Over the past few years, India Inc has witnessed a tremendous surge in M&A activities both in the domestic as well as the international space. Overseas acquisitions from mega-deals such as Tata Steel's [Get Quote] acquisition of Anglo-Dutch major Corus and Hindalco's [Get Quote] acquisition of Novelis to many a transaction in the mid-cap space have been fuelled by the insatiable growth appetite of emerging Indian companies.

Further, domestic M&A deals have also shown significant increase depicting the inherent strength of the Indian economy.

Though there are various provisions under the Indian income tax laws which encourage M&A activities in India, some of these provisions need to be revisited to further step up the momentum. Further, the scope of some of the concessions needs to be extended to all sectors.

Transfer of past losses and depreciation

To facilitate the revival of loss-making units, tax laws provide for the transfer of unabsorbed losses and depreciation. Further, as an additional incentive, the law provides for a revival of the eight-year period for the carry forward of unabsorbed losses.

This concession is, however, available only in the case of mergers of companies engaging in manufacturing activities, telecommunications, manufacture of computer software, specified banks, power generation companies, and so on.

Interestingly, most of the activities in the service sector, which forms the heart of the Indian economy, are not covered under this provision. For example, the merger of advertising companies or private airline companies are not entitled to this concession.

In addition to the above, there are cumbersome conditions to be satisfied for the unabsorbed loss and depreciation transfer. The law requires the merging company to carry on the business for at least three years prior to the merger and for the merged company to carry on the business for at least five years thereafter. Further, it also requires continuity ownership of a portion of the fixed assets of the merging company for a specified period before and after the merger.

To further boost M&As, the scope of Section 72A should be extended. Also, the above conditions should be liberalised.

Change in shareholding -- Benefit restricted

For a closely-held Indian company, if there is any change in shareholding that takes voting rights beyond 51 per cent, the company is not entitled to carry forward and set off past losses. While the benefit is not lost, if there is a change in the shareholding of an Indian company, which is a subsidiary of foreign company -- due to an international merger/demerger -- the same is not available in a scenario where the change in the shareholding is due to a merger/demerger in India. The provisions of this section should be further extended to cover Indian restructurings.

International mergers of two Indian-owned companies

As most commonly understood, the Indian Income tax Act provides for several tax concessions to mergers/demergers of two Indian companies. Thus, when a transfer of shares of a company (whether Indian or foreign) happens in an Indian merger, there is a specific exemption under the Income Tax Act on such transfer from capital gains. However, the same is not true for foreign company mergers; that is, when two foreign companies merge and the owner of merging foreign company is an Indian company. This triggers serious Indian tax issues.

Responding to the need of Indian companies' global ambitions, it is imperative that this issue is specifically addressed by Indian tax laws. This will only facilitate quicker realisation of synergies by Indian corporates from their overseas forays.

Depreciation on goodwill

Based on the present provision, tax depreciation on 'acquired goodwill' (difference between consideration paid and fair value of assets acquired) is a contentious issue, the better view being that the same is not allowable. In countries such as the US and the Netherlands, for tax purposes 'goodwill' costs are allowed to be amortised over a specified period. Since business acquisitions are a very common mode of corporate actions, the allowability of depreciation on goodwill will only integrate the Indian tax laws with international practices

Another type of payment which is becoming increasingly common in acquisition deals is that of non-compete fees by the acquirer to the target. Though there is a clear provision for taxability of the said fees in the hands of recipient, there is an ambiguity of tax deduction in the hands of the payer. Clarification on this point will be welcomed. 

MAT credit setoff

Companies have to pay Minimum Alternate Tax on their book profits at 10 per cent if tax payable is less than 10 per cent of the book profit. The difference between MAT and normal tax is allowed to be carried forward (not beyond seven years), and can be set off against the tax payable by the company in the year in which it pays normal tax. The Indian tax laws do not expressly provide for carry forward of MAT credits in case of merger/demergers. Presently there are ambiguous interpretations in this regard and clarity in the law on this point will be appreciated.

Transfer of tax holidays

The tax law expressly provides for the transfer of tax holidays under Section 10A/10B and SEZs in the case of mergers/demergers. However, the tax laws are silent in the case of transfer of these benefits for sale of business. Clarity on this front will help.

The author is is Executive Director & Head, M&A tax, KPMG