There is a great need and
importance of introducing CFC i.e. controlled foreign corporation legislation
in Indian tax law, as it is one of the biggest measures to avoid payment of
income tax in India by the resident persons of India. In the current scenario,
there are no such provisions existing in income tax act, 1961 but the same has
been introduced in Direct tax code in lines with the Action Plan 3 of OCED tax
avoidance model.
Tax avoidance has been accepted as
an area of concern in international tax arena, which is the reason why several
countries have been legislating anti-avoidance measures. Taxation of foreign
passive income is at heart of CFC regulations.
Meaning of Controlled Foreign
Corporations;
CFC’s are corporate entities
incorporated in an overseas low tax jurisdiction and controlled directly or
indirectly by residents of a higher tax jurisdiction (Parent State). Since each
corporate entity is treated as a separate legal entity, the profits earned by
such CFC’s are not taxed at the owner level until they are distributed. CFCs
tend to earn passive income; such income is not distributed, thereby resulting
in tax deferral in the parent state.
Detailed analysis of above
mentioned definition:
CFC’s are those corporate entities
which are incorporated in low tax jurisdictions like Tax Haven Countries say
Bermuda, Singapore and many more with a intention to evade and avoid payment of
tax in high tax jurisdiction by diverting the income accrued or earned to low
tax jurisdiction by creating or incorporating companies or any other form of
entities in that jurisdictions which is ultimately controlled by person
resident in high tax jurisdiction. This lead to tax evasion which is completely
unlawful and bad in the eyes of law and also the high tax jurisdictions like
India suffered huge loss of tax revenues which ultimately results in unfair tax
collection from honest taxpayers. Such income can only be taxed in India after
it has been repatriate to India in the form of distributable profits like
dividend, which is usually not done so as to avoid tax liability.
After, considering the above
mentioned facts and unfair practices of tax evasion and avoidance, there is a
great need of introducing CFC’s legislation in India.
With Best Regards;
CA Pushp Kumar Sahu
Author can be reached at Pushpkumarsahu44@gmail.com and 7694905887.
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