By Vaibhav Gupta & Vibhor Jain
Indian Union Budget 2021-22: Budget FY22 has proposed amendments to improve the tax administration in the country and provides incentives to promote foreign investments, investments in the GIFT City, and in the insurance sector. From an M&A perspective, it seeks to bring in significant changes that are likely to impact deal structures.
In a far-reaching change, depreciation on goodwill will no longer be available as a deduction against the taxable income from the current year. Seeking to overrule a Supreme Court ruling, the amendment is presumably aimed at curbing depreciation on goodwill created through internal restructuring. However, it will also impact transactions involving payment for goodwill pursuant to business acquisition by third-party buyers, where goodwill is recorded on account of purchase price allocation of the consideration paid. In such cases, the value of goodwill will only be available as a cost on subsequent sale. Interestingly, one of the arguments of the government is that goodwill can only appreciate in value and hence, depreciation should not be permitted. Given the way the various provisions carrying out the amendment are worded, it will be interesting to see whether Revenue seeks to challenge depreciation claims of past years also.
Another change relates to business transfers structured as slump exchange. In the past, some courts have taken a view that a slump exchange involving issuance of securities as consideration is not taxable since the existing provisions cover taxation of a slump sale. With the proposed expansion of the definition of slump sale to include any means of transfer, the government has plugged this anomaly in law. This amendment provides clarity, quite welcome for the deal-making environment. While the amendment is meant to be effective prospectively, it will be interesting to see the position that gets taken for past transactions, including matters pending before the Supreme Court.
Taxation of partnerships upon dissolution or reconstitution has been changed to include distribution of cash or any asset by the firm to partners as capital gains for the firm. The change covers instances where revaluation of assets or valuation of goodwill of the firm was used to effect a tax-free distribution to the partners. Structures widely prevalent, particularly in the real estate sector, are now covered within the ambit of tax.
Similar to tax collected at source (TCS) on sale of goods, a new provision has been proposed covering deduction of tax at source on purchase of any goods from a resident seller. The CBDT had earlier clarified that TCS provisions shall not apply on transactions in securities traded on recognised stock exchanges. In light of a wider meaning of ‘goods’ and the CBDT clarification, transfer of securities by resident-sellers might become liable to a 0.1% TDS. The TCS provisions will no longer apply on such transactions. From an M&A perspective, this amendment is likely to remove the difficulty where a non-resident buyer of shares is required to claim a refund of the TCS amount. Introduction of section 206AB which increases TDS rate for non-filers of return of income is another provision which may impact indemnity aspects in transactions since the obligation to withhold a higher tax falls on the payer.
Availability of benefit of treaty withholding tax rates on dividend income to FPIs is very welcome—an ask of the FPI fraternity to set to rest the controversy created by the PILCOM ruling by the Supreme Court. With a view to encourage real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), TDS has been removed from dividend paid to them. Coupled with the proposal to allow such trusts to raise debt from FPIs, the Budget reaffirms the government’s commitment to promote India as a vibrant REIT market and attract foreign capital in the sector.
Other proposals such as raising FDI limit in insurance, disinvestment of two banks and a general insurance company, launch of InvITs by Power Grid and NHAI are again meant to provide a positive direction and boost foreign capital inflows. While an announcement on overseas listing was also anticipated, we hope that the Government would come out with guidelines on it sooner this year.
Gupta is partner & Jain is senior associate, Dhruva Advisors Views are personal