Budget expectations 2022
M&A Tax
Current environment
M&A activity is expected to boost the rather lull environment that businesses are trying to overcome. While the government has been providing certain relaxations to uplift this scenario and provide much-needed relief, certain relaxations in the mergers and acquisitions arena are the need of the hour. We have discussed below key expectations and their rationale in this regard
Expectations -
Top four asks:
Expectation #1: Ensuring outbound mergers to be practical aka tax neutral
- The Companies Act, 2013, permits the merger of an Indian company into a foreign company, subject to certain conditions
- The merger of an Indian company with another Indian company is tax neutral if the prescribed conditions are satisfied. However, there is no specific exemption provided under the Income-tax Act, 1961 for the merger of an Indian company with a foreign company
- It is recommended that tax exemption be provided on the merger of an Indian company with a foreign company by way of the specific clause in Section 47
Expectation #2: Extending transition of losses from amalgamating a “non-industrial undertaking” company to an amalgamated company
- Under the existing provisions contained in Section 72A, the benefit of carry forward of losses and unabsorbed depreciation is, inter-alia, allowed in cases of amalgamation of a company owning an “industrial undertaking”
- The provision was inserted when India was a capital-intensive country. Currently, the country is moving from a capital-intensive to a capital-light model and the services industry is equally growing and contributing to the economy
- To encourage rapid consolidation and growth and to make India a competitive country in the services sectors, the benefit under Section 72A (to carry forward of loss and depreciation on amalgamation) should be extended to service industries, amongst others
Expectation #3: Rationalisation of taxation of contingent consideration
- India is an attractive market by international investors. With a focus on balancing profitable exits and correct valuations, most private equity players are increasingly introducing a combination of clauses in the shareholders agreement, including consideration payable in a contingent manner based on certain performance milestones being achieved by promoters
- In essence, such clauses incentivise promoters for good performance
- There is no clarity on whether such contingent consideration is to be taxed in the year of transfer or in the year of receipt, once the consideration crystallises
- It may be clarified by way of an explanation or clarificatory provision to Section 45 that in case of a contingent consideration, the contingent portion should be chargeable to tax as capital gains in the year in which the same is crystalised, irrespective of the year in which the transfer takes place (in line with the accrual concept – refer section 5 of the Act)
Expectation #4: Providing exemption to foreign shareholders in case of mergers and demergers
- Section 47(via) provides that transfer of shares of an Indian company transferred in a foreign amalgamation would not be regarded as a transfer, provided certain conditions are satisfied
- Similarly, Section 47(via) provides that transfer of shares of a foreign company that derive value substantially from assets located in India, in an amalgamation, would not be regarded as a transfer provided certain conditions are satisfied
- These sections seem to indicate that the exemption is provided only to the amalgamating foreign company and not to its shareholders
- It is suggested that specific provisions be incorporated in the Act to provide relief to the shareholders of the amalgamating foreign company, similar to Section 47(vii), which exempts shareholders in a domestic amalgamation
- A similar issue crops up for demergers - In the absence of exclusion from compliance with the Indian company law requirements in Section 47(vid), the benefit of shareholder exemption is not available to shareholders of the foreign demerging company in an overseas demerger. This has the effect of imposing a tax liability on the shareholders of the foreign demerging company and hence, against the principle of enabling tax neutrality for overseas demergers
- It is suggested that a proviso [as provided in section 47(vid) and 47(vid)] be incorporated in section 47(vid) to provide exemption to the shareholders of the foreign demerged company in spite of the demerger not complying with the relevant Indian company law provisions.
