Presently, Company and Income Tax laws provide for specific concessions for facilitating mergers and amalgamation of companies and there is no such provision for demerger of a company.

In a communication addressed to the finance ministry, FICCI said that the existing income tax makes it almost impossible to undertake restructuring by way of demerger of companies because of heavy tax liability.

FICCI said that demerger is an important part of business reorganisation and keeping this in mind, the Finance Act 1998 allowed benefits in cases of business organisation where a firm or a proprietary concerned is succeeded by a company in the business carried on by it.

It has been provided that the transfer of any building, machinery, plant and furniture or intangible assets to the company shallnot be regarded as transfer to attract levy of capital gains subject to certain conditions. It also provides for carry forward to accumulated business losses, and unabsorbed depreciation to successor companies. However, the provisions of the Income Tax laws limit this to mergers and amalgamations.

Therefore, FICCI suggested tax benefits made available in respect of conversion of proprietary concerns and firms into companies should also be extended to restructuring of companies, particularly the demerger of companies which would be in consonance with the recommendations of the Chelliah committee.

Indian companies have to essentially restructure and reposition themselves to be more competent and efficient. Diversified multi-product companies may like to restructure the corporate operations into more homogenous units and there may have to be structural changes in the ownership and control of joint companies in business interests. These may entail transfer of business units from one company to the other orbreaking up of the largest business group in the similar ones.