India Regulatory Brief: Tax Collection to Widen in Tier-II Cities, Company Registrations on Decline

I-T Expanding Tax Collection Efforts in Tier-II Cities

The Income Tax Department plans to expand its tax collection activities in Tier II cities, such as Jaipur in Rajasthan state, Indore in Madhya Pradesh state and Vishakhapatnam in Andhra Pradesh state. The initiative follows a directive from the federal government to increase the number of taxpayers in the country by 2.5 million individuals and entities every month.

The Central Board of Direct Taxes (CBDT), the Income Tax Department’s administrative and policymaking body, found that the gap between the actual number of taxpayers and potential number of taxpayers was widest in the country’s rapidly growing Tier-II cities. Income Tax and CBDT officials quoted in the media report that authorities will not use adversarial or intrusive measures to expand tax collection.

Company Registrations on Decline

The number of new company registrations declined during the 2014-15 financial year, according to Ministry of Corporate Affairs (MCA) data. The 64,000 companies registered during 2014-15 marks a 35 percent drop from the 98,029 companies that registered during the 2013-14 financial year. While the number of companies that registered as limited liability partnerships (LLPs) in 2014-15 increased by 55 percent from the previous financial year, the number of public and private company registrations dropped by 52 percent and 33 percent, respectively, contributing to the lowest number of company registrations since 2009-10.

The lower start-up costs and number of compliances for LLPs in comparison to private companies may in part explain the increase in the number of LLPs. Many local observers have blamed the Companies Act, 2013 for the decline in company registrations. In their view, the Companies Act drastically increased the number of compliance requirements for companies, while the associated liabilities for companies also increased. However, the decline in the number of company registrations in the past six years may mirror the economic slowdown India experienced since 2009-10, when company registrations initially began to decline.

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New Insolvency Body Forthcoming

The Supreme Court upheld the constitutionality of the National Company Law Tribunal (NCLT), which will replace the Company Law Board and the Board for Industrial and Financial Reconstruction. The Supreme Court subsequently requested the federal government to make several amendments to the Companies Act, 2013 that will operationalize the NCLT. The NCLT, a quasi-judicial body, will govern companies in the country and oversee corporate insolvencies. The NCLT will also serve as the main component of a new bankruptcy code. Government officials expect the NCLT to improve India’s ranking in the Doing Business Report published by the World Bank.

This article was first published on India Briefing.

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