In these hyper-aware times of proxy advisory firms telling shareholders how to vote and of both the Companies Act and Sebi declaring that minority shareholders will have more rights than majority ones on various issues, the last thing we need is for the taxman to join the party. Yet, that’s precisely what seems to be happening. Thanks to a change in the Finance Act, tax officials are now reportedly looking into the compensation of directors and CEOs, to determine whether or not they are justified. Why that should be the taxman’s concern is not clear. And in case the taxman concludes the compensation is excessive, the difference will be added back to the income of companies in terms of a transfer pricing adjustment.
While it is obvious that neither directors nor CEOs are functioning at ‘arms-length’ as far as their remuneration is concerned, it doesn’t help to add another layer of scrutiny—of the taxman—to the functioning of companies. In which case, the central board of direct taxes needs to ensure the taxman’s newly-got powers are not abused—given the wide-difference in salaries across companies, it is impossible to figure out what the ‘correct’ remuneration should be. The best solution, of course, would be to look at CEO/director from the angle of transfer pricing only if, as per the Companies Act/Sebi, the minority shareholders decide to strike them down. Indeed, thought should be paid as to whether this logic needs to be extended to other areas—it would be ironic if, for instance, Maruti’s minority shareholders found the deal with Suzuki
Gujarat to be kosher while the taxman ruled it was a related party transaction and added back income for transfer pricing.