Business Structuring under the Income Tax Act, 2025 – Continuity over Change
Introduction
From a business structuring perspective, Income Tax Act 2025 largely retains continuity with the earlier 1961 Act. The changes are more linguistic, aimed at simplification and consolidation rather than altering the tax fundamentals that drive business structuring choices.
Core Continuities
1. Tax Rates and Entity Choice
The relative tax advantage between companies, LLPs, and proprietary concerns remains broadly the same.
The special tax regimes for certain entities (e.g., start-ups, manufacturing companies, concessional corporate rates) are preserved.
Hence, the choice between LLP and company continues to be driven more by non-tax considerations – governance, investor preference, and compliance requirements.
2. Capital Gains and Reorganization
The fundamental principles for taxing transfer of capital assets, slump sale, amalgamation, and demerger remain intact.
The new Act simplifies language and consolidates holding period categories but does not alter tax neutrality conditions.
Thus, group restructurings, family reorganizations, and business transfers continue to be guided by commercial substance rather than tax change.
3. Dividend and Profit Distribution
The DDT abolition introduced earlier continues unchanged.
Dividend remains taxable in the hands of shareholders with the same treatment for inter-corporate dividends and foreign remittances.
No new mechanism affects profit repatriation or group cash flow structuring.
4. International Structuring and Residence
The tests for residence, place of effective management (POEM), and business connection follow the same conceptual framework.
Treaty provisions continue to override domestic law, preserving the status quo for cross-border structuring and holding company models.
5. Tax Incentives and Pass-through Regimes
Provisions for pass-through taxation in AIFs, business trusts, and LLPs are retained with minimal drafting reorganization.
Investment structuring and fund flows remain unaffected.
Practical Impact
From a tax planning perspective, the 2025 Act does not warrant a change in entity structuring or business reorganization strategies.
The Act brings predictability and clarity, reducing interpretational uncertainty rather than changing tax outcomes.
