In a major move that could reshape how large corporations handle regulatory cases, India’s Central Board of Direct Taxes (CBDT) has issued a directive that disallows tax deductions on payments made by companies to settle violations under key laws, including the Competition Act and the Securities Contracts Regulation Act. This new rule, released via a circular on April 23, 2025, significantly raises the cost of settling probes for big tech firms and listed companies.

What Has Changed?

Earlier, companies could claim tax deductions on settlement fees paid to regulators like the Competition Commission of India (CCI) or the Securities and Exchange Board of India (SEBI). This practice reduced their overall tax liability, offering financial relief while also allowing them to close regulatory investigations quietly, without admitting guilt.

Now, under the updated guidelines, such expenses will be added to taxable income, increasing the tax burden by 25.17% (the effective corporate tax rate in India). This will not only raise costs for companies but also affect their bottom lines.

"Taxpayers will not be able to reduce their tax liability by claiming tax deduction for settlement fees and charges after this change," said Amit Maheshwari, tax partner at AKM Global.

Why Is This Significant for Big Tech?

Some of the world’s most prominent tech players — including Google, Amazon, Flipkart, Apple, and Samsung — are currently under the scanner of Indian regulators for alleged abuse of market dominance. These cases often end in settlements to avoid litigation and reputational risks.

For instance, Google recently settled a CCI investigation related to its practices in the smart TV segment, paying a hefty ₹20.24 crore. Under the new CBDT rules, such a settlement fee will now be taxable, resulting in additional financial outflows.

Settlement vs. Litigation: A New Dilemma

Settlement was traditionally preferred because it saved legal costs, time, and negative press, all while allowing companies to move on without admitting wrongdoing. But now, with increased costs due to tax implications, companies may reconsider.

In fact, SEBI's whole-time member Kamlesh Varshney recently remarked at an event that settlements often result in higher payouts than litigations:

"You come for settlement, you pay more than what you end up paying for litigation."

With tax incentives removed, this cost-benefit equation is tilted further against settlement.

Legal Experts Call for Clarity

While the new rule is clear for future cases, there's ambiguity about how it applies to past payments. Some legal experts suggest that the tax department must clarify whether settlement fees paid before April 23, 2025, will still be eligible for tax deduction or not.

Amit Singhania, founder of Areete Law Offices, stated:

“CBDT notification under Section 37 of the Income-tax Act, 1961 is helpful as it provides clarity... However, it is not clear if such expenses incurred prior to 23 April, 2025 will be deductible or not.”

How It Affects Businesses

This move impacts not just big tech but also all companies settling regulatory issues. Businesses under scrutiny by SEBI, CCI, or other government bodies must now consider:

• Higher effective cost of compliance

• Increased tax liability on settlement

• Impact on profit margins

• Strategic shift towards contesting cases instead of settling

Government’s Reasoning and Industry Reaction

Although the government hasn't publicly stated the motivation behind the move, it aligns with broader efforts to close tax loopholes and ensure that settlement fees are not used to lower taxable income.

However, tax professionals and industry insiders have expressed concern, noting that this could:

• Discourage companies from cooperating with regulators

• Delay closure of cases

• Increase court burdens as more entities opt for litigation

Understanding the Broader Impact

1. Tech Giants at the Centre of It All

Firms like Google and Amazon have been at the centre of several probes in India — from e-commerce platform dominance to anticompetitive practices in Android and digital ecosystems. These cases involve significant sums, and tax implications could raise settlement costs by millions.

2. Impact on Smaller Players

While the headlines focus on tech giants, smaller companies and startups facing SEBI notices or CCI allegations will feel the pinch too. Startups often rely on quick resolution to avoid disruption — a costlier settlement regime could hurt their already tight cash flows.

3. Implications for Corporate Strategy

Many companies will now revisit their risk management frameworks, legal budgets, and regulatory strategies. Expect a shift towards:

• Proactive compliance measures

• Early legal consultation

• Greater scrutiny before opting for settlement

What is Section 37 of the Income Tax Act?

The CBDT circular draws authority from Section 37 of the Income Tax Act, 1961, which deals with allowable business expenses. The recent amendment adds settlement fees to the list of expenses not permitted for deduction — similar to how penalties or bribes are treated.

This reinforces the government’s message: Violations should not receive tax benefits, even if resolved through settlement.

Conclusion: The Cost of Closure Just Went Up

The decision to deny tax deduction on settlement amounts marks a turning point in India’s regulatory and tax landscape. It sends a strong message — compliance must be proactive, not negotiated.

Big tech firms, already under pressure from global regulators, will have to factor in higher costs for dispute resolution in India. At the same time, listed companies in other sectors may now be more hesitant to settle violations unless the consequences of litigation are significantly higher.

As the corporate world recalibrates its approach to regulation and taxation, one thing is clear: settling regulatory disputes in India has just become more expensive.

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