The Conundrum of Lifting the Corporate Veil of One-Person Companies for Tax Evasion

The Companies Act, 2013 has introduced the concept of One-Person Companies (‘OPCs’) in India for the first time. By definition, an OPC is a company which consists of a single member. The sole member of an OPC can also be its sole director. Classically, the ‘Insubordinated Agency’ Rule and the ‘Business Purpose’ Rule are used to determine when a company’s corporate veil can be lifted for tax evasion. When these classical rules are applied to an OPC, absurd and unreasonable results follow. The corporate veil of an OPC becomes liable to be lifted far more than that of any other company. In some cases, this reduces the corporate personality of an OPC to a complete farce. Thus, the classical rules seem inadequate for OPCs. It is necessary to suitably modify, or discard, them. Lifting the corporate veil of an OPC for tax evasion engages with two competing public policy considerations: the value of limited liability vis-a-vis the benefit of revenue. Hence, the rules governing the lifting of the corporate veil must strike a proportionate balance between these competing interests. By this yardstick, I suggest a new legal framework to govern the lifting of an OPC’s corporate veil for tax evasion. Firstly, the ‘Insubordinated Agency’ Rule, which reduces the corporate personality of an OPC a complete farce, should never be applied to an OPC. Secondly, the ‘Business Purpose’ Rule should be retained, but subject to an important qualification. Merely the fact that its sole member has gained no reasonable business advantage by incorporating the OPC, does not necessarily mean the OPC in question lacks a reasonable business purpose. Finally, the corporate veil of an OPC should be lifted for tax evasion only in exceptional circumstances which satisfy the test of necessity