Externalization: Can the government halt the trend?

Externalization is the strategy of incorporating holding companies in offshore jurisdictions for tax optimization and operational stability.

With India’s growth story gaining significant traction in the international marketplace, the prospect of Indian entities setting up offshore holding companies, especially in the e-commerce sector, has become increasingly alluring considering challenges associated with India’s complex tax and regulatory regimes. The allure is further augmented by the ease of operating from more business-friendly jurisdictions and the possibility of attracting financing overseas.

Advantages

One of the major triggers of externalization has been the uncertainty in the current Indian tax regime that has been bought about by ambiguities pertaining to the application of general anti-avoidance rules as well as moves such as the government’s attempts to apply retrospective taxation on indirect transfers of Indian assets. Further, the high rates of corporate tax, dividend distribution tax, taxation on transfer of shares and minimum alternate tax under the Indian tax laws have added impetus to companies seeking to externalize from the standpoint of mitigating tax risks.

Rajesh Begur is the managing partner of ARA LAW, a first-generation law firm with offices in Mumbai and Bengaluru.