They are asking experts whether a facility set up on a plot bought next to an existing manufacturing plant can be registered as a new company or will it be seen as expansion or restructuring of the existing one, people with direct knowledge of the matter said. Similar questions are also being asked about the same customers ordering products from a newly set up company and transferring machinery bought for expansion to a new company.
Most of these companies are going with the view that they would be able to pass these off as the deals of the new company and take the benefit of the 15% tax rate, the people said.
For instance, an auto sector company that has a facility on the outskirts of Pune and bought a plot right beside it, is now looking to set up a new company there. According to a person with knowledge of the plan, the existing company would sell the land to the newly registered company. Tax experts said such manoeuvring might not come under restructuring. “Many companies are taking a bet that a new land parcel bought right beside their existing manufacturing plant, or the same set of customers giving similar orders for a newly set up company, doesn’t necessarily mean restructuring of business,” said Amit Singhania, a partner at Shardul Amarchand Mangaldas & Co.
India slashed corporate tax rates to 22% from 30% for existing companies and to 15% from 25% for new manufacturing companies. Companies can opt for the higher tax rates, or the new ones where they, however, will have to give up other tax incentives and benefits.
The latest rate for new manufacturing companies is one of the lowest in the world.
Tax experts said one of the fears among companies was that if the tax department termed the setting up of the new company as just restructuring of an existing business, they might end up losing the benefit. They are worried also about what else would happen in such an event.
“There is a controversy around consequences of not meeting conditions of new regime vis-à-vis the new company — as we look at it both the new tax regimes are mutually exclusive and so the new company may have to go back to the 35% tax rate (including surcharge) in case of non-compliance,” Dhruva Advisors partner Saumil Shah said. A company that is into steel manufacturing has asked its tax advisers if customer profile could impact the tax treatment.
“The newly set up company will be in the same sector with same customers. The fear is this could be termed restructuring by the tax department,” which the tax head of the company told ET was a worry. His adviser, he said, was confident that this structure could pass the test of the revenue department.
“If one were to see the rules, the emphasis is on new manufacturing unit and even if the company sells to related party or a third party, that’s not restructuring,” said a legal tax expert advising another company on a similar matter.
Industry insiders point out that many of the companies had put their expansion plans on hold due to the newly announced tax rates. ET reported on September 24 that many such companies were reaching out to tax experts after the corporate tax for new companies was cut to 15%. The reason was that instead of investing directly, if a separate entity is formed with the same investment, there could be a tax arbitrage of about 10 percentage points.