Expert Zone

Straight from the Specialists

A look at the proposed new Companies Act

By Vishal Shah and Smit Sheth
August 22, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

With its overhaul of the 1956 Companies Act, the government aims to simplify its provisions, keep pace with global trends and make it easier to do business in the country.

But the proposed law’s implementation would depend on its integration with existing statutes and laws such as the Foreign Exchange Management Act (FEMA) and the Income Tax Act. More clarity is needed on certain issues.

Here’s a look at some of the provisions of the Companies Bill:

OUTBOUND MERGERS
The Companies Bill allows for the merger of an Indian and foreign companies, giving Indian companies the flexibility to participate in global M&A activity. The current Act allows inbound mergers that are tax neutral (subject to certain conditions) but does not allow tax-neutral outbound mergers. Similarly, FEMA provisions would have to be amended for outbound mergers.

TRANSFER PRICING
Under the Income Tax Act, cross-border transactions between associated enterprises are subject to transfer pricing provisions, recently made applicable in a limited way for specified domestic transactions. The concept of transfer pricing has also been introduced in the Companies Bill, requiring the transaction to be on arm’s length basis else it would require board resolution and a special resolution from shareholders in case of companies having prescribed paid-up capital or transaction value.

Given the difficulty of determining the arm’s length price and the commercial imperatives of companies entering into such transactions, it could cause ambiguity since no specific methods are prescribed in the Companies Bill. It is also not clear whether corporates would be required to obtain independent certifications.

FOREIGN COMPANIES
The Companies Bill has also widened the definition of foreign companies to include those having a place of business in India via an agent or through electronic mode. This would require foreign companies to comply with the maintenance of financial records and reporting requirements in India. This may trigger unnecessary tax enquiries for foreign companies not having a direct business presence.

CORPORATE SOCIAL RESPONSIBILITY
The Companies Bill requires companies to set aside a certain percentage of profits for corporate social responsibility. This is a good move but tax deductions for such expenses are unclear. The question is whether this spending will be treated as deductible expenditure.

OTHER FACETS
While evaluating tax liabilities, corporates will have to consider new provisions such as fast-track mergers and restrictions on multiple buybacks in a financial year.

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