinational enterprise (MNE) group with consolidated financial statement revenue in excess of EUR750 million. Over the time, the OECD has released model GloBE Rules, commentary, guidance on GloBE safe harbours, administrative guidance and standardised GloBE information return.

Under the GloBE rules, an MNE group would be required to determine an effective tax rate (ETR) for all entities located in a jurisdiction. When the entities’ jurisdictional ETR is less than 15%, a top-up tax generally will be due to bring the jurisdictional effective tax rate to 15%. Where ETR is lower than the minimum tax rate of 15%, MNE would be liable to pay top-up taxes under Income Inclusion Rule (IIR) or Undertaxed Payments Rule (UTPR) mechanism. Top-up tax is calculated as difference between agreed minimum tax rate and ETR in each jurisdiction. The other vital component of the Pillar Two is Subject to Tax Rule (‘STTR’) which is a treaty-based rule granting source countries the right to tax certain cross-border payments if the recipient’s jurisdiction imposes a rate below 9%.

The 18th G20 Summit convened under India’s Presidency for the first time, with the underlying theme of ‘Vasudhaiva Kutumbakam’, has accomplished the major breakthrough on 9.9.2023, with the adoption of the G20 New Delhi Leaders’ Declaration. In it also, the G20 leaders have agreed for the swift implementation of the Two-Pillar international tax package.

Numerous jurisdictions have made significant progress in implementing the GloBE Rules, either through enacting final or draft legislation, or by expressing their clear intentions to do so. The implementation of the global minimum tax is well underway, with approximately 50 jurisdictions taking measures to incorporate it into their tax systems. According to estimates, by 2025, nearly 90% of global multinational enterprises (MNEs) generating revenues above EUR 750 million will be required to adhere to a minimum effective tax rate of 15% in all the jurisdictions where they operate.

Having said this, the implementation of the Pillar Two Model Rules will have a significant impact on organizations worldwide. In no time, the corporate groups have to gear up to assess the implications of global minimum taxation and keep the preparedness and readiness due to the extensive data requirements as well as the complex rules for determining the ETR. Reviewing and simplifying entity structure in the context of these emerging tax reforms is need of the hour, such that, corporate structures are aligned vis a vis Pillar Two world. Needless to mention, it is crucial for the multinational corporates to understand the implications and take proactive steps to ensure compliance and minimize tax risk.

Communiques from the department
Recently, the tax department has issued communiques to companies/employers responsible for tax deduction on payment of salaries. Broadly, these letters provide that:

1. Many employees in the states of Telangana and Andhra Pradesh 1 have been claiming refund of TDS on salaries by filing false income tax returns with exaggerated claims of deductions/exemptions. Such claims were being verified by the department.

2. The department urges that the employers may advise their employees:
a. To verify the correctness of their claims for past 3 assessment years (AYs) and voluntarily file a revised, belated or updated tax returns, as applicable; and

b. About the consequences of misreporting income (interest, penalty and additional tax payable).

Legal Provisions
The Income tax Act, 1961 (the Act) casts a responsibility on the
employer/deductor to procure evidence from the employee and on the employee to provide evidence to the employer/deductor. The relevant provisions are as follows:

1. Section 192(2D) reads as follows:
“The person responsible for making the payment referred to in sub-section
(1) shall, for the purposes of estimating income of the assessee or computing tax deductible under sub-section (1), obtain from the assessee the evidence or proof or particulars of prescribed claims (including claim for set-off of loss) under the provisions of the Act in such form and manner as may be prescribed.”

2. Rule 26C of the Income tax Rules, 1962 provides the assessee shall furnish to the person responsible for making payment section 192(1), the evidence or the particulars of the claims referred to in sub-rule (2), in Form No.12BB for the purpose of estimating his income or computing the tax deduction at source.

3. Circular 24/2022 dated 7 th December 2022 para 8 reads as follows:
“section 192(2D) provides that person responsible for paying (DDOs) shall obtain from the assessee evidence or proof or particular of claims such as House rent Allowance (where aggregate annual rent exceeds one lakh rupees); Leave Travel Concession or Assistance; Deduction of interest under the head Income from house property and deduction under Chapter VI-A as per the prescribed Form 12BB laid down by Rule 26C of the Rules.”
Thus, it is amply clear that the employer is responsible for collecting the requisite evidence for claims made by an employee, verify them to its satisfaction and thereafter, computed the TDS liability.

Matters of concern for employers
Although the department’s communiques to the employers sound soft or advisory in the nature, the future ones may not be so. Let’s look into some of the areas of concern for the employers.

1. The notices currently being issued may pertain to past AYs – 2023-24, 2022- 23 and 2021-22. The employers may proactively educate their employees about restrictions on claiming deductions under the Act, the monetary limits, the possibility of correcting errors, if any, by filing revised or updated tax returns.
For instance, employees may erroneously claim deduction under section 80D for medical expenses of parents up to Rs. 50,000, despite the fact that there is a health insurance in place for their parents. In such cases, employees may genuinely not be aware of the tax provisions and may be willing to file the correct tax return.There is a possibility that the department may issue a notice to the employer for wrongful deductions claimed by the employee and consequent lower deduction of TDS. In that case, the employer may be considered as an assessee in default under section 201 of the Act. The employer may however, take support of decisions 2 where courts have held that if the employer deducted lower TDS under a bona fide belief, it cannot be considered as an assessee in default under section 201. In certain decisions 3 however, the courts have upheld the applicability of section 201 even where the assessee had a bona fide impression for non-deduction of TDS.

2. India is gradually moving to a low/nil deduction tax regime for individuals. In that case, this issue may not be relevant for many employees opting for the default tax regime with almost NIL deductions for AY 2024-25 and onward.
However, the employer may be held responsible in certain cases, viz.
a. Where an employee claims deduction of interest or set-off of losses under the head ‘income from house property’;
b. Where employees exercise stock options or similar rights and TDS is deducted based on the valuation of shares of the company; or
c. Where residential status of inbound and outbound expatriates changes in the years of transition.
In such cases, it is imperative for the employer to procure and maintain relevant documentary evidence to justify its stand on deduction of TDS.

3. Practically, most employees may not understand taxation and the requirement to maintain/submit proofs for claiming deductions. It is the responsibility of the finance team of the employer to ensure that employees are allowed deductions only after they have submitted the relevant proofs of deductions/set-off of losses. The finance team as well as the employees must be educated about the requirements to maintain adequate proofs and evidence for claiming deductions. As it is rightly said, ignorance of law is not an excuse.

Conclusion
The onus of accurate tax computation and tax deduction on employee’s salary is cast on the employer. Hence, it is incumbent upon the employer to put in place the requisite infrastructure for collecting, verifying and maintaining records or documents to justify the claims/deductions of the employee and finally deduct the right amount of TDS.

What are carbon credits?

The necessity of reducing carbon emissions was first recognized at the Kyoto Protocol of the United Nations Framework on Climate Change signed in 1997 wherein the member countries, including India, committed to limit and reduce the greenhouse gas emissions. The Kyoto Protocol provides for trading of Carbon Credits, i.e., emission reduction units through Clean Development Mechanism (CDM).

Under CDM, specified parties engaged in project activities resulting in Certified Emission Reductions (CERs) may trade in such CERs. The purchasers of CERs may use such CERs to comply with part of their quantified emission limitation and reduction commitments. The unit associated with CDM is the CER; where one CER is equal to one metric tonne of carbon dioxide equivalent.

Developed countries with emission reduction targets can simply trade in the international carbon credit market. This implies that entities of developed countries exceeding their emission limits can buy carbon credits from those whose actual emissions are below their set limits. Carbon credits can be exchanged between businesses/ entities or can be bought and sold in the international market at the prevailing market price.

Whether carbon credits are considered as capital receipt or revenue receipt?

Taxation under the Income tax Act, 1961 (the ITA) depends on whether the income is a revenue receipt or a capital receipt. As a general rule, revenue receipts are chargeable to tax unless specifically exempted and capital receipts are exempted from tax unless specifically held to be chargeable.

Prior to FY 2017-18, there was a lot of uncertainty on whether ‘carbon credits’ are revenue receipts or capital receipts. The Revenue treated income from carbon credits as revenue receipt1 and sought to tax the same as business income. The taxpayers, on the other hand, succeeded in establishing that income from carbon credits are capital receipts. Consequently, the Revenue has not been able to tax the income from carbon credits till date.

Taxation of carbon credits under section 115BBG
To address the litigation on the taxation of carbon credits in India, the Finance Act, 2017 introduced section 115BBG under the ITA “in order to bring clarity on the issue of taxation of income from transfer of carbon credits and to encourage measures to protect the environment.”

On a plain reading of section 115BBG, the following points emerge:

• This is a specific provision applicable to the taxation of income from the transfer of carbon credits. Consequently, such income from carbon credits shall not be taxed under the general provisions of the ITA.

• The said income shall be taxed at 10%.

• Though the section uses the term income, which generally means revenue less expenditure, clause 2 specifically prohibits deduction of any expenditure / allowance in calculating the tax base under this section. This implies that the rate of 10% shall be applicable on the gross receipts on the transfer of carbon credits.

• The section does not specify whether it is applicable to a resident assessee or a non-resident assessee. Consequently, it is applicable to non-resident taxpayers as well. However, in the case of non- residents, taxability arises only to the extent it is attributable to the business connection/permanent establishment in India. Tax treaty benefits would also be available.

In the case of non-resident taxpayers, the OECD Publication on Tax Treaty Issues Related to Emissions Permits/Credits provides that:

• Income from carbon credits may be taxed as business profits or as capital gains.

• Business profits are taxed in the source country if the non- resident taxpayer has a permanent establishment in the source country (otherwise, in the country of residence). Further, business income must be determined as per the domestic law of the source country.

Section 115BBG was introduced to mitigate the tax litigation on taxability of income from carbon credits. Whether it has achieved the desired objective or not, is something only time will tell. As of date, all jurisprudence in the matter pertains to the years prior to the introduction of section 115BBG. Taxability under section 115BBG may be challenged on the following grounds:

• The section does not specifically categorize income from carbon credits as a capital receipt or a revenue receipt. In the absence of a clear categorization, the existing judgments in the matter, which have clearly established that income from carbon credits is a capital receipt, may still hold true.

• There is no amendment to the definition of ‘income’ under section 2(24) of the ITA. For instance, where the Revenue intended to tax the receipt of property for an inadequate consideration as income, a specific amendment was made to the definition of income. Alternatively, there is no amendment to section 28 of the ITA defining ‘Profits and gains of business or profession’. In other words, the computation mechanism under section 115BBG may fail in the absence of a charging mechanism under sections 2(24) or 28 of the ITA.

Recent judgements

Taxability of the carbon credits is still a contagious issue in India. In a well- reasoned Tribunal judgement of Shri Pramod Kumar in the case of Kalpataru Power Transmission Ltd., it was held that “the gains on sale of CERs, though taxable in nature, could only have been taxed at the point of time when these CERs were actually transferred to the foreign entity. Accordingly, the value of CERs, even though quantifiable, cannot be brought to tax by the reason of accrual simplictor”. The decision has been approved by the Gujarat High Court.
A similar matter in the case of Lanco Tanjore Power Corporation Ltd. is pending for adjudication before the Apex Court. The Apex Court is pondering over the issue of taxability of the carbon credit in India as it would have a far-reaching impact on the future industries.