India: Taxation Aspects In Cross Border Mergers

Last Updated: 8 November 2016
Article by Rajesh Begur and Avik Karmakar

Owing to the favorable regulatory regime in India and considerations such as diversification, competition and access to growing markets, cross border mergers involving Indian companies is expected to go up in volume and size.

Merger (amalgamation) is essentially an arrangement whereby one or more existing companies merge their identity into another existing company or form a distinct new entity. In a merger the undertaking comprising of property, assets and liabilities, of one (or more) company(ies) are absorbed by and transferred either to an existing company or a new company. Simply put, the transferor integrates with the transferee and the former loses its entity and dissolves without winding-up.  This paper touches upon certain taxation related aspects of note in cross border mergers.  

Regime under Companies Act, 2013.

Company law in India is undergoing an overhaul with the advent of the new Companies Act, 2013 ('2013 Act').  However, certain sections of the 2013 Act are yet to come into force and the provisions relating to mergers covered in Sections 230 to 240 are yet to be notified. Until then, this court driven process will continue to be governed by Section 391-396A of the Companies Act, 1956 and the Companies (Court) Rules, 1959 ('1956 Act').

Permissible Cross Border Mergers. While the 1956 Act prohibited mergers of Indian companies with foreign companies, the reverse was allowed. The 2013 Act however allows the merger of Indian companies with foreign companies (incorporated in foreign jurisdictions notified by the Central Government), provided prior RBI approval is obtained. Under the new regime, Inbound, Outbound and Global cross border mergers are permitted.

Taxes and Concessions under Income Tax Act, 1961 ('IT Act').

In terms of Section 47(vi) of the IT Act, transfer of any capital asset is generally subject to capital gains tax in India. However, certain types of mergers enjoy tax-neutrality with respect to capital gains taxes under Indian tax law as is dealt with below.

Inbound Mergers. In an inbound merger, a foreign company merges with an Indian company and the amalgamated entity is an Indian company. Amalgamation enjoys tax-neutrality with respect to transfer taxes and both the amalgamating company transferring the assets and the shareholders transferring their shares in the amalgamating company are exempt from tax. To achieve tax-neutrality for the amalgamating company transferring the assets, the amalgamated company should be an Indian company and the amalgamation should be as per Section 2(IB). In an amalgamation as per Section 2(IB) of the IT Act, all the properties and liabilities of the merging companies immediately before the amalgamation should become the properties and liabilities of the amalgamated company, and 75% of the shareholders of the amalgamating companies have to remain the shareholders of the amalgamated company as well. Additionally, to achieve tax-neutrality for shareholders of the amalgamating company, the entire consideration should comprise of shares in the amalgamated company.

Outbound Mergers. An outbound merger is one where an Indian company merges with a foreign company and the amalgamated entity is a foreign company. The IT Act presently grants tax exemptions on mergers if the transferee is an Indian company but does not recognize a situation where the transferee is a foreign company.  Therefore, with the introduction of cross-border mergers under the 2013 Act, corresponding changes would have to be made in the IT Act.

Global Mergers.  A global merger takes place when a foreign company holding controlling stake (of more than 51%) in an Indian company merges with another foreign company, resulting in the transfer of shares of the Indian company to such other foreign company. Such a scheme is exempt from tax in India if 25% shareholders of the amalgamating company continue to be shareholders of the amalgamated company, and the transfer does not attract capital gains tax in the country in which the amalgamating company is incorporated.

Certain other Taxation Aspects.

Carry forward of losses.  Amalgamated companies have the privilege of setting off depreciation and carry forward of unabsorbed/accumulated losses against its accrued profits.  The same is however not available to public companies where shareholders carrying 51% voting rights on the last date of the year in which set off is sought are different from shareholders carrying 51% voting rights on the last date of the year in which the given loss was incurred by the company. Carry forward of losses is applicable only for the sectors that are specifically provided under the IT Act or notified by authorities.

GAAR. The General Anti Avoidance Rules ('GAAR') under the Finance Act, 2013, is slated to come into force in India with effect from April 1, 2017. Once implemented, it will grant discretion to tax authorities to scrutinize arrangements and invalidate them as an 'impermissible avoidance agreement' ('IAA') where they lack commercial substance, resulting in denial of the tax benefit under the provisions of the Act or tax treaty. An IAA is an arrangement the main purpose of which is to obtain a tax benefit and which either, creates rights and obligations that are not ordinarily created between persons dealing at arm's length, or results in the misuse or abuse of tax provisions, or lacks commercial substance, or is not for a bona fide purpose.

GAAR's provisions would extend to all taxpayers irrespective of their residential or legal status (i.e. resident or non-resident, corporate entity or non-corporate entity). These provisions will apply only if tax benefit arising to all parties to the arrangement exceeds Rs 30 million in the relevant financial year.

Stamp Duty & Registration. The transfer of assets, particularly immovable properties, requires registration with state authorities and payment of stamp duty for purposes of authenticating transfer of title. Stamp duty rates differ from state to state and range from 5% to 10% for immovable properties and from 3% to 5% for movable properties. The same is calculated on the amount of consideration received for the transfer or the market value of the property transferred (whichever is higher). Some state stamp acts contain special beneficial provisions pertaining to stamp duty on court-approved mergers.

Value Added Tax (VAT). Implications of VAT in court-approved mergers vary from state to state. Most states stipulate that the transfer of properties, etc., between the merging entities by way of a court-approved merger attracts VAT till the date of the High Court order. In the absence of such provision, courts have held the effective date of the merger to be the day the merger scheme becomes operative and not the date of the order of the court. In such cases, VAT has been held as not applicable on the transfer of properties between the merging entities during the period from the effective date of merger till the date of the order of the jurisdictional High Court.  

Conclusion.

Apart from GAAR related implications as already discussed, the other aspects where parties involved in an amalgamation have to be cautious about include, incidence of tax occurring in the case of indirect transfers (i.e. transfers of foreign securities which derives substantial value from underlying Indian assets), and undervaluation of shares. In order to mitigate some of these tax risks, parties can obtain advance rulings or nil withholding tax certificates from tax authorities, negotiate and incorporate tax specific indemnities in their deal documents, and take the necessary tax insurance to cover potential tax risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.