– By Kalpesh Maroo and Ankur Nishar
As we approach the unveiling of the first budget under the Modi 3.0 Government, a wave of anticipation is prevalent for a budget that will lay a strong foundation for sustainable growth. With a focus on growth at a macro level complemented with a holistic welfare at micro level, the upcoming budget is expected to pave the way for India’s journey to become the third largest economy (GDP of USD 5 trillion by 2027-28).
In India’s quest to realize its full potential, attracting investments in sectors such as infrastructure, healthcare, renewable energy, fintech, IT/IT services etc. would be vital. Factors such as stabilization of interest rates across the globe, buoyant Indian capital markets and India’s increasing importance in the global economy augurs well for a robust M&A and PE activity in India. In this background, a summary of some of the key budget expectations from the PE fraternity is given below:
1) Revamping the existing capital gains tax regime
There are currently multiple capital gains tax rates, surcharges, and holding periods for different investment instruments. The industry has long anticipated the introduction of amendments to unify the holding periods and equalize the tax rates for both domestic and foreign investments, regardless of their form – whether equity, debt, listed or unlisted.
Additionally, the PE Funds have made numerous representations to the government to grant following deductions while computing capital gains: (i) expenses incurred at the time of acquisition of securities (such as legal and professional fees, due diligence fees etc) and (ii) management fees paid by the PE Funds to the fund manager.
2) Rationalisation of tax provisions to facilitate corporate M&A transactions
Given the buoyancy of the Indian capital markets, the Indian companies relocated offshore have growingly shown interest in listing their businesses in India. In order to incentivize such companies to re-domicile back to India and bring depth in the Indian capital markets, appropriate provisions should be introduced for reverse flipping in the best interest of the company and the shareholders.
The availability of losses on amalgamation of all companies (in addition to specified industrial undertakings currently provided for) is expected to give a fillip to business combinations in the form of mergers and acquisitions. Further, in case of intra group restructuring, where the ultimate holding company remains the same, clarity should be provided to permit carry forward of losses.
To encourage cross-border merger of India companies, it is suggested that a specific tax exemption be provided on the merger of Indian company with a foreign company.
3) Safe harbour for deemed gift provisions
The Gift tax provisions were introduced as anti-abuse provisions to curb laundering of unaccounted income. However, the catch-all nature of these provisions covers within its ambit even genuine transactions and hence creates an impediment for deals between third parties. Accordingly, on acquisition of unlisted securities by the PE investors, there is a need for safe harbour provisions to the extent of 10% taking into consideration the evolving dynamics of the acquisition structures.
Separately, the acquisition of listed securities by non-resident PE investors is already governed by various regulators such as the SEBI, the RBI etc. Accordingly, the acquisition of such listed securities should be kept outside the ambit of gift provisions.
4) Relaxation in the application of indirect provisions
The indirect tax provisions, introduced as a result of a controversy in a transaction in telecom sector have not kept pace with the evolving nature of the Fund structures. As a result, offshore Funds which are set up as multi-tier investment structures and making investments in India, suffer multiple level taxation of the same income at the time of repatriation of such income (other than by way of dividends) at the overseas level. This warrants a clarification that the indirect transfer provisions would not apply on repatriation of income proceeds at the overseas level where such income has already been subject to one-level tax in India.
The upcoming budget could potentially spur the M&A PE activity in India but will require a conscious effort to foster a conducive environment for diverse investment opportunities. It’s a daunting task ahead, but with the appropriate tax policies and a fair administration of the same, it’s a feat that India can certainly achieve.
(Kalpesh Maroo, Partner & National Head – Deal Advisory – M&A Tax, PE, KPMG in India; and Ankur Nishar, Partner, Deal Advisory – M&A & Private Equity Tax, KPMG in India.)
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