Business restructuring – plugging loopholes, easing bottlenecks but lacks bold play

Amidst high inflation risk and continuing Covid uncertainties, Union Budget 2022 has provided a booster dose of CapEx spending with an objective of achieving an economic multiplier effect to inoculate against future disruptions. With hardly any room for changes to the personal and corporate income tax structure, the spotlight is on ease of doing business in India which can be a stimulus for the economy’s much required recovery.

Our economy and financial sector is definitely receiving an impetus from global investments and successful IPOs. Ambiguities in the current tax regime adds to the challenges faced by such investors and tax administrators. Undoubtedly, the investors groups are looking for tax certainty instead of keeping track of mounting litigations with the taxmen. For ease of compliances, speedy resolutions and to create an investor friendly climate, the Finance Bill 2022 has nailed at the following :

♦ Capping of surcharge on sale of unlisted shares by private investors

Surcharge in case of individuals with total income more than Rs. 5 crores, including capital gains arising from transfer of unlisted securities, is 37 percent. To give a spur to private investments, surcharge on gains from unlisted shares shall now be capped at 15 percent The amendment shall result in reducing the effective tax rate for short term and long-term gains by approx. 7 and 5 percent respectively and be effective from FY21-22. 

♦ Ambiguity regarding legality of assessment in business reorganisations to be settled

Reorganization / restructuring of businesses are governed by the Corporate and Income-tax laws and it is concluded only after receipt of approval from the High court / National Company Law Tribunal (NCLT). Hon’ble Supreme court in the case of Maruti Suzuki India Ltd. (Civil appeal no. 5409 of 2019) has held that the income tax proceedings and assessments carried on and completed on the predecessor shall be illegal since the predecessor assessee ceases to exist. Ultimately, this contributed to ambiguity with respect to continuity of past tax proceedings in case of re-organisation. To plug this loophole with effect from FY 21-22, it is proposed  that the assessment / reassessment / other proceedings carried out during the pendency of the business reorganization shall remain valid and be deemed to have been made on the successor itself. This amendment is proposed to be effective from FY21−22.

♦ Mechanism for revising return for interim period between appointed date and effective date

Orders from the NCLT approving business reorganisations and the Scheme of Arrangement have a retrospective appointed date. The interim period between the appointed date and the effective date of final order requires revision of return by the successor company. Mostly, the window available for revising the return is closed by the time NCLT approvals are received. This is a genuine difficulty faced by the corporates wherein they are obligated to obtaining specific approval from the CBDT for filing revised return of income adding to overall time and effort for effecting the reorganisation. In view of Hon’ble Supreme Court’s decision in case of Dalmia Power Ltd and Dalmia Cement (Bharat) Ltd (Civil Appeal Nos. 949699 of 2019), the Finance Ministry has brought in a welcome move which enables companies to file of revised return after the due date, once the adjudicating authority’s order is received. This amendment is proposed to be effective from FY21−22.

♦ Cross border restructuring and speeding the insolvency resolution process

With existing global economic scenarios, MNCs which cannot sustain their business operations are looking to wind up their business in unviable overseas jurisdictions. Considerable delays are faced by companies in completion of the insolvency resolution process. For speedy resolution in cross border insolvencies, the ministry has not only introduced cross border insolvency framework, but it has also proposed a fixed timeline of 30 days for the Adjudicating Authority to approve the resolution plan. Importantly, timeline for voluntary corporate exits is to be crashed down from two years to six months. Quick incorporation and speedy exit are sure to attract more investments and rank up ease of doing business indices for India.

♦ Streamlining deletion of outstanding demand for sick companies

Pursuant to order passed by any adjudicating authority under Insolvency and Bankruptcy Code, 2016 (IBC), demands raised on sick companies are to be reduced from the tax authority’s records. To synchronise, the time frame under the IT Act vis-à-vis the IBC, the ministry has proposed a mechanism which will give effect to the competent authority’s orders and reduce / delete the tax demands (including interest, penalty, fee). These amendments will take effect from FY21-22.

♦ Aiding investment in loss-making Public sector undertakings (PSUs)

The government is actively looking to increase public private partnerships in strategic PSUs. With recent deals in case of Air India, NINL etc., it has been identified that providing a level playing field to the investors will bring a surge in such investments. With a view to allow the buyer of loss-making PSUs to avail set-off of erstwhile PSU’s losses, restriction to carry forward loss after the PSUs strategic disinvestment has been done away with subject to minimum 51 percent voting power. The amendment is proposed to be effective from FY21−22.

♦ Clarification on reduction of goodwill from block of assets to be considered as ‘transfer’

Finance Act 2021 restricted claim of depreciation on goodwill and required an adjustment to the block of assets in the tax books. Reduction of goodwill from block of assets has now been clarified to be treated as ‘transfer’ for purpose of capital gains and written down value will continue to be available as cost of acquisition. Considering the earlier amendment, the above amendment will apply retrospectively from FY 20-21.

Likewise, the government has repealed several laws easing the procedural and compliance load on the corporates. Although the expectation is to steer the economy towards a higher growth trajectory by bringing in the above welcome moves, the ministry has also proposed certain amendments to plug certain loopholes as well as brought in anti-avoidance measures

Directors of private companies in liquidation are liable to pay the non-recoverable tax dues. Amendment is to be brought in with the intent to clarify that such provisions also apply to directors of all closely held companies and not restricting to private companies in liquidation

Bonus and dividend stripping have been made applicable to the pooled investment vehicles like Real Estate Investment Trust (REITs), Infrastructure Investment Trust (InvITs), Alternative Investment Fund (AIFs). Bonus stripping provision is now applicable in case of all securities and not just units. This denies capital losses created by the taxpayers.

Additionally, concessional tax rate of 15 percent on dividend income from foreign subsidiary companies in the hands of Indian holding companies is to be done away with, increasing the tax cost from 17.16 percent to 25.17 percent. This acts as a dampener for bringing back cash into India. Alternate tax effective options to repatriate profits from its overseas subsidiary may have to be explored by Indian groups.

Overall, Budget 2022 is definitely one step closer to aid start-ups and offer ease of compliance to India Inc., however, some of the investors’ wish lists including carry forward of losses in case of group restructuring schemes, relaxation of exemption conditions for conversion of firm into LLP / consolidation of LLPs have been dropped. As the proposals are betting on India’s growth from infra spending, robust exports, strong capital flows and impressive vaccination rate, the main crux lies in its execution to lead India from 75 to 100.  Just as water is the elixir to life; execution is the elixir to Amrit Kaal.

Mansi Mehta, Senior Manager and Miloni Mehta, Manager with Deloitte Haskins & Sells LLP