A Supreme Court ruling on Thursday that could potentially allow Indian companies to keep profits maximized in the profits section of the Income Tax Act has sparked a wave of concern about the power of companies to avoid paying taxes.
The ruling, which was handed down by the apex court on the first day of its term, allows companies to maintain profits at a higher rate than the statutory rate even if the turnover in the firm is less than Rs 1 lakh crore ($1.3 billion).
The ruling has sparked concerns about the extent of profit maximisation in India and whether it would lead to increased tax collection.
“We are concerned that there is no clarity on the interpretation of the rule, particularly in light of the fact that profits can be minimised as well as income,” said Aniruddha Kumar, the co-founder and chairperson of the Tax Justice Network, an advocacy group.
“The ruling could open the door to increasing tax collection through the profit maximising loophole,” she added.
The case was brought by a Delhi-based IT firm, Reliance Industries Ltd, on a complaint that it did not pay tax on the income it earned from its operations in India.
In its complaint, Reliant alleged that it was a monopoly.
The Supreme Court has already allowed Indian companies, including the government, to keep their profits at the statutory rates.
The apex court, however, has ruled that profit maximizers are not permitted to claim any tax advantage.
The decision could also have implications for the Indian economy.
“With the Supreme Court’s ruling, the income tax law is open for use by companies, especially in cases of tax evasion,” said Maitreya Rao, director of the Centre for Development Studies, a think tank.
“That means that companies will be able to avoid taxes and avoid paying any tax on their profits,” Rao added.
In India, the profits that can be made from the services of a company, such as salaries or salaries paid to its employees, are taxable.
The government has made it a requirement for companies to declare profits from any activity to the government.
The Supreme Court on Wednesday issued notices to Reliance, which is based in the capital New Delhi.
The notices were handed down after the company’s lawyers submitted an application for an appeal.
“We have submitted a detailed response on the application, which includes our detailed reply to the notice,” Reliance’s lawyer said.
“This is a case that has already gone to the Supreme Bench and has been taken to the court.
It is our contention that this case is a genuine case and that the matter should be heard by the court.”
Rao said Reliance had submitted its response to the notices in the Supreme Courts on January 23.
“It is a very clear and convincing answer to the question put to us,” Rao said.
Rao claimed that the Income Taxes Department has said that the company has paid tax in the last five years.
However, Rao said that there are still discrepancies in this information.
Reliance has argued that the discrepancy is due to the fact the firm has been in existence for more than five years and its profits are now higher than the income declared by the government on its tax returns.
“There are some discrepancies between the Income tax return and the return filed by the company,” Rao alleged.
Reliant has also argued that Reliance should be given a one-year grace period to appeal the Supreme court’s order.