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M&A: Union Budget 2021: Will amendments to tax provisions boost M&A activity?

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India has been one of the fastest-growing economies in the world; this can be confirmed with the large number of M&A deals taking place in the country. As per figures reported last year, India recorded M&A activity worth $80 billion in 2020 (a 7% increase from 2019). While a large part of the investment has gone into Jio Platforms, the statistics certainly indicate the growth opportunities the country offers.

The disruptions caused by the pandemic have led to questions about its impact on the Indian economy and the turn-around time to regain lost ground. The fall in the number of infections coupled with Q3 data and GST collection numbers indicate that the country can salvage the situation earlier than expected.



Finance Minister Nirmala Sitharaman, has raised expectations from the upcoming budget by promising ‘a Budget like a never before’. This could therefore be an appropriate time to revisit direct tax provisions impacting M&A deals. In any M&A transaction, income tax is one of the critical elements for consideration, along with indirect tax, foreign investment guidelines, stamp duty, etc.

One tax provision that has seen litigation on numerous instances is Section 79 of the Income tax Act, 1961 (IT Act). Section 79 provides for the ability to carry forward business loss by a company in which the public is not interested, subject to satisfaction of condition specified therein. The primary condition is that shareholders of such a company should continue to ‘beneficially’ hold atleast 51% of the voting power in the company, to enable set off of brought forward business loss. There is no one view by the judicial authorities on the term ‘beneficial’, giving rise to varied interpretations by an assessing officer and consequential harassment for an assessee.

The next provision that requires attention is Section 72A of the IT Act dealing with allowability of carry forward and set off brought forward business loss and unabsorbed depreciation of the amalgamating company in a merger. The section allows carry forward and set off only if the transferor company is engaged in specified business activity. Further, there are conditions prescribed for the transferee company to fulfil, to set off the losses. These are age-old provisions and it is time for the government to relook at this section in its entirety.

Another aspect that needs attention is the tax neutrality in case of amalgamation of two or more Limited Liability Partnerships (LLPs). While the Limited Partnership Act, 2008 contains provisions dealing with the merger of LLPs, the IT Act has been silent on this aspect. So, while Section 72A talks about the treatment of loss in case of amalgamation of companies, there is no similar provision in case of LLPs.

The next talking point is provisions dealing with cross border merger. While the Companies Act, 2013 and the Reserve Bank of India have provided guidelines dealing with cross border merger, the IT Act has remained completely silent on this subject. Considering the paradigm shift in business dynamics and the spurt in cross border M&A, it is time for the Government to chart out certain guidelines in this direction.

Income tax provisions are a key element of consideration while advising on an M&A transaction and the aspects above are only the tip of the iceberg. There are numerous issues that companies and advisors must deal with while finalising a transaction structure. It is therefore imperative that the Finance Minister deals with some of the issues in the upcoming budget and signals an impression that India is serious about reducing tax litigations and providing certainty on tax laws.

(The writer is Partner and Leader, Transaction Tax, BDO India)

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