Budget 2021: Government looking at tax issues related to business rejig, mergers and acquisitions

NEW DELHI: The government is considering tax issues related to corporate restructuring within a group and as a result of mergers and acquisitions (M&A) as it expects these activities to be discontinued due to the disruption and stresses caused by the Covid-19 pandemic will increase. The changes could be announced in the budget for February 1st.

In particular, the government is reviewing restrictions on the transfer of losses in the event of changes in related party ownership and mergers and acquisitions.

Limiting loss carryforwards to selected service sectors such as banking could also be considered for easing.

Clarifications on divisions and capital gains tax regulations on grandfathering capital transfers due to divisions or inheritance are also examined.

“There are some issues related to the restructuring … some could be resolved,” said one person familiar with discussions. A final call for the exact contours will be made after examining the impact of such changes on revenue, the person said.

The industry had reported tax issues related to restructuring earlier in the year as the pandemic disrupted businesses and many continue to suffer.

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“Post-Covid, the service sector that still has a dominant share of India’s GDP, needs a booster as it is also the most labor intensive,” said Sudhir Kapadia, national tax officer at EY. “In order to encourage reorganization and consolidation, the current benefits of any losses incurred by the Merging Company that are being used by the Merged Company by industrial companies under Section 72A (Income Tax Act) should be extended to all companies in the service sector such as real estate and hospitality.”

E-commerce, retail, IT and ITeS (IT Enabled Services), startups and various other service sectors are omitted as Section 72A states that only one “industrial company” is eligible.

The service sector is hardest hit by the pandemic.

In addition, according to Section 79 EStG, a related company cannot offset its losses in the first year with future profits, for example in the fifth year, unless a participation of 51% is still common in the first and fifth years. Kapadia said this is at the expense of intra-group reorganizations, where the stake changes nominally, but final or general control of the company has not caused any losses.

The Finance Act of 2018 incorporated Section 112A into the Income Tax Act of 1961, which made capital gains from the sale of publicly traded stocks taxable. Receipt of profits made by January 31, 2018 was permitted and no tax should be levied on capital gains made by that date.

However, it is unclear whether a company in which shares are held on January 31, 2018 will merge and shares in new companies will be issued. The same applies to shares that were held before January 31st and are assigned to a successor or are gifted.

“The government should come up with these clarifications, which have no effect on revenue, but provide ample relief for those affected,” Kapadia said.

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