Indian Budget has always been a mixed bag of surprises for all the stakeholders – jolts and jerks for some and relief for some. The Modi Government is due to present the Budget for 2018-19 on 1 February 2018 - being the last full budget before next general elections in 2019 and thus, the expectations of many are soaring. The corproate India is no exception.

In the M&A space, unclear tax provisions or provisions leaving scope for interpretation prove a hurdle in concluding a transaction. In the backdrop of the objective of improving ease of doing business in India, the Government has done a laudable job in weeding out these hurdles to the extent possible. Regardless, there are still some loose ends in the Indian income-tax law which needs to be tightened. Below are the deal makers top wish list from this Budget:

  • Save unintended stakeholders from the Vodafone ghost!

    Offshore transfer of shares/interest in a foreign entity (even without involving any direct sale in India), still triggers Indian tax in the hands of non-resident seller, if the offshore target derives its substantial value from Indian assets. This tax was brought in to cover the celebrated 'Vodafone' type transactions.

    While the lawmakers have provided for safe harbour provisions exempting a foreign merging/ demerging entity from the Vodafone tax trigger, there is no shareholder level exemption (unlike domestic tax neutral restructuring). This disparity seems highly unintended and needs to be addressed to ward off the unwanted litigation.
  • "Please sir, I want some more"

    Currently, a private limited company may convert itself into a Limited Liability Partnership (LLP) without triggering any tax implications. For doing so, it has to fulfill certain conditions one of them being that its gross turnover in any three previous financial years is not beyond INR 6 million and the value of the assets its holds does not exceed INR 50 million. There are companies who are seeking to migrate to cost effective structures and improve profitability but fail to fulfil the prescribed threshold which is quite low. One really hopes that these thresholds are increased.
  • The ride which is not so merry-go-round

    Under certain circumstances, a taxpayer is required to pay tax on receipt of specified property if it receives it for free or by not paying a fair value (simplistically called as the gift tax). The law prescribes detailed rules for determining the fair value of different assets including shares of a company. In case of cross holding structures, viz., when two companies hold stake in each other, then the exercise of valuation is inconclusive especially if their shares are unquoted. Therefore, there is a need that this situation is addressed – may be provide for income-based valuation of shares of company which have cross-holdings.

    Additionally, the rules need to be clarified to the extent that if the foreign company shares are being valued, then in that case any internationally approved valuation method should suffice.
  • Balancing it out

    While the Indian tax law provides exemption to the transferor from capital gains tax in certain situations suc as transfer between parent and its wholly owned subsidiary, conversion of preference shares/debentures into equity shares, there is no corresponding relief to the transferee under the gift tax. This seems unintended and hence a clarification is very much needed.
  • Keep it simple

    • The current definition of 'quoted share' under the Indian tax laws in the context of fair value based taxation, leads to an ambiguous interpretation in determining when the shares of listed companies will be treated as 'quoted' or 'unquoted'. The definition may therefore be amended to bring it in line with the concept of 'frequently traded shares' as provided under the securities law prescribed by Securities and Exchange Board of India.
    • While the Government, in the last Budget, did attempt to resolve some of the issues that emanated due to the adoption of Indian Accounting Standards (Ind AS), there are some open ends which need to be tightened. For example, in case of any uncontrolled business combination (say, demerger), Ind AS requires that the transaction should be accounted using the 'fair value' basis. However, the definition of 'demerger' under the income tax requires it to be at 'book value' for it to qualify as a tax neutral demerger. One hopes that there is clear alignment of provisions of income tax law in light of the adoption of Ind AS.
  • Make room for the new kid on the block

    • The Companies Act, 2013 recently allowed Indian companies to merge/demerge with offshore companies. However, there are no provisions under the income tax law to determine the tax implications in the hands of the offshore company, Indian company and its shareholders upon such outbound amalgamation/demerger. Thus, clarity on taxation of outbound merger is much required.
    • The Government introduced the Insolvency and Bankruptcy Code paving the way for revival of stressed companies. Thus, it is expected that this Budget weaves in the revival of stressed companies using the tax sops.

In conclusion, one will have to wait and watch to what extent and in what manner the above is implemented in order to eliminate uncertainty in tax laws and thereby reduce litigation.

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