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Tax Impact in India and Abroad in M&A
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By Hitesh Kumar & Shradha Dubey
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Mergers & Acquisitions (M&A)
M&A recognized by Income Tax Act,1961 (ITA)
Amalgamation/Merger
Acquisition (transfer) of shares
Demerger
Sump sale/Itemized sale
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TAX IMPLICATIONS INMERGER/AMALGAMATIONS
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Definition and Chargeability
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Merger not defined.
Amalgamation as per Section 2(1B) of ITA
Under ITA, Capital gains are charged to tax u/s 45.
S. 45 Profits & gains taxable when arising fromtransfer of capital asset in India.
Transactions tax free only on merger of a foreign
company into an Indian company.
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Exemption from CGT
No CGT implications on mergers/amalgamations
provided they satisfy conditions of S. 47 of ITA.
Conditions for exemptions from CGT -
transfer of capital asset from amalgamating co.
to amalgamated co. is exempt if amalgamated
co. is an Indian company. {S. 47(vi)}
transfer of share(s) in amalgamating co. is
exempt if (i) transfer is for consideration of
share(s) allotted to the shareholders of
amalgamating co. in amalgamated co., and (ii)amalgamated co. is an Indian company. {S. 47
(vii)}
Contd..
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Contd.
Exemption from CGT is applicable at
shareholder level to the extent shareholders
receive sharesas consideration.
Transfer of share(s) held in Indian co., by
amalgamating foreign co. to amalgamatedforeign co. is exempt if (i) at least 25% of
shareholders of amalgamating foreign co.
become the shareholders of amalgamated
foreign co., and (ii) such transfer is not subjectto capital gains tax in the home country of
amalgamating foreign co. {S. 47 (via)}.
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Treatment of accumulated losses &unabsorbed depreciation (S. 72A)
Accumulated loss (AL) & Unabsorbed depreciation
(UD) of amalgamating co. deemed to be AL & UD of
amalgamated co.
Entitlement is available if following conditions arefulfilled:
Amalgamating co.
has been in that business for at least 3 years,
has held at least 3/4th of book value of fixed assets
for 2 years.
Contd..
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Contd.Amalgamated co.
to continue the business (all businesses) of
amalgamating co. for at least 5 years,
to hold least 3/4th
of book value of fixed assetsof amalgamating co. for5 years,
to fulfill such other conditions as may be
prescribed to ensure the revival of business of
amalgamating co. or that amalgamation is for
genuine business purpose.
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Other Tax Benefits
Amalgamated co. can claim deduction for:
Expenditure incurred on scientific research (S. 35)
Expenditure for obtaining license to operate
telecommunications services (S. 35ABB)
Preliminary expenses (S. 35D)
Expenditure incurred for amalgamation (S. 35DD)
Expenditure incurred under VRS(S. 35DDA)
Expenditure on prospecting, etc., for certain
minerals (S. 35E)
Amalgamated co. is eligible for unexpired tax holidays
under sections 10A, 10AA and 10B.
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TAX IMPLICATIONS IN ACQUISITIONS
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Modes of Acquisition & Classification
of assets
Acquisitions may generally take following forms:
Acquisition of shares
Acquisition of assets
Acquisition of business (slump sale)
Tax treatment and applicable rates under ITA depend upontype of acquisition and period of holding of a particular
asset.
Long term capital asset (LTCA) and Short term capital
asset (STCA) are defined under S.2(29A) and S. 2(42A) of
ITA.
Gains arising from transfer of LTCA are Long Term Capital
Gain (LTCG).
Gains arising from transfer of STCA are Short Term Capital
Gain (STCG). 11
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Tax impact of Acquisition of shares
Shares held for 12 months or less Short term capitalasset.
Shares held for more than 12 months Long term
capital asset.
Sellers perspective :
Chargeable under section 45 of ITA.
STCG & LTCG rates depend upon whether shares
are listed or unlisted and also upon whether seller
is resident or non-resident (refer to Tables on next
slides)
DTAA (Mauritius) Article 13 Capital gains derived
by a resident of a State chargeable to tax in that
State only.
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STCG on Sale of Shares
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Nature of share Resident status Tax Rate (%) Section
Unlisted Resident Co. 33.22 Finance Act
Unlisted Non-resident Co. 42.23 Finance Act
Listed (if STT is
paid)
Resident Co. 16.61 111A
Listed if STT is
paid)
Non-resident Co. 15.84 111A
Listed (if STT is not
paid)
Resident Co. 33.22 Finance Act
Listed (if STT is not
paid)
Non-resident Co. 42.23 Finance Act
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LTCG on Sale of Shares
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Nature of share Resident status Tax Rate (%) Section
Unlisted Resident Co. 22.15 112
Unlisted Non-resident Co. 21.12 112
Listed (if STT is
paid)
Resident Co. Nil 10(38)
Listed if STT is
paid)
Non-resident Co. Nil 10(38)
Listed (if STT is not
paid)
Resident Co. 11.07 112 Proviso
Listed (if STT is not
paid)
Non-resident Co. 10.56 112 Proviso
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Buyers perspective:
Section 195: Withholding taxHonble Supreme Court held in G.E. India Technology
Centre Private Ltd. Vs CIT & Anr .
[MANU/SC/0688/2010] that the payer is bound to
deduct Tax at Source (TAS) only if the tax is
assessable in India. If tax is not so assessable, there
is no question of TAS being deducted.
Vodafone acquisition of shares of Hutch raises a
controversy over jurisdiction of IT Dept.- whether
acquisition of shares by a non-resident entity fromanother non-resident entity is taxable in India in
respect of capital gains of the non-resident seller and
if so, does the non-resident buyer have a withholdings
obligation u/s 195.15
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Vodafone transaction
Transfer of shares by HTIL (A Cayman Islands) Co.)
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Vodafone
(Netherlands)CGP Investments
(Cayman Islands)
Mauritian Cos. Indian Cos.
Vodafone EssarLtd.
(Indian Co.)
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Issues arising from Vodafone transaction
Jurisdiction over cross border transactions between
non-residents.
Extra territorial operation of Indian Laws.
Implications for overseas investors.
Possibility of other similar transactions to come under
tax scanner - Indemnity from the buyer.
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Tax impact of Acquisition of assets
Acquisition of assets may take place either as a
purchase of one or more individual assets or as
purchase of whole of the undertaking as a going concern
(slump sale).
Assets held for36 months or less Short term capital
asset.
Assets held for more than 36 months Long term capital
asset.
Sellers perspective in case of itemized sale of assets:
Chargeable under section 45
In case of non-resident seller, gains from transfer of
(i) short term capital asset chargeable @ 42.23%,
(ii) long term capital asset chargeable @ 21.22%.
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In case of resident seller, gains from transfer of(i) short term capital asset chargeable @
33.22%,
(ii) long term capital asset are chargeable @
22.15%.
Buyers perspective:
Section 195: Withholding tax
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Tax impact of Slump Sale
Slump Sale as per S. 2(42C) of ITA
The transaction of Slump Sale is chargeable
under section 50B of ITA.
Computation of capital gains in Slump Sale:If the capital asset being undertaking has been
held for more than 36 months long term capital
gain.
If the capital asset being undertaking has beenheld for 36 months or less short term capital
gain.
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Slump Sale
Sale proceeds Net worth Capital gains
Value of liabilitiesValue of assets
WDV
(depreciable
assets)
Nil
(capital assets
deduction
allowable u/s35AD)
Book Value
(other assets)
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TAX IMPLICATIONS IN DEMERGERS
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Definition and Chargeability
Demerger as per Section 2(19AA) of ITAAll properties of undertaking before demerger
become properties of resulting co.
All liabilities of undertaking before demerger
become liabilities of resulting co.
Resulting co. issues shares in consideration.
Shareholders (at least 3/4th in value) in demerged
co. become shareholder in resulting co.
Transfer of undertaking is on a going concern
basis.
Under ITA, Capital gains are charged to tax u/s 45.
Section 45 Profits & gains taxable when arising
from transfer of capital asset in India23
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Exemption from CGT
No CGT implications on demergers provided they
satisfy conditions of S. 47 of the ITA.
Conditions for exemptions from CGT
transfer of capital asset by demerged co. toresulting co. is exempt if resulting co. is an
Indian company. {S. 47 (vib)}
transfer or issue of share(s) by resulting co. to
the shareholders of demerged co. is exempt iftransfer or issue is in consideration of demerger.
{S. 47 (vid)}
Contd..
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Contd..
Transfer of share(s) held in Indian co. by
demerged foreign co. to resulting foreign co. is
exempt if (i) shareholders holding at least 3/4th
in value continue to remain the shareholders ofresulting foreign co., and (ii) such transfer is not
subject to capital gain tax in the home country of
demerged foreign co. {S. 47 (vic)}
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Treatment of accumulated losses &unabsorbed depreciation (S. 72A)
Resulting co. is allowed to carry forward and set off
accumulated loss & unabsorbed depreciation of
demerged co. in following manner:
If loss/unabsorbed depreciation is directly
relatable to undertaking transferred to resultingco. entirely allowed to be carried forward and
set off.
If not directly relatable then proportionately
allowed to be carried forward and set off.No such conditions like holding of at least 3/4th
of book value of fixed assets for 2 years or
continuance of business for a minimum
specified period are applicable.26
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Other Tax Benefits
Resulting co. is eligible to claim deduction for:Expenditure for obtaining license to operate
telecommunications services (S. 35ABB)
Preliminary expenses (S. 35D)
Expenditure incurred for demerger (S. 35DD)
Expenditure incurred under VRS (S. 35DDA)
Expenditure on prospecting, etc., for certain
minerals (S. 35E)
Resulting co. is eligible for the unexpired taxholidays under sections 10A, 10AA and 10B.
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