income tax
The introduction of Controlled Foreign Corporation (CFC) legislation in Indian tax law is crucial to combat income tax avoidance by residents. Currently, the Income Tax Act of 1961 does not have provisions addressing this issue. However, the Direct Tax Code proposes CFC measures aligned with the OECD's Action Plan 3 on tax avoidance.
CFCs are corporate entities established in low-tax jurisdictions and controlled, either directly or indirectly, by residents of higher tax jurisdictions, known as Parent States. Each CFC is treated as a separate legal entity, which means that profits earned are not taxed at the owner’s level until distributed. Often, CFCs generate passive income, which is not immediately distributed, allowing for tax deferral in the Parent State.
CFCs are typically incorporated in low-tax areas, such as Bermuda or Singapore, primarily to evade taxes in higher tax jurisdictions like India. This is accomplished by funneling income to these low-tax jurisdictions through established entities. Consequently, such practices can lead to unlawful tax evasion, resulting in significant revenue losses for high-tax jurisdictions and unfair tax burdens on compliant taxpayers.
In India, income from these CFCs is only taxed after repatriation in the form of distributions like dividends. However, to minimize tax liabilities, such repatriation seldom occurs.
Considering the outlined issues surrounding tax evasion and avoidance, there is a pressing need for the implementation of CFC legislation in India. This will help mitigate unfair tax practices and ensure a fairer tax system for all taxpayers.