Tax Due Diligence for Acquiring an Indian Target

Tax due diligence on an Indian target covers six areas: direct tax, GST and legacy indirect tax, transfer pricing, withholding on cross-border payments, FEMA filings, and employment-related obligations. What matters is the output. Not a list of findings, but each exposure quantified and assigned to a deal mechanism: price adjustment, indemnity, escrow, or condition precedent.

Scope

Direct tax. Open assessment years, pending appeals and quantum, positions taken on material items, carry-forward losses and their availability post-transaction, and the effect of the Income-tax Act, 2025 transition on open matters.

GST and legacy indirect tax. Registration status across states, ITC claimed and its reconciliation against auto-populated data, classification and rate positions including the September 2025 restructure, pending notices, and legacy service tax, VAT and excise matters, which remain live for many targets.

Transfer pricing. Documentation adequacy, characterisation against operational reality, adjustment history, and any APA or MAP in progress.

Withholding. Payments to non-residents and the chargeability analysis supporting the rate applied. Under-withholding produces disallowance, which is often the largest quantified exposure in a diligence report.

FEMA. Historical filings — FC-GPR, FC-TRS, FLA, downstream investment reporting — and any unfiled or late filings. Frequently under-scoped, and directly relevant because unresolved contraventions can obstruct the transaction itself.

Employment. Provident fund and ESI coverage and contribution base, contractor arrangements that may be reclassified as employment, and ESOP withholding.

Exposures that recur

ITC reconciliation gaps where credit was claimed against suppliers who did not file. Under-withholding on cross-border payments, particularly software, intra-group services and reimbursements. Transfer pricing characterisation drift. Unfiled FEMA reporting, especially downstream investment and FLA returns. Share premium valuation on historic funding rounds without adequate support. Contractor misclassification. Legacy indirect tax disputes assumed closed but still live. And related party transactions without adequate approval.

[INSERT: an anonymised Solique example — a diligence finding that materially changed a deal, and the mechanism used to address it.]

Converting findings into deal terms

The value of diligence is in the conversion, and this is where reports frequently fail by presenting findings without a view.

Each exposure should be assessed on probability of crystallisation, quantum including interest and penalty, and time horizon relative to limitation. That assessment determines the mechanism:

Price adjustment for exposures that are probable and quantifiable.

Specific indemnity for identified contingent exposures, with defined conduct provisions determining who controls the defence — routinely under-negotiated and consequential, since a seller controlling a dispute may settle in ways that suit them.

Escrow or holdback where an indemnity’s value depends on the seller’s continuing creditworthiness.

Condition precedent where the exposure must be resolved before completion — the right treatment for FEMA contraventions that would otherwise obstruct the transaction.

Structural change where an exposure attaches to the entity and can be avoided by acquiring assets instead.

Practical points

Scope indirect tax state-by-state rather than treating GST as a single national obligation.

Reconcile the transfer pricing position with the customs position.

Check that carry-forward losses survive the change in shareholding. A target’s accumulated losses are frequently valued in the model and frequently forfeited by the transaction itself.

Related reading

• share purchase versus asset purchase — Share Purchase vs Asset Purchase in India: Tax Comparison
• the red flags founders should fix first — Tax Red Flags PE Diligence Finds in Indian Targets
• post-merger integration — Post-Merger Integration: Tax and Reporting Pitfalls in India
• transfer pricing documentation — Transfer Pricing Documentation for Indian Subsidiaries