Budget 2018: The much awaited Union Budget 2018 was delivered by the Finance Minister, Mr. Arun Jaitley, today. While it was expected to be a people-pleasing budget, being the final budget pre-election, it focussed more on the poor people. In so much so, it did not do much to save companies undergoing insolvency proceedings from becoming bankrupt, the “poor” amongst companies.
Prior to the budget, the Ministry of Finance had received several representations to provide exemptions to companies undergoing insolvency proceedings from harsh taxing provisions including relaxation from Minimum Alternate Tax (MAT). MAT is an alternate tax that is levied on the book profits of the company, where the amount of normal corporate tax is less than 18.5% of the book profits of the company. In such cases, MAT is levied at the rate of 18.5% of the book profits, increased by applicable cess and surcharge.
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Where a lender takes a haircut and the liability of the company is reduced or extinguishes, such waived amount may be added to the book profits of the company, in accordance with the current MAT provisions. Accordingly, the waived amount is subject to tax in the hands of the already suffering company. Rather, the companies under the erstwhile Sick Industrial Companies Act, 2003 (SICA) enjoyed a specific exemption from the applicability of MAT. With this background, the absence of MAT exemption to companies undergoing insolvency proceedings appeared to be an oversight on change of insolvency law and one hoped it only to be a matter of time before the two laws were aligned. However, today’s budget indicates considered act on part of the ministry to not confer any MAT exemption.
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As a welcome move, the budget codifies its recent press release whereby it allowed companies undergoing insolvency proceedings to set off accumulated losses (including unabsorbed depreciation), while computing its MAT liability. In case of regular companies, book profits are only reduced by the lesser of brought forward losses or unabsorbed depreciation, resulting in higher MAT liability. Although complete waiver of MAT would have been ideal, reduction of MAT liability, by increased losses and depreciation, will be some respite for companies laden with surmounting liabilities.
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Further relief was granted by the present budget to companies undergoing insolvency with respect to carry forward of losses in case of majority change in their ownership. A company which incurs losses can carry forward such losses for a period of 8 years and set them off against future profits. At present where a closely held company’s majority shareholding (i.e. 49%) is transferred such company loses its ability to carry forward any unabsorbed losses (other than depreciation). The Finance Bill, 2018 proposes to relax such restriction for companies undergoing insolvency proceedings, whereby change in ownership would not hamper the ability to carry forward its losses. Such amendment is vital for revival of business by new investors or creditors by taking over the controlling interest of the company.
While the above mentioned budget proposals are positive steps and essential for survival of companies undergoing insolvency proceedings, there is much that could be done from the perspective of direct taxes.
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The provisions of Income-tax Act, 1961 (the Act) seeks to tax waiver of certain loans and interest, such taxation is separate from the MAT liability discussed above, it was hoped that a waiver from such liability could be provided to companies being revived under the insolvency proceedings.
Further, at times, the creditors are issued shares in lieu of waiver of loan/interest liability or shareholders undertake distress-sale of their shares, such transfer of shares gets taxed in the hands of the acquirer of shares by certain anti avoidance provisions. The Act provides for taxation in the hands of acquirer of shares where the shares are acquired for a value lesser than the fair market value of shares, such provision is again a hurdle in revival of struggling companies and seek to tax the saviour.
The Indian government hails its own initiative of introduction of Insolvency and Bankruptcy Code, 2016 (IBC) and claims to have changed the lender-debtor relationship as also mentioned by the Finance Minister in today’s budget speech. Indeed, the government has come far but still has a long way to go in providing a conducive environment for resolutions of financial disputes. It would only be counter-productive to tax companies in dire need of rescue as it may end an existing source of revenue for the government.
By Vinita Krishnan (Associate Director) Khaitan & Co and Indruj Singh Rai (Principal Associate) Khaitan & Co.