Corporates going in for debt restructuring may face rough weather on the income-tax front when the Direct Taxes Code (DTC) comes into play from April 1, 2012. This is because the DTC provides that loans waived by lenders will be treated as income in the hands of the borrowers and taxed accordingly.
It may then not matter whether the loan was utilised for acquisition of capital asset or for revenue expenditure purposes, say some tax experts.
The DTC Bill seeks to directly bring within the scope of income the amount of remission or cessation of any liability by way of loan, deposit, advance or credit.
This could affect corporate debt restructuring (CDR) activities in the country. Many tax experts are of the view that the clause concerned is quite broad and vague, which could lead to litigation.
“This provision could create issues for debt restructuring activities,” Mr Samir Kanabar, Tax Director, Ernst & Young, told Business Line.
CDR packages may not always involve waiver of loan repayments, but there could be cases where loans are rescheduled or partial waiver is agreed.
The Code proposes to treat such remission (of loan, deposit, advance or credit) as income for tax purposes. However, the same may require reconsideration in light of genuine debt and financial restructuring exercises to mitigate undue hardships.