Budget 2019: Will the FM clean air around some ambiguous tax provisions?

January 31, 2019 12:21 PM

Typically a budget in an election year is presented as a vote on account budget without announcement of gutsy policies and schemes. This time around, however, it may be different.

Budget 2019, Union Budget 2019, interim budget 2019, finance minister, tax expectations from budget 2019, angel tax, corporate taxThe debate over disallowance of expenditure incurred in relation to earning exempt has been going in tax litigations for years now.

Fiscal budget has always been of great significance for any government. Unlike previous years, not only we will miss the budget coming from the armor of Mr. Jaitley, it would also be testing waters for the government as the last budget before the conclusion of their current term.

Typically a budget in an election year is presented as a vote on account budget without announcement of gutsy policies and schemes. This time around it may be different as the government may plan to present a full budget, perhaps subtly indicating its confidence for a second tenure.

With the controversy surrounding the withdrawal of angel tax circular still afresh, it would be great if our acting Finance Minister is able to clean the air around some of the ambiguous tax provisions a few of which we have attempted to summarize in this article.

In a bid to gradually reduce the corporate tax rate to 25%, last year’s budget announced companies with a turnover of up to Rs 250 crore in the financial year 2016-2017. Newly-incorporated companies in the current year are left in a state of flux since it is not feasible for them to meet this criterion and are left with no option but to seek opinions and clarifications from their tax advisors.

The debate over disallowance of expenditure incurred in relation to earning exempt has been going in tax litigations for years now. It’s high time that a clarification in the tax literature brings certainty to the tax payers earning no income from their investments.

In order to facilitate ease of doing business and boost M&A, the government realigned the exchange control and corporate law regulations to enable inbound and outbound merger of Indian companies with their overseas counterpart. However, we are still awaiting an enabler in the tax rule book to make this a tax neutral event.

Continuing our discussion on overseas mergers, any transfer of shares of an Indian company on account of merger of two overseas entities is a tax neutral event, in case at least 25% of the shareholders of the transferor company continue to be the shareholders in the transferee company. However, there is an impossibility of performance to this condition in case of merger involving parent and its wholly-owned subsidiaries. It may be noted that a similar clarification for exemption to this condition is included for a demerger between two domestic companies having a parent subsidiary relationship.

Under the extant of current tax provisions, a tax neutral demerger requires the assets and liabilities of the transferor to be recorded at their book values by the transferee entity. While the IND AS mandates accounting for such transaction between two unrelated parties to be recorded at their fair values. To this effect, a clarification requiring the resulting company to record assets and liabilities in terms of Ind-AS 103 sufficient for compliance as tax neutral transaction is required.

Apart from the above, we would also like to see specific inclusions in the Income Tax Act, bringing clarity on certain aspects such as transfer of MAT credit in a merger/demerger or treatment of taxes paid in deals with a deferred consideration.

(By Suraj Malik, Partner, BDO India LLP)

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