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Budget 2014: M&A Expectations

Published on Thu, Jun 26,2014 | 21:36, Updated at Wed, Jul 02 at 18:28Source : 

By: Rakesh Nangia, Managing Partner, Nangia & Co.

The news has been released and the Hon’ble Finance Minister Shri Arun Jaitley is all set to present the Union Budget in the second week of July. As oppose the general expectations and sentiment trending around the nation, the expectations this time from our Finance Minister is as high as it can be. And the Hon’ble Finance Minister will have a tough task in his hand to meet the expectations of the common man and also address the economic and industry issues.

The upcoming budget has raised lot of hopes from the new Government and is expected to bring sight of relief to the investors and to the public at large. The Hon’ble Union Minister of Law has positively supported the current investor sentiment by stating that ‘the government will avoid retrospective taxation and strive to provide stable policies such that foreign investors don't face any uncertainty’. Probably, this statement send some positive signals to counter the changes proposed in the Union Budget 2012-13 relating to the General Anti-Avoidance Rules (‘GAAR’) and retrospective amendment in capital gains taxation on indirect transfer of Indian assets which were ambiguous and had been widely criticized by the global investors.

So what can be expected from the new Government in the Union Budget from Mergers & Acquisitions perspective? The demand from the M&A experts over clarity on tax laws, and extending tax benefits on certain inorganic transactions have been existent for some years, however, nothing much seemed to have changed, rather become more worrisome in some areas during the last few years. The time is ripe now to take corrective action to boost the confidence of global investors and encourage foreign investment in India. The tax policy should not just aim to increase the Government treasury and reduce fiscal deficit but also aim to address other macro-economic and industry issues. The recent enactment of Companies Act, 2013 has affected the M&A landscape in various ways and now, it’s the turn of tax policy of the Government to introduce radical changes in the legislation by bringing more clarity on the existing tax regime and bring in new provisions to clarify the taxability on transactions which are now possible under the new Corporate Law.

This article highlights some key areas where changes can be expected in M&A tax arena from the upcoming budget session:

  • Clarity on the applicability of GAAR provisions – The Government is likely to defer implementation of the controversial GAAR provisions by one more year to April 2017 and provide grandfathering provisions for any arrangements/ investments existing as on the date of commencement of GAAR. Such a bid would improve the business sentiments and allow more time to corporates to restructure their portfolios in a tax-efficient manner
  • Clarity on the taxability of indirect transfer of shares of Indian company/ assets – The threshold to determine the term ‘substantial’ used in Explanation 5 to Section 9(1)(i) of the Income Tax Act, 1961 (‘Act’) relating to an indirect transfer of Indian assets needs to be clarified. The revised Direct Tax Code has recommended 20% threshold to determine the substantial test. It is expected to increase the recommended threshold of 20% to 50% while calculating the ratio of Indian assets against the value of global assets for triggering tax incidence in India. Government should also mull the possibility to do away with this retrospective amendment which was brought earlier, post Supreme Court’s judgment in the case of Vodafone
  • Taxability on cross border mergers – The Companies Act, 2013 provides for merger of an Indian company with a foreign company subject to compliance with certain conditions, although such provisions of outbound merger has not been notified yet. The tax authorities have not yet released any clarification on taxability of such outbound merger, and the same can be expected to be released in this year’s Union Budget.
  • Clarity on taxability of Real Estate Investment Trusts (REITs) - A REIT is a company that owns, and in several cases, operates income-producing real estate. REITs can own different types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers and hotels etc. REIT is fairly a new concept in India. However, more and more players are infusing funds through REIT structure. Past few months of media coverage has suggested that the Government in consultation with Central Board of Direct Taxes is contemplating options to provide tax breaks for REITs in the upcoming budget. An appropriate and lucrative tax break would act as a big boost to the investments in the sector.
  • Extending benefit of carry forward of losses on amalgamation to other sectors – The growing contribution of tertiary sector in the country’s GDP necessitates allowing carry- forward of losses under section 72A of the Act in cases of amalgamation for all services sector (including infrastructure), which at present, allows such benefit of carry forward of losses’ only to certain industrial undertaking
  • Allowing MAT credit and deductibility of certain expenses on amalgamation - Specific clause may be introduced under the Act to allow carry forward of MAT credit of the amalgamating company to the amalgamated company post amalgamation. Similar benefit may be introduced under the Act to allow the deductibility of certain expenses as provided under section 43B of the Act, of the amalgamating company or demerged company or transferor company to the amalgamated company or resulting company or transferee company on payment basis, in cases of amalgamation, demerger or slump sale
  • Exempting domestic mergers from applicability of Section 79 of the Act - Section 79 of the Act provides that a change of more than 49% voting rights of a closely held Indian company would result in denial of carry forward and set-off of business losses. However, when change in the shareholding of the Indian company occurs by virtue of amalgamation / demerger of a foreign holding company with another foreign company, the provision of Section 79 may not trigger. Such a relaxation from provision of Section 79 of the Act is not there for amalgamation/ demerger of one Indian holding company with another. It is expected that the Government should extend the scope of exemption under this section, from foreign merger/ demerger to domestic merger/ demerger of Indian companies also.
  • Tax break on business transfer by Project office of foreign company to their Indian subsidiary – India has seen remarkable growth in presence of foreign companies in its territory. Most of the foreign companies operate in India through project or branch offices initially and once their operations increase, they prefer a more stable presence locally in form of a wholly owned subsidiary company. Structuring transfer of business by Indian project office to wholly owned subsidiary can be granted a special tax-exemption, which may be subject to fulfillment of certain conditions as the Central Board of Direct Taxes may deem fit. This will facilitate the decision of foreign companies wanting to have a long term and stable presence in India in form of a local corporate body

The major economic issues such as controlling Inflation, stabilizing the fiscal deficit, catalyzing the industrial and infrastructure growth and finance etc are some of the major issues that need to be addressed urgently. In light of the present global scenario and economic environment in the country, it would be interesting to see how and to what extent these recommendations are adopted and how the Indian Government is able to restore the global investor’s confidence in the Indian markets and push the tax reforms in the country.


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