Budget 2016: Not up to the expectations from an M&A perspective

Amrish Shah / Mokshada GohilAhead of the presentation of the Union Budget 2016 by Finance Minister Arun Jaitley (‘FM’), there were huge expectations from stakeholders for a progressive tax structure. With the saga of ‘make in India’, ‘end to retrospectivity’ and ‘ease of doing business in India’ being on the cards, the anticipations from this leap year budget had been elevated. The major expectations with regard to M&A surrounded around the following-- Clarity on indirect transfer taxation rules;- Revision in provisions relating to carry forward of losses, MAT credit and capital gains taxation for ease of corporate re-organizations;- Taxation of arrangements like earn-out, non-compete fee etc which are very common in deal scenarios off late.Prospects for regulatory reforms including uniform compliances in Companies Act and SEBI laws on related party transactions as also simplicity in Stamp duty laws had also become need of the hour.Despite the above, the direct tax proposals from the Finance Minister did not seem to be major game changer. Apparently the budget speech did not throw up any major amendments, until reading of the fine print of the Finance Bill. From M&A viewpoint, following proposals merit consideration- - The applicability of place of effective management is proposed to be deferred by one year i.e. will be effective from FY 17. - Beneficial concessional tax rate of 10% is extended to non-residents on long term capital gains on transfer of private company shares.- Clarification on MAT exemption for foreign companies before 1 April 2015 has been brought out. - As a measure to reduce tax litigation and plug tax arbitrage opportunities, any buyback (whether under scheme of arrangement sanctioned by High Court or otherwise) is proposed to covered within the ambit of buy-back tax provision and the manner in which ‘amount received’ is to be computed in various circumstances including tax neutral re-organizations and different tranches is proposed to be prescribed. The amendment is proposed to apply with effect from 1 June 2016. - With a view to rationalise the tax treatment for dividend income, it is proposed to tax dividend in excess of Rs. 1m for resident individuals, Hindu undivided family (HUF) or firm who is resident in India at 10% on gross basis. - For conversion of company to LLP to be tax neutral, an additional condition has been introduced according to which the total value of the assets as appearing in the books of account of the company in any of the three years prior to conversion should not exceed Rs. 50m.- Receipt of shares by shareholder in merger and demerger will not be taxable in hands of recipient as received without consideration.- Period of holding for unlisted securities reduced from three years to two years to treat them as long term (though Finance Minister mentioned this in his speech, the amendment does not appear in the Finance Bill – hopefully the same is introduced in the law and enacted).The Finance Minister has expressed commitment to implementing GAAR from April 1, 2017. At the same time, from ease of doing business standpoint, there is proposal to introduce bill to amend Companies Act and also enable registration of companies in a day.All in all, the leap year budget (in the backdrop of Acche Din) may not be up to the expectations of many stakeholders from an M&A perspective, though, at least there are no major deal-breakers. (Amrish is a Partner and Transaction Tax Leader & Mokshada is a Senior Manager with Ernst & Young. Views are personal)