Tax proposals can change Mergers and acquisitions landscape in India

Caucasian businessman using digital tablet in cafeThe new Government has been focusing on improving the business environment as well as economic growth and development. Hopefully, this will lead to “Acche Din” for Mergers and acquisitions. A more robust and transparent tax and regulatory environment is key to transformation in investor sentiment and appetite.

The discussions on deferring GAAR have already given a sort of a breather. However, the overriding effect of GAAR over DTAAs is something, which should be removed. Moreover, GAAR provisions should be enacted to ensure that the same income is not taxed twice in the hands of the same taxpayer in the same year or in different assessment years and specifically incorporated as law. Furthermore, complementary adjustment/relief should be provided for in the hands of the other party when GAAR is applied so that GAAR does not become an avenue for revenue generation on an arbitrary basis.

There is still lack of clarity on what is “substantial” with regard to retrospective amendment on indirect transfers. In that context, only “transfer of a controlling interest” in a foreign entity deriving its value substantially from assets located in India should attract tax in India. A threshold limit of transfer of more than 50% beneficial interest in the capital of a foreign entity and/or transfer of more than 50% voting power of a foreign entity could be prescribed to define “transfer of a controlling interest”.

Furthermore, there could be other exemptions provided in context of taxation of indirect transfers, i.e., no Indian tax should be imposed where say for example the shares of the foreign company are listed and traded on a stock exchange outside India or if there are intra group transfers (where the ultimate control is not transferred outside the group) or the transactions are otherwise not ”transfer” as per law (for example – gift) or transactions, which do not result in any transfer per se (for example primary infusion in company for acquisition of shares) or shares received by shareholders of a foreign company (which have indirect stake in India) under a swap pursuant to foreign companies amalgamation/demerger. To encourage more foreign investments in India, it could be considered to exempt P-Note holders from the applicability of indirect transfer provisions.

From a repatriation perspective, changes to the DDT and buy-back tax are inevitable. The roll over benefit/DDT credit should be given for all dividends subjected to DDT (not only for dividends from subsidiaries) and the benefit should be allowed for multi-tier corporate structures as well. Appropriate specific provisions should be made to treat such DDT as tax on dividend receipt of non-resident shareholders to claim credit in their home countries without affecting Indian revenue. Concessional tax rate on foreign dividends should be extended to all persons. A mechanism for availing credit of buy-back tax should be notified as imposing a tax, as a final tax with no credit available is grossly unjustified.

Moreover, no tax should be levied on repatriation of funds by the offshore company to its investors due to dividend distribution, buy back, redemption, capital reduction or liquidation by the offshore company, to the extent that repatriation amount relates to the amount realized by the offshore company on sale of Indian assets on which taxes have been duly discharged, or on which no taxes or reduced taxes are due on account of tax provisions or treaty benefits available, as may be applicable.

Considering that acquisition through amalgamation is increasing, the benefit of carry forward of losses, pursuant to amalgamation, should be extended to all companies irrespective of the line of business.

Transactions such as transfer of shares in a foreign company by a resident or domestic company pursuant to amalgamation or demerger abroad should be exempt from capital gains tax, provided that such amalgamation or demerger is exempt from tax under domestic tax laws of the foreign country in which such amalgamation or demerger takes place.

Even in case of business transfers, there needs to be clarity on difference between “slump sale” and “slump exchange”. Moreover, clarification on treatment of negative net worth in computing capital gains in case of slumps sale will be helpful, given divergent judicial precedents.

Some other amendments that are required include providing exemption from taxation to transactions such as receipt of shares by amalgamated company or resulting company pursuant to amalgamation or demerger, receipt of shares by Trust on settlement, genuine business/commercial transactions, issue of shares etc.

Another aspect, which becomes relevant in context of deals, is “Goodwill” arising on acquisitions and whether or not depreciation can be allowed for tax purposes. While there is an Apex Court ruling in context of depreciation on Goodwill arising on amalgamation, the law needs to be modified to include Goodwill to be included in the block of assets for depreciation purposes.

In the interest of development, Minimum Alternate Tax (MAT) should not be levied for industrial undertakings in the business of infrastructure and SEZ developers and units. Importantly, MAT-related provisions should be amended to clarify that it will not apply to foreign companies.

To sum up, while the endeavour is to help more investment flow in India and overall growth, the legislature needs to tighten up tax laws/rules and wipe off any ambiguity on various critical aspects affecting overall Mergers and acquisitions scenario.

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Article was first published on on 20 February 2015

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