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Apart from the ongoing World Cup fever, another thing that made headlines was the much-awaited maiden budget of Finance Minister Nirmala Sitharaman. There were huge expectations from the Government to bring in measures to boost mergers and acquisitions (MnA) and restructuring activities in our country. This article summarises the key amendments impacting MnA activity.

Let us begin with the amendment in section 2(19AA) of the Income tax Act, 1961 (the Act) dealing with the definition of demerger. Currently, one of the conditions is that the properties and liabilities of the undertaking must be transferred by the demerged company at book values as on the date immediately preceding the date of demerger. The Budget has added a proviso that this condition it shall not apply if the resulting company records assets and liabilities at a value different from the book value, in accordance with and to comply with the applicable Indian Accounting Standards (Ind AS).

Few immediate repercussions of this amendment are as follows:-

a. Parity with accounting– It harmonises tax laws with accounting provisions under Ind AS that require the resulting company to record assets and liabilities at fair values – when entities are not under common control.

b. Higher depreciation in the books– As the assets would be recorded at fair value in the books, the resulting company would be able to claim higher depreciation. As per explanation 2B to section 43(6) of the Act, the written down value of the block of assets for the resulting company would be the same as that in the hands of the demerged company. Hence, tax depreciation available to the resulting company would be lower compared to book depreciation. Further, the increased depreciation due to increased block of assets in the books reduces reportable profits for the resulting company.

One factor worth considering is that this amendment only specifies fair valuation conducted in accordance with Ind AS and not Indian Generally Accepted Accounting Principles (IGAAP). Prior to this amendment, a view was prevalent that the condition under section 2(19AA) referred only to transfer from the perspective of the demerged company, and therefore, the resulting company had a choice of recording the assets and liabilities at fair value. With this amendment, it appears that the tax neutrality of demerger for companies under IGAAP adopting fair valuation may come under the tax scanner.

The next most important amendment in this Budget is the introduction of buyback tax (BBT) on listed shares under section 115QA of the Act. As per the extant provisions, buyback of shares by listed companies was taxable only in the hands of the shareholders, in the same manner as transfer of such shares – which would be either taxable at 10% or 15% depending on the period of holding. This made buyback a cheaper route of rewarding the shareholders as compared to dividend.

As per section 115QA of the Act, a 20% BBT is payable by domestic unlisted companies on the difference between the consideration paid by the company and amount received by it at the time of issue of such shares. Further, section 10(34A) of the Act provides an exemption in the hands of the shareholders on the income received on account of buyback referred to under section 115QA.

Few immediate repercussions of this amendment are as follows:

a. Impact on ongoing buybacks– As this amendment is immediately effective, all listed companies who have already announced buybacks (price/ quantum etc.) and are in the process of completing it will be hit by this new tax, thus impacting their cash flows adversely.

b. Operational difficulties Shares of listed companies are held in demat form and are fungible. In such a situation, listed companies would face the challenge of how to calculate the issue price of such shares tendered in the buyback. If the existing rules are applied to listed companies as they are, it may lead to absurd results. Hence, it is imperative that the Government brings about some quick clarification in this regard.

c. Inadvertent double taxation– While computing this tax, the company will reduce the amount it has received on issue of such shares. Generally in case of a secondary acquisition, a shareholder (i.e. buyer) might have purchased those shares at a much higher amount than the issue price. Since last year, long-term capital gains on sale of listed shares are also taxable. Therefore, the seller must have paid tax on the difference between the selling price and his/ her cost. Hence, by limiting the deduction to amount received by the company on issue of shares only, this provision will lead to double taxation to some extent.

Section 79 of the Act deals with lapse of business losses of certain companies on account of change in shareholding. This section has been amended to provide that where the Board of any company has been suspended due to an application made by the Central Government under section 241 of the Companies Act, 2013 and new directors have been appointed, a change in shareholding of such company, its subsidiary and sub-subsidiary would not impact the carry forward and set off of business losses of these companies. Further a deduction of the aggregate amount of unabsorbed depreciation and loss brought forward is also granted to such companies while calculating book profits under section 115JB of the Act. The above amendments attempt to bring parity in tax benefits given to distressed companies regardless of whether their resolution is being undertaken through Insolvency and Bankruptcy Code or otherwise. This is certainly a welcome move.

Similar to every year, this year’s Budget has certain hits and misses as well. The biggest hit undoubtedly is the non-introduction of the estate duty law. However, although expected, the Budget did not provide any respite from tax on long-term capital gains arising on sale of listed shares. In addition, the Budget has proposed to increase the minimum public shareholding to 35% in all listed companies. This could compel the promoters of such companies to sell their shares, gains from which would be taxable under the normal provisions of the Act as well as be subject to minimum alternate tax on book profits. Hopefully, the next budget or the Direct Tax Code will provide some respite from this taxation.


Author: Falguni Shah – M&A Tax Partner, PwC India and Nidhi Mehta – Associate Director – M&A Tax, PwC India

The views expressed in this article are personal. The article includes input from Aaditi Kulkarni – Assistant Manager, M&A Tax, PwC India and Punit Gala – Associate, M&A Tax, PwC India.


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July 2024