Economies across the globe are under distress due to the COVID-19 pandemic and have brought more than 35% business organisations in India at the verge of its closure. To combat the ongoing circumstances many business organisations have planned to curb down their cost of operations by way of retrenching their employees. This strategy of retrenchment adopted by such organisations may be a ray of hope to survive the situation of distress but, would be a nightmare for its employees resulting in mass unemployment. Therefore, the need of the hour is to restructure the corporate entities in such a way which would not only succour their survival but would expedite its revival from the situation.
Corporate restructuring is a strategy opted to significantly modify the structure or the operations of a corporate entity. It can be driven by external factors requiring a change in the organizational structure or business model of an entity, or it can be driven by the necessity to make financial adjustments to its assets and liabilities. Often, restructuring plans are necessary to cope with the constantly changing demands of technology that competitors are embracing, survive adverse economic weather, or poise the corporation to move in an entirely new trend
The process of restructuring is generally carried by way of mergers/amalgamations, acquisitions/takeovers, divestitures/demergers, slump sale, business sale; joint venture, strategic alliance, financial restructuring (buy-back, alteration & reduction). However, Merger, Amalgamation and Demergers are commonly practised as a means of corporate restructuring in India.
There are various factors to be taken into consideration for corporate restructuring which are as follows:
- Legal & Procedural
- Accounting
- Human & Cultural
- Taxation & Stamp Duty
- Valuation & Funding
However, we would be emphasising on the most important aspect of corporate restructuring in this article i.e. Taxation and Stamp Duty.
TAXATION & STAMP DUTY ASPECTS OF CORPORATE RESTRUCTURING
It is one of the most imperative aspects of corporate restructuring and plays a pivotal role. Often a restructuring though operationally and technically viable may fail due to taxation and other issues. Capital Gain; Set-off and carry forward; Deemed Dividend; Payment of Stamp Duty on the scheme, payment of stamp duty on movable and immovable properties are important aspects to be taken into consideration for corporate restructuring. Financial aspects of merger denote financial benefits. Stamp duty and taxation aspects are closely linked to the financial aspects. Similarly, the incidence of stamp duty is an important consideration in the planning of any merger. In fact, in some cases, the whole arrangement in which the merger is sought to take place is carefully chosen after considering the stamp duty.
As discussed above let us now discuss the provisions of Income Tax Act, 1961.
Carry forward and set off of an accumulated loss and unabsorbed depreciation allowance
- Under the provisions of section 72A of Income Tax Act,1961, carrying forward and set-off of accumulated business loss and unabsorbed depreciation allowance in certain cases of amalgamation which are as follows:
- Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company.
- There is an amalgamation of a banking company referred to in clause (c) of Section 5 of the Banking Regulations Act,1949 with a specified bank.
- Where one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in a similar business.
The amalgamated company can carry forward the losses of the amalgamating company for a period up to 8 years subjected to certain conditions mentioned in the Act.
Provisions related to Capital Gains
- If there is any capital gain on transfer of any capital asset in the scheme of amalgamation, by an amalgamating company to the amalgamated company, such capital gains shall be exempt from tax provided the amalgamated company is Indian.
- If capital gains arising on transfer of shares held in an Indian company by amalgamating foreign company to amalgamated foreign company, such capital gains shall be exempt from tax but there is a proviso to this exemption.
- Capital gains arising from the transfer of shares in the scheme of amalgamation on the fulfilment of a few conditions which are given in the act are exempt from tax.
- In case the shares received from the amalgamated company are later sold or transferred, the cost of shares of the amalgamating company shall be the cost of shares of the amalgamated company and also for determining whether the shares in the amalgamated are long-term capital assets or not, the period of the holding shall be computed from the date of acquisition of shares in the amalgamating company.
- Depreciation charge on assets are waived and are not strictly observed in case of amalgamation or demerger of companies where an asset is transferred to an Indian amalgamated or resulting company under the scheme of amalgamation or demerger.
- The chargeability of Section 45(1) under the Income Tax Act to attract capital gains tax liability of capital assets is not to be applied in a scheme of amalgamation or demerger of companies on the presupposition that transfer of the asset is not to be constructed as a transfer. In terms of Section 43C of the Act, while computing the profit or loss on the sale of assets as stock in trade which has become the property of the amalgamated company under a scheme of amalgamation, the cost of acquisition of such asset to the amalgamated company shall be the cost of acquisition of such asset to the amalgamating company plus any increase in cost due to any improvement made thereto and expenditure incurred wholly and exclusively in connection with such transfer.
- There are several other provisions also but these are some of the main provisions which are very effectively promoting the reorganization of companies because these provisions have made the taxation policy for reorganization very relaxed.
- Provisions concerning the Stamp Duty:
- The law relating to the payment of stamp duty on the order of Hon’ble National Company Law Tribunal (NCLT) in case of a Merger is subjected to the stamp duty laws of the state who beholds the jurisdiction of the asset. Also, in a few cases where the assets are in two or more states things may get murkier and hard to deal with financially and logistically. Some states like Maharashtra, Gujarat, Karnataka, Rajasthan etc have drafted their separate stamp acts and have made definite provisions for payment of Stamp Duty on the order passed by the NCLT under provisions of section 232 of the Companies Act, 2013, while some other states like Madhya Pradesh, Andhra Pradesh etc which have adopted the Indian Stamp Act, 1899 have made state amendments to impose Stamp duty on the order passed by NCLT. The remaining states which neither have their Stamp Act nor have they made any State Amendment in the adopted Indian Stamp Act, 1899, impose Stamp duty as per the order passed by the Hon’ble National Company Law Tribunal (NCLT) or adhere to the judgment of Hon’ble Supreme Court of India as put in place in the judgment of Hindustan Lever.
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