Govt amends I-T Act to put curbs on shell companies

To curb the formation of shell companies, which are located abroad but controlled from India, to evade taxes, the government has amended the income tax act by introducing the concept of ‘place of effective management’. Following the amendment, all such companies would be taxable in India even if they are incorporated abroad but their key […]

To curb the formation of shell companies, which are located abroad but controlled from India, to evade taxes, the government has amended the income tax act by introducing the concept of ‘place of effective management’.

Following the amendment, all such companies would be taxable in India even if they are incorporated abroad but their key management took important commercial decisions in India at any time of the year.

“A company shall be said to be resident in India in any previous year, if it is an Indian company; or its place of effective management (POEM), at any time in that year, is in India,” the Finance Bill tabled in the Lok Sabha said.

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POEM has been defined as the place where key management and commercial decisions that are necessary for conducting the business of an entity as a whole are, in substance, made. The changes will be effective from April 1, 2016 and apply in assessment year 2016-17. The tax department will come out with a set of guiding principles for determining the POEM.

As per the existing law, under clause 3 of section 6 of the Income Tax Act, a company is said to be resident in India in any previous year, if it is an Indian company or during that year, the control and management of its affairs is situated wholly in India. The tax department has argued that a company can easily avoid becoming a resident by simply holding a board meeting outside India. “This facilitates creation of shell companies which are incorporated outside but controlled from India,” the Finance Bill said.

“It is a common practice and the department has moved in the direction of putting an end to it. Even though their entire work is done from India, they are not taxable here. This will in effect stop the generation of black money,” Bharat Dhawan, managing director, Mazars Advisory Pvt Ltd, said.