(First published on Linkedin)
With Budget 2025 around the corner, the following amendments could address tax hurdles impacting M&A:
1️. “Undertaking” and Demergers: For a demerger to be tax neutral, there should be a demerger of an “undertaking,” i.e., a business activity. The definition of “undertaking” should be clarified to include shares of subsidiaries or SPVs (typically required in case of regulated entities, sector-specific needs, such as infrastructure, or diversified businesses) within the definition of an “undertaking”, if such entities represent genuine business operations, not merely non-business holdings or treasury investments. This amendment would factor structural realities of modern corporate operations.
2. Grandfathering Provisions under Section 55(2)(ac): Mergers/demergers involving listed companies require the issuance of fresh shares by the transferee company to the shareholders of the listed companies, technically disqualifying them from the grandfathering benefit of January 31, 2018, since they could not ever have been “acquired” as on that date. Amending Section 55(2)(ac) to clarify the availability of grandfathering benefit vis-à-vis new shares issued on merger/ demerger would logically align with the principles of tax neutrality.
3. Taxation of Deferred and Contingent Consideration: Presently, deferred consideration is taxed as capital gains upfront, even if not yet received. In the case of contingent consideration, since the payment depends on future milestones, while it is a settled position that it cannot be taxed upfront, current laws do not clarify whether it should be taxed as capital gains (lower rate) or as income from other sources (higher rate) upon receipt. Hence:
– Deferred Consideration i.e., Question of “When”, not “If”: Tax when received, not at accrual.
– Contingent Consideration i.e., Question of “When” and “If”: Tax as capital gains in the year of receipt, in line with its nature as part of sale proceeds.
4. Non-Applicability of Section 56(2)(x) for Commercial Transactions: This provision deems the difference between the transactions and tax FMV as income, for example:
– In distressed acquisitions, with say, a large immovable property, the tax FMV, as adjusted for the reckoner value of property, may be much higher than the actual business valuation.
– For listed shares, the market price may fluctuate between the share purchase agreement date and the actual transfer, especially in open offers.
Therefore, section 56(2)(x) should be amended to exclude applicability to bona fide transactions and commercially negotiated deals that reflect genuine market dynamics.
5. Loss Set-Off Provisions under Sections 72A and 79
– Section 72A: Expand the ambit beyond manufacturing/ banking to include NBFCs, tech, and services.
– Section 79: Allow loss carry-forward for intra-group restructurings, which do not result in the change of beneficial ownership.