Any payment made towards settlement of overseas disputes or to prevent litigation for offences that are not serious or criminal in nature could be treated as a business expense and allowed as a deduction, the official said, adding that changes are being examined in Section 37 of the Income-Tax Act.
This has been a long-pending demand of the industry.
No deduction is allowed if such an expenditure is made for settlement and paying for penalty or legal compensation overseas.
Section 37 of the Act provides that an expenditure incurred wholly and exclusively for the purposes of business is tax deductible, provided it is not incurred for any purpose that is an “offence” or for any purpose that is “prohibited by law”. Last year, the Centre in the Finance Act said this shall include expenditure incurred by an assessee either in India or outside India.
Vishwas Panjiar, partner, Nangia Andersen LLP, said, “Many a times when payment is made under a foreign law, tax officers are unable to appreciate the true purpose of the payment during scrutiny proceedings owing to the inherent complexity in such payments, leading to unnecessary litigation at the tribunal/high court level”.
Industry and financial institutions have represented to the government that enterprises operating in a foreign jurisdiction have to sometimes resort to settlements to save time and legal hassles.
They have pitched for relaxations of the provisions for ease of doing business.
“This provision is leading to unintended hardship for businesses as the payments are not towards any fines or penalties, but merely compensatory payments, and often to avoid any friction with overseas country regulators,” said an executive who did not wish to be named.
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