By - King Stubb & Kasiva on July 17, 2023
Corporate restructuring activities, such as Mergers and Amalgamations, are extensively regulated under the Companies Act 2013. However, the taxation aspect, including changes in the taxation computation system and provisions regarding the treatment of different types of mergers and amalgamations, is governed by the Income Tax Act, 1961.
In the Indian taxation system, a capital gains tax is imposed on the transfer of various assets during an amalgamation scheme from the company being amalgamated to the other company. Following the merger of two companies, the assets transferred are not considered as a transfer and therefore do not attract Capital Gains tax provisions. Additionally, shareholders of both companies enjoy taxation benefits if both entities are based in India. Consequently, tax issues in Merger and Amalgamation Transactions can be categorized into two parts: tax issues in domestic merger and amalgamation transactions, and tax issues in international transactions.
The Indian Income Tax Act, 1961 has laid down some essential conditions for any merger to be considered an amalgamation which are as follows:
Capital gain, in taxation terms, refers to the difference between the cost of acquisition of an asset and the sale price when the capital asset is transferred within a fiscal year. When the spread i.e., the difference between the sale consideration and cost of acquisition is positive, it is called capital gain which is taxable in the hands of the transferor entity.
There are various implications of Capital Gains tax on various entities such as:
According to Section 206AA of the Income Tax Act, upon the failure of any person to provide his PAN to the party responsible for collecting TDS, the latter party has the duty to deduct 20% Tax deducted at the source or the maximum applicable rate. However, in case of a treaty regulating the implications of tax under such situations, the courts shall be the competent authority to adjudicate upon such issues.
This will also differ in case the foreign entity has the Most Favoured Nation status given by India which would result in different tax treatment as decided by the competent authority or the central government.
Merger and Acquisitions in forms of amalgamations open a plethora of ways through which any company can save their taxes or lower them through operation of their income or strategic management of their assets.
The system pertaining to taxation in merger and amalgamation transactions is highly complex where the merger or amalgamation deal gives only a single chance to adopt a method of tax planning which would give an opportunity to save taxes in the future. Secondly, various details need to be taken care of while adopting a strategy for tax planning which goes hand in hand with the scheme of restructuring in order to enable a proper system of tax management.
The acquiring business may experience a taxable gain from the transaction if the tax basis of the assets or shares acquired is lower than the fair market value. This gain is determined by subtracting the asset's or stock's tax base from fair market value
47(vi)]: Under section 47(vi) of the Income-tax Act, capital gain arising from the transfer of assets by the amalgamating companies to the Indian Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for the purpose of Capital Gain.
Transfer of business under mergers, amalgamation and acquisitions do not attract any tax liability under GST regime, they are unlikely to be impacted by indirect taxation. For calculating the Capital gains, the holding period is calculated from the date of the original purchase of shares.