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Thin Capitalization - Restriction of Interest under Section 94B - Next Litigation Saga
Background:
The concept of ‘thin capitalization’ draws utmost attention in the modern group structuring of MNE[1]. Many multinational groups resort to thin capitalization model in order to minimize group’s net tax liability. A company is said to be thinly capitalized when such company is having more debt-equity ratio. Having more debt-equity ratio may cause shifting of profits from one country to other in order to reduce tax liability of the entire group.
The Indian avatar of elimination of abusive strategy of ‘thin-capitalization’ can be seen in the form of Section 94B of ITA[2], which we will be detailing at length at appropriate place. In these series of articles, we intend to cover the background of introduction of thin-capitalization, reasons for introduction of Section 94B and the various issues springing out of inadequate language of Section 94B. In this part, we cover the background and overview of Section 94B and the subsequent parts, the issues will be covered in much detail.
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