Budget Expectations 2025: Mergers and acquisitions

Vivek Gupta, Partner, Deloitte India

Current environment

• During the first nine months of 2024, the total value of deals in India surged by 66 percent compared with the same period in 2023, driven primarily by high-value transactions.

• Businesses across various sectors in India intend to further use cross-border M&A to strengthen their international presence, acquire new technologies and consolidate resources.

• Considering the above, the following are the expectations for the upcoming Budget, which will help streamline tax structures and improve the overall ease of doing business.

Expectations

Top asks
•Ask #1: Taxation on contingent consideration

• At the time of making investments in India, most investors plan to introduce a combination of clauses in the shareholder’s agreement, including contingent consideration based on certain performance milestones.

• In essence, such clauses incentivise promoters to achieve better performance after the deal.

• No clarity exists on whether such contingent considerations should be taxed in the year of transfer of shares or in the year of receipt after the consideration crystallises.

• It may be clarified by an explanation or clarificatory provision that the contingent portion should be taxable as capital gains in the year it is crystallised, irrespective of the year the transfer of share takes place.

• The introduction of a mechanism to defer taxation until the contingency is realised would improve tax certainty for both parties involved in the transaction.

Ask #2: Applicability of Section 56(2)(x) on listed company trades

• Section 56(2)(x) of the Income Tax Act, 1961 serves a critical role in preventing tax avoidance through undervalued asset transfers. Still, its interpretation in the case of the trade of shares of listed companies in an off-the-exchange transaction could lead to unintended tax liabilities.

• Anti-abuse gains arise in the hands of the buyer if the traded price of the listed entity on the date of receipt of such shares exceeds the transaction price as agreed between the parties for an off-the-exchange transaction.

• Generally, a significant time gap exists between the signing and closing of a transaction involving the listed entity due to open offer obligations, which are required to be followed per the capital market regulations. Thus, instances occur where the traded price of the listed company increases in the interim period, leading to unintended tax consequences for the buyer.

• To avoid unnecessary tax burdens and provide greater clarity for M&A and investment activities, it would benefit the acquirer to receive clarification relating to this issue.

Ask #3: Exemptions for enabling carry forward of business losses in case of internal group structuring

• According to Section 79, no loss incurred in any prior year is permitted to be carried forward and set off in the event of a change in shareholding of a closely held company unless shares carrying not less than 51 percent of the voting power, are beneficially held by persons who held such shares in the year in which the loss was incurred.

• Currently, differing judgements exist regarding the interpretation of “change in beneficial ownership” in the absence of a specific definition.

• Section 79 should introduce exemptions for internal group restructuring to enable the carry-forward of business losses where the beneficial ownership of group entities continues to be the same.

• This would ensure that tax losses can continue to be used post-reorganisation in case of legitimate group restructurings.

Policy recommendations

Recommendation #1: Introduction of tax consolidation regime

• In India, multiple subsidiary structures are prevalent to house businesses in separate entities under the parent company for various commercial reasons.

• However, such group structures result in various challenges from a tax and regulatory compliance front for both the taxpayer and tax department.

• Adoption of the “Group Tax Consolidation Regime” is crucial and will prove to be beneficial for the taxpayer as well as the department in various ways, including:
  o Reduced tax compliance costs for corporate taxpayers
  o Efficient usage of tax losses through set-offs at the group level, thereby lowering the tax burden on large conglomerates operating in various sectors
  o Reduced tax administration costs for revenue authorities due to a reduction in the number of litigations

Recommendation #2: Tax clarity on internalisation

• A noticeable rise in the “internalisation” of India-based groups is evident through the integration of ownership and the consolidation of the entity’s value back into India.

• Considering that “internalisation” involves consolidation of value at the Indian level, it is expected to bring long-term benefits for the economy, both from a tax and exchange control perspective.

• Considering there is no third-party transfer and the value remains within the group, specific policy amendments enabling internalisation in a speedy and tax-efficient manner shall help boost shareholders’ confidence and strengthen the Indian market by consolidating value in India.