Context:
A Select Committee of the Lok Sabha has submitted recommendations on the draft Income Tax Bill, 2025, with significant implications for how inter-corporate transactions will be taxed. One key change relates to expanding the scope of transfer pricing rules beyond the current formal thresholds of shareholding and board control.
Key Recommendations on Transfer Pricing
- Substantive Influence Clause:
- Transfer pricing scrutiny may now apply if the tax department believes one company exerts substantial influence over another—even without meeting formal thresholds such as 26% voting rights or majority board control.
- Definition of Associated Enterprises (AEs):
- The draft Bill proposes treating entities as AEs based on actual influence, combining the two limbs of the current definition (management/control/capital participation and quantitative criteria) as independent provisions.
- Implications:
- Could significantly widen the scope of transactions covered under transfer pricing regulations.
- May lead to increased compliance for companies involved in intra-group or cross-border transactions, even when shareholding or directorship criteria are not met.
- May increase litigation risks, especially for companies with informal business dependencies.
Current Framework vs Proposed Change
| Aspect | Current Law (1961 Act) | Proposed Change (2025 Bill) |
|---|---|---|
| Definition of AEs | Requires formal thresholds + management influence | Substantive influence alone could trigger scrutiny |
| Court Interpretation | Both limbs must be read together | Provisions treated as independent |
| Applicability | Mostly to entities meeting ownership/control tests | Even where only informal influence is evident |
Additional Recommendations in the Draft IT Bill
- House Property Income:
- 30% standard deduction after subtracting municipal taxes.
- Pre-construction interest deduction allowed for let-out properties.
- Small Taxpayers:
- Proposal to remove mandatory return filing for those seeking only refunds, easing compliance for small taxpayers.
