Budget expectations has been saved
M&A – Tax
Despite unfavourable conditions being projected by macroeconomic indicators, the overall business sentiment among Indian corporates has been positive because of the implementation of game-changing tax reforms. In the current scenario, the government should deliver an impetus-oriented budget to ensure that the positive sentiment translates into economic momentum, supporting India’s journey to becoming a US$ 5 trillion economy. Corporate restructuring has always played an important role in a growing economy. Therefore, the government must take some positive, if not bold, measures while formulating the fiscal and tax policies for 2020 to incentivise mergers and acquisitions (M&A) deals and make the reorganisation of businesses less taxing.
The top five expectations from an M&A and corporate restructuring standpoint are as follows:
- Transactions resulting from the Insolvency and Bankruptcy Code (IBC) proceedings have been on the rise. Under the current law, acquirers of shares in companies pursuant to such IBC proceedings are subject to tax on account of potential valuation adjustments. To address this issue, the scope of transactions, being currently excluded from the purview of section 56(2)(x) of the Income-tax Act, 1961 (“Act”), ought to be extended to cover transactions that are undertaken in line with a resolution plan approved by the National Company Law Tribunal (NCLT).
- Due to court-approved amalgamations or demergers, non-cash transactions get tax neutrality benefits on meeting prescribed conditions. However, while issuing shares pursuant to such amalgamations or demergers, there is no specific exemption on the applicability of the super-premium rule under the section 56(2)(viib) of the Act, which can potentially distort the intended overall tax neutrality. Appropriate clarification is required to exclude non-cash transactions arising out of an amalgamation or demerger, which is otherwise tax neutral, from the purview of the section 56(2)(viib) of the Act.
- Cross-border transactions involving the merger of an Indian company with a foreign company was enabled by the Companies Act 2013. Tax neutrality benefits, which are otherwise available in case of a merger of any Indian company into another Indian company, have not been extended to transactions arising on account of such cross-border transactions. This has been one of the disincentives for Indian promoters considering cross-border deals. A specific exemption ought to be provided for such transactions to enable cross-border mergers.
- Limited liability partnership (LLP) vehicles, which have been popular among small and medium enterprises and service-oriented businesses, are being subject to reorganisations (such as merger with other LLP/companies). There is a need to extend tax protection and benefits (such as enabling carry forward of tax losses and providing tax neutrality) to LLPs and their partners on mergers undergoing reorganisations. This would bring the tax treatment for such transactions at par with that available to Indian companies on similar transactions.
- Real estate investment trusts (REITs) are expected to gain traction after the success of the first REIT-IPO earlier this year. The current tax framework for REITs has a potential tax leakage in the form of non-availability of dividend distribution tax (DDT) pass through in cases the property owning special purpose vehicles (SPVs) are not wholly owned subsidiaries in a holding company structure. This can potentially impair returns to investors. The option of extending the DDT exemption under section 115-O of the Act for such cases needs to be considered to promote investor participation in REITs.
Additionally, the REIT tax framework does not provide tax neutrality to REIT unit sponsors to swap real estate properties. Likewise, the swap of interest in an LLP for REIT units is not regarded as a tax neutral transfer. Providing specific exemptions for these transactions will encourage more industry players to set up REITs.