I recently spoke on Taxsutra’s podcast “Tax Beats”, which delves into the finer nuances of the Income-tax Act, 2025. My episode focused on a critical area of corporate taxation – the tax neutrality of fast-track demergers.
Under Section 2(19AA) of the Income-tax Act, 1961, a “demerger” refers to transfers under Sections 230–232 of the Companies Act, 2013 (mapped from the 1956 Act through the General Clauses Act).
While the Ministry of Corporate Affairs has now expanded Section 233 to expressly include demergers as well, the the Income-tax Act, 2025 continues to conspicuously exclude them from the definition of a qualifying “demerger.”
This exclusion, consciously retained per the Parliamentary Standing Committee report, could have far-reaching implications including denial of tax neutrality for demergers in the hands of the transferor company, transferee company, and shareholders of the transferor company, and also the denial of carry forward of business loss/ unabsorbed depreciation, even for bona fide internal reorganisations.
The inconsistency is striking.
Fast-track mergers under Section 233 enjoy full tax neutrality if they meet Section 2(1B) conditions; yet their counterpart – fast track demergers – are left out, despite identical checks and regulatory scrutiny.
If unaddressed, this gap could not only trigger litigation but also undermine the government’s broader objective of ease of doing business.
A policy clarification is thus imperative, either through amendment or circular, to extend parity of tax treatment to fast-track demergers.
Procedural efficiency should not come at the cost of fiscal discrimination.
You can listen to the episode on Taxsutra’s “Tax Beats” podcast, where I unpack these issues in detail: https://soundcloud.com/user-52105967/tax-beats-8-income-tax-act-2025-distilled-with-binoy-parikh