Budget amendment limiting carry forward of losses can make distressed deals less attractive, say experts

Experts also pointed out that the amendment will make the Indian tax laws less flexible on this front compared to developed markets such as US and UK as they do not  totally disallow loss carry-forwards due to substantial ownership cha

A Budget 2025 amendment that proposes to limit carrying forward of business losses to up to eight years from the period of recording such loss is likely to make distressed deals or insolvency resolutions less attractive for acquirers, leading to more cases of liquidations, experts have said.

Earlier, when a company underwent an amalgamation or business reorganisation resulting in a substantial change in ownership, the eight-year clock would be reset. The new shareholders could carry forward the losses for eight years from the time of acquisition, allowing them to offset the losses against future profits to calculate their tax obligations.

The Budget presented on February 1 by finance minister Nirmala Sitharaman has done away with this reset, which means the  amalgamated entity can only carry forward losses for the remaining years from the original eight-year period.

Why the worry

While the amendment aims to plug misuse of the provision and prevent “evergreening” of losses by constant merger or amalgamation of loss-making companies with profit making ones, experts say this change could deter genuine buyers from acquiring loss-making companies that need a longer turnaround time.

This change will apply to all amalgamations from April 1, 2025.

There are several arguments why carry forward of losses shouldn‘t be as rigid as proposed, as the law already has provisions to curb misuse, experts at law firm Resolut Partners said.

“By restricting the ability to set off genuine past losses, this amendment may discourage financially stable companies from acquiring struggling businesses, ultimately making it harder to revive distressed entities,” said Isha Shah, Member, Resolut Partners.

“Utilisation of accumulated losses and availing the consequent tax benefit was usually incidental to a genuine commercial transaction, which is now proposed to be curtailed.”

While one can understand the government's intent to limit the benefit to curtail abuse of the provision, it might hurt genuine business rescues.

“This is especially concerning since there already exist several stringent riders to avail the loss carry forward set-off benefit,” Shah said.

For instance, to avail the benefit, at least 51 percent of the voting power must remain beneficially held by the same shareholders in both the years — in which the loss was incurred and the year it is being set off. If this condition is not met, such losses cannot be carried forward, she said.

Recoveries under IBC stand at 31-32 percent of the admitted claims, Insolvency and Bankruptcy Board of India chairman Ravi Mittal told Moneycontrol earlier.

Kumar Saurabh Singh, Partner at law firm Khaitan & Co, said the move will impact the interest of resolution applicants, while also increasing the due diligence needed at the time of evaluating such acquisitions.

“Acquirers will need to assess the remaining carry-forward period of the target company's accumulated losses, taking into consideration their overall revival plan and time involved, necessitating enhanced due diligence," said Singh.

“Limiting the period for carrying forward losses to eight years without giving intervening benefit of extension linked to change of control would surely reduce attractiveness for revival if the business as such may not have a going concern value/prospect,” he added. Bidders may prefer to take assets in itemised sale in liquidation rather than looking at purchasing companies in an insolvency resolution process," Singh said

While the Budget amendment does add a disadvantage for acquirers, ultimately the object of insolvency resolution can’t be merely benefitting out of the timeline for carrying forward losses, he added.

“So in that sense the proposed changes will be a check/incentive for timely action to resolve companies in distress. Otherwise their attractiveness may diminish and liquidation would become fait accompli in absence of tax benefits which were hitherto available,” Singh said.

Experts also say that the amendment will make the Indian tax laws less flexible on this front compared to the US, the UK and other developed countries, as they do not totally disallow loss carry-forwards due to substantial ownership changes.

“Instead, they (US and UK) impose usage caps, continuity of trade test etc., which ultimately allow businesses to utilise their past losses,” Shah said. This ensure that companies can still benefit from their past losses over time, as against losing them entirely. “Both jurisdictions allow indefinite carry-forward of losses, unlike India’s strict eight-year limit, which is now further tightened by removing the reset mechanism post-amalgamation,” she said.

With the government planning to simplify the Income Tax Act, 1961, it may also want to consider a fresh approach and consider easing of the loss carry forward provision as a whole, he said. “This would incentivize corporate takeovers of struggling firms,” Shah said.