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Last Updated : Jul 14, 2019 08:21 AM IST | Source: Moneycontrol.com

'These 7 key proposals in Budget 2019 will have potential impact on merger and acquisition activities'

It is a well-known fact that a spur in merger and acquisition activities is predominantly an indication of trust among the investor fraternity of a country

Moneycontrol Contributor @moneycontrolcom
Representative image
Representative image

Anil Talreja and Madhvi Jajoo

Budget 2019 exudes zeal and enthusiasm to mould a brighter and stable new India.

There have been numerous aspiring proposals for the overall development with major focus on infrastructure, education, financial service sector, agriculture and rural development which are essentially the backbone of the Indian economy.

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It is a well-known fact that a spur in merger and acquisition activities is predominantly an indication of trust among the investor fraternity of a country. The Finance Bill (No.2) 2019 presented has proposed to address some of the issues impacting merger and acquisition activities in India. However, there are various pre-Budget expectations which remain unheard and still await clarity.

The key proposals with potential impact on merger and acquisition activities include:

1. Tax neutrality in case of demerger: Recording assets and liabilities on demerger, at fair value pursuant to Indian Accounting Standard shall not vitiate the tax neutrality of demerger.

This proposal is a welcome move as it puts to rest the ambiguity on tax neutral demergers for companies reporting under Indian Accounting Standard. However, there are several areas where accounting treatment legislated by Indian Accounting Standards do not have clarity under income-tax laws and the same continues to afflict the industry as divergent views emerge.

2. For companies suspected of oppression and mismanagement and where the government has suspended the Board of Directors and appointed new directors, there are following proposals:
> Carry-forward of tax losses permitted even if the change in shareholding is in excess of 49 percent

> For computing MAT, aggregate of business loss and unabsorbed depreciation can be set-off against the book profits

This proposal is for companies suspected of oppression and mismanagement. The proposal is in-line with provisions for companies under Insolvency and Bankruptcy Code (IBC).

3. CBDT to prescribe transactions for which the provisions relating to deeming of fair market value of shares shall not be applied for computation of capital gains and deemed gift.

As stated in the memorandum to the Budget proposal, the intention is to cover those transactions where the parties to the transaction do not have control over the determination of price.

4. Income accruing or deemed to accrue in India shall now cover income on account of deemed gift.

Ambiguity on applicability provision relating to taxation of deemed gift in the hands of non-residents is put to rest with the proposal of including deemed gift provisions under income deemed to accrue or arise in India. In a treaty situation, the relevant article of applicable tax treaty shall continue to apply for such gifts as well.

5. Capital gains on transfer of specified capital assets by Category III AIF shall be exempt from tax subject to following conditions:
> AIF is situated in International Financial Services Centre (IFSC)
> AIF earns income solely in foreign currency; and

> All the units of AIF are held by non-residents.

This proposal is in line with government’s intention to promote the development of world class financial infrastructure in India and to bring IFSC at par with similar IFSC in other countries.

6. It is proposed that Category II AIF shall be excluded from the purview of angel tax (as applicable on issuance of share at a premium). Further, the entities excluded from applicability of angel tax have to comply with stipulated conditions. It is proposed that failure to comply with stipulated conditions shall attract angel tax on the consideration exceeding face value of shares, in the year in which failure takes place.

Further for start-ups, the Finance Minister in her speech mentioned that, the angel tax issue for start-ups would not be scrutinised by tax authorities if requisite declarations and information is made available in the return.

Widening the list of exclusions to angel tax is a welcome move for the industry.

7. Listed companies will be liable to buy-back tax on payment of buy-back proceeds to its investors. Likewise, in the hands of shareholders of listed companies, receipt of proceeds on buy-back shall be exempt from tax. Also, for corporate shareholders, there shall be no MAT on such buy-back proceeds. Once legislated, this amendment will take effect from 5 July 2019.

The intention of the proposal is to curb tax avoidance practices adopted by listed companies. However, from an investor’s perspective, a buy-back of listed company’s share would typically be classified as capital gains and thus would suffer tax either at 15 percent/10 percent (plus surcharge and cess).

With buy-back tax being introduced for listed companies as well, the tax rate would effectively increase to 20 percent (plus surcharge and cess).

Although the tax would not be paid by the investor, the buy-back proceeds received from the listed company would be net of buy-back tax. It will be a wait and watch situation to see if the listed companies would prefer buy-back or dividend as the option for rewarding its shareholders.

In a nutshell, the amendments proposed by the Finance (No. 2) Bill 2019 are in the right direction and meet some of the industry expectations. However, there are many issues which continue to remain unaddressed in this Budget.

(The author Talreja is Partner with Deloitte India and Jajoo is Senior Manager with Deloitte Haskins and Sells LLP.)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jul 14, 2019 08:21 am
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