Last year India witnessed remarkable M&A activity with deal values reaching an all-time high. Further, with technology and e-commerce making rocketing advancements, India has seen significant foreign investment inflows and cross border deals, both inbound and outbound. Furthermore, with Make in India and the government’s constant efforts to improve its ease of doing business ranking, M&A activity is bound to gain more buoyancy. This article captures the industry’s expectations from the first budget of the new finance minister which can facilitate deal activity.
Long-term capital gains on sale of listed shares
The last budget introduced a levy on long-term capital gains from sale of listed equity shares and units of equity-oriented mutual funds. However, gains up to 31 January 2018 were grandfathered by providing market price as on 31 January 2018 as deemed cost of acquisition for such shares. However, there is still ambiguity with respect to availability of such grandfathered cost base in case of gains from transfer of shares acquired as a result of certain tax neutral transactions (for instance, mergers, demergers, gift, etc.) after 31 January 2018. There is a need to expressly clarify that grandfathering provisions would be applicable in such cases.
Another area which needs clarification is in relation to availability of grandfathering benefit under the tax treaties with Mauritius, Singapore and Cyprus in case of shares acquired pursuant to corporate actions. While the treaties were amended to tax capital gains tax in India on sale of shares of any Indian entity held by a non-resident, there are specific provisions in these tax treaties that grandfather the benefit and exempt capital gains in India in respect of shares acquired before 1 April 2017. It should be clarified that grandfathering provisions under these tax treaties should be available even to shares received after 1 April 2017 as a result of corporate actions such as amalgamation or demergers pursuant to the shares held prior to 1 April 2017.
Insolvency and Bankruptcy Code
While the Insolvency and Bankruptcy Code (IBC) has been lauded as a commendable move by the government for providing resolution mechanism for sick companies, the tax cost still acts an impediment. Though the Minimum Alternate Tax (‘MAT’) provisions have been amended to provide deduction of losses including depreciation to such companies, book profits arising from waiver of debt as a result of haircut taken by lenders result in high MAT cost—a major bottleneck in the resolution process. Such haircuts should be specifically exempted from the levy of MAT. Also, acquisition of shares of a company undergoing insolvency resolution process under IBC should also be exempted from taxation under the deeming fiction of section 56 of the Income-Tax Act. Further, considering that the main objective of a resolution plan under the IBC is to maximise the value of assets of the company undergoing insolvency resolution process and thereby for all creditors, in any case, a specific carve-out should be provided under General Anti-Avoidance Rules (GAAR) for any transaction undertaken as a part of the resolution plan.
Further, the Companies Act, 2013, and the RBI regulations now permit outbound mergers, i.e. merger of an Indian company into an overseas company. The provisions of the Income-Tax Act should also be amended to provide for tax neutrality for such mergers.
Provisions introduced for taxing excessive share premiums have in fact thwarted angel investment activities. Such provision need to be simplified so that its application is only in cases of intended situations. Further, it should be clarified that in any case such provision should not be applicable in case of premiums arising on account of mergers/demergers.
Certain other clarifications expected to ease M&A process and reduce litigation would be:
- Higher threshold for turnover and asset base in case of tax neutrality for conversion of a company into LLP.
- Tax neutrality for merger of LLPs since LLPs are now more and more employed for business operations.
- Clarification on tax neutrality in case of demergers, where the demerged assets and liabilities are recorded at fair value in line with accounting mandate under Indian Accounting Standards (IndAS).
- Enabling provisions for transfer of MAT credit in a scheme of amalgamation/demerger.
- Specific provision enabling revision of tax returns to give effect to the scheme of arrangement even after the due date of filing revised returns, especially considering the amended curtailed timelines for revision of return.
- Express exemption for schemes sanctioned by NCLT from GAAR provisions.
Further, to align Indian tax provisions with practices adopted globally, a few provisions like tax deferral in respect of capital gains arising on share swap till actual sale of shares, and permissibility of interest deduction in case of debt push structure for acquisition, should be deliberated. Even providing for a fast-track window for clearances under Section 281 and nil/lower withholding tax certificate may ease M&A transactions considering many such are time sensitive.
Clarity about tax provisions, quicker disposal of litigation, and a clear and consistent tax law will further boost M&A activity in India.
Views are personal.
Vishal Gada is partner, Zeel Jambuwala is principal, and Jay Shah is senior associate at Dhruva Advisors LLP.