How Can a Shell Company be tax compliant? Part I

The Securities Exchange Board of India (SEBI) recently put on notice 331 shell companies suspected of violating tax laws by directing the Registrar of Companies to deregister such entities vide Section 248 of the Indian Companies Act, 2013.

So, what are shell companies and if you are the owner of a business that has not made any transactions for some time, what tax liabilities fall upon you?

Are shell companies defined under Indian law?

A shell company is not defined by any law in force at this time. Online dictionary, Investopedia, defines a shell corporation as a business entity that does not have any active operations or assets of consequence.

Note that a shell company is not illegal in itself but may be used to raise funds fraudulently. It may launch IPOs, perform hostile takeovers or act as a façade for hiding ownership of business from tax authorities.

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Benefits of forming a Company

1. In India, a corporation is a corporate entity that may be international in scope while a company has to be registered to do business for profit in India.
2. In accounting terms, a company is considered a going concern, meaning that it is not going to close its operations in the foreseeable future and that it meets its expenses out of its current earnings and current assets.
3. Another important point to understand is that a company is a legal person. This means that it can enter into contracts, own buildings, machines or property, hire people, earn capital gains, lend money or borrow money and enter into suits in its own name.
4. Taxes are collected in the name of the company.
5. These provisions create a veil between the company and the public because the members of the association are not liable for losses, debts or tax liabilities of the company.

Why do Shell Companies Exist?

It is acceptable to face losses and bankruptcy in business as this keeps the spirit of innovation going and is responsible for human progress. A commercial entity may face difficulties in obtaining sufficient capital to fund its day-to-day operations and feel that is it less diminishing of earnings to halt functions. It may, however, want to resume operations once the financial climate changes in its favour.

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How can a Shell Company avoid dissolution?

1. If your company has not been functioning for some reason you may apply to the Registrar of Companies to obtain the status of a dormant company.
2. A dormant company is defined in Section 455. This is a company that may have been incorporated for a future project or an entity that simply owns an intellectual property or asset. It must have been inactive for the last two financial years immediately preceding the present one. If there have been no operations or no significant transactions (fees to the ROC, division of shares, maintenance expenses), the Registrar may initiate proceedings on her own and the company may be listed as a dormant company.
3. A dormant company needs to fulfil certain conditions regarding the minimum number of directors, annual fees or the mandatory filing of certain documents as laid out in rules and procedures from time to time or face de-registration.
4. If your company has received a show cause notice from the ROC, you have 30 days to respond and satisfy the Registrar. Make sure you have all the right documents and other relevant evidence to explain why your company’s name should not be scrubbed from the register of companies. (Section 248)
5. If the Registrar does decide to dissolve the company, a further appeal lies to the National Company Law Tribunal which will decide the case on its own merits.

Good bookkeeping is one way to answer charges of tax evasion by governments. Performance of audits is another. E-file your tax returns for greater transparency.

You can take advantage of the online revolution to take the help of a CA or Financial Expert via an online tax platform. You’ll find that rates are far cheaper now for services than before. Tax compliance can be a tricky matter to delve into and experience can make all the difference between staying afloat and dissolution.