The proposal in the Budget to amend the tenure for carrying forward of losses after a merger could be a double-edged sword, according to M&A (mergers & acquisitions) and tax experts.

While on the one hand it may curtail evergreening of tax benefits on account of carrying forward of losses, it could also deter well-run companies from investing in ailing ones and turning them around, they said.

The Budget, presented by finance minister Nirmala Sitharaman on Saturday, proposed curtailing the tenure of carrying forward of losses of an acquired company by the acquiring one only for the residual period of eight years from the assessment year in which the first instance of loss was reported.

Currently, in case of merger or amalgamation of companies or business reorganisation, the accumulated loss of the predecessor entity is deemed to be the loss of successor entity for the previous year in which the amalgamation was brought into force and can be carried forward for eight years from the year of the merger. The amendment will come into effect from April 1, 2025.

“The explanatory memorandum seems to suggest that this amendment is proposed to bring clarity and parity, prevent evergreening of losses and to ensure that carry forward and set-off is not allowed beyond eight years after the year in which the loss is originally incurred,” Pranav Sayta, international tax and transaction services leader, EY India, said.

For instance, if a loss-making company is acquired in the fourth year of reporting losses, the acquiring company can – according to the current provision – carry forward the loss of the acquired company for eight years starting from the year of the merger. Carrying forward of losses helps the acquiring company reduce the taxable profits and in turn reduce tax outgo for the year.

Under the proposed amendment, the acquiring company will be able to carry forward losses, in this example, and consequently reduce taxable profits, for four years, starting with the year of the merger/acquisition.

Experts said that while argument can be made that if the predecessor or the company being acquired itself is not being allowed carrying forward of losses beyond eight years, the successor or merged entity after the acquisition should not be granted an even more favourable regime to carry forward and offset losses for another eight years.

“However, if the intention is to incentivise an efficiently run profitable company to absorb, take over and revive and revitalise an ailing company with large accumulated losses, thereby protecting jobs, improving efficiency, ensuring productive utilisation of resources and capital costs already incurred, minimising NPA’s (non-performing assets) for lenders/creditors, and giving an impetus to consolidations which are generally value-accretive to the economy, then this step may well be counter-productive since it will reduce the incentive for such mergers to take place,” Sayta added.

In 2024, India Inc carried out 479 M&A deals resulting in an aggregate deal value of $23.5 billion (`2 lakh crore), according to a report by Grant Thornton. There were 83 inbound deals with a deal value of $3.7 billion (`32,000 crore), it said.

The proposed amendment also throws a spanner in the works for deals that were decided before the start of the next fiscal, basis the benefits in the current provision, experts said.

There are some grey areas as well, say analysts. For example, the proposed amendment does not clarify whether the amended tenure for carrying forward of losses of the acquired company is effective from the date of the approval of the merger or from the date of the execution of the merger.