Budget 2025: Consolidating taxes, it's a big deal

India stands on the brink of a major transformation in the sphere of direct taxation. Nirmala Sitharaman is set to introduce a new I-T Act, with a focus on simplification and modernisation, both essential for aligning India's tax framework with its goal of becoming a $5 tn economy. While past reforms, such as reductions in corporate tax rates, have aimed at bolstering the business environment, the need for further streamlining and adaptability remains. In this context, tax consolidation is a potential game-changer. It could ease the compliance burden and drive corporate growth.

Finance Act 2019 reduced corporate tax rates, giving companies an option to avail of tax at a lower rate of 22% (25.17% with surcharge and cess) if these companies did not claim exemptions or incentives. To boost 'Make in India', a manufacturing company set up after Oct 1, 2019, could pay tax at 15% (17.16% with surcharge and cess), provided manufacturing began on or before Mar 31, 2023 - later extended by a year. No exemption/incentive could be claimed by such companies if they wished to avail concessional rates. If these options were not exercised, the highest corporate tax rate stood at 34.94%. Rates have remained unchanged since.

As of Jan 12, net direct tax collections were Rs 16.9 lakh cr, a 16% increase from the previous year. While corporate tax collections rose to Rs 9.71 lakh cr from Rs 8.33 lakh cr (a 16.5% increase), non-corporate tax, which primarily includes personal I-T, showed a significant rise in collections of nearly 22%, rising to Rs 10.45 lakh cr from Rs 8.58 lakh cr.


There is a buzz that tax slabs and rates may be tweaked for individuals to give relief to the middle class. This would be the right step. Corporate tax rates are unlikely to be tinkered with. But there is a need for impetus to corporate growth, including ease in tax compliance.

This can be achieved by bringing in tax consolidation provisions. In India, group companies are not treated as a single entity for tax purposes. This provision prevails in the US, Britain, Australia, Canada, Japan, and several EU countries such as France, Germany, the Netherlands and Italy, though rules and criteria vary. Key benefits include:

Offsetting profits and losses
Losses from one company in the group can offset profits from another, potentially reducing the overall tax liability of the group.

Simplified reporting
Instead of filing separate tax returns for each entity, the group files a single consolidated tax return, simplifying the process and reducing administrative costs.

Inter-company transactions
Transfers of assets or services within the group are generally tax-free, which can lead to more efficient management of resources and capital.

In the US, for instance, an affiliated group consists of a US parent corporation and all other US entities in which the parent holds directly or indirectly at least 80% of the voting power. A single consolidated tax return can be filed, which enables offsetting losses within the group and simplifies inter-company transactions.

In the Netherlands, tax consolidation is permitted if the parent owns at least 95% of the shares of its subsidiary. In certain instances, foreign subsidiaries can also be included. This enables offsetting losses within group companies.

In India, it is common for a parent company to have more than one subsidiary, each operating in a separate line of business. Thus, each company (parent and subsidiaries) individually meets their tax compliance obligations - be it filing of corporate tax returns, payment of advance and corporate tax, and meeting withholding tax obligations, to name a few.

Further, assessments are company-specific, and scrutiny of transactions such as intra-group transactions results in each company bearing administrative costs for the same issue.

While carry-forward and set-off of losses are allowed for eight years, and unabsorbed depreciation can be carried forward indefinitely, tax consolidation would permit offsetting losses of, say, a newly set-up entity against the profits of its parent company.

This would provide an impetus to setting up new businesses and aid job creation.