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Is there a need to review tax benefits for mergers?
December, 05th 2006
It will be useful to review whether Section 72A should be expanded: Expert


The Indian-Air India merger proposal has been in the air for some time now. With the Union Finance Ministry indicating that the coming together of the two national airlines may get the blessings of Section 72A of the Income-Tax Act, it looks like that the way forward is bright. However, to remove the haze about what the tax benefits may be under income-tax provisions, the Business Line contacted Mr Girish Vanvari, Executive Director of KPMG, Mumbai.

What is the rationale of Section 72A?

The Indian tax law offers several concessions for merger/de-merger. One of the key concessions is the transfer of unabsorbed losses and unabsorbed depreciation.

How does that help?

Transfer of unabsorbed losses and unabsorbed depreciation facilitates the revival of loss-making units. Further, as an additional incentive, the law provides for a revival of the eight-year period for the carry forward of unabsorbed losses. This concession is, however, available only in the case of mergers of companies engaging in manufacturing activities, telecommunications, manufacturing of computer software, specified banks, power generation companies and so forth.

Not all mergers are eligible for the concessions?

Interestingly, most of the activities in the service sector, which forms part of the heart of the Indian economy, are not covered under this provision. For example, merger of advertising companies, airline companies, consulting companies and so on, is not entitled to this concession.

Are there any other conditions?

Yes, there are cumbersome conditions to be satisfied for the transfer of unabsorbed loss and depreciation. The law requires the merging company to carry on the business for at least three years prior to the merger and for the merged company to carry on the business for at least five years after the merger. Further, it also requires continuity of ownership of a portion of the fixed assets of the merging company for a specified period before and after the merger.

Do de-mergers also have to meet similar criteria?

As far as de-mergers are concerned, the conditions for transfer of unabsorbed losses and depreciation are not that onerous. There is no restriction on carrying on the business or on the ownership of the assets. Further, the concession is available to all businesses unlike mergers. However, there is no revival of the carry forward period.

Can there be occasions when a merger or de-merger fails to reap the anticipated tax benefits?

Acceptability to the revenue authorities of the transfer of unabsorbed losses/ depreciation, in case of mergers/de-mergers, would normally depend on the commercial rationale of the transaction and satisfaction of the above-mentioned conditions. Mergers/de-mergers driven by tax motives are likely to be more prone to scrutiny than transactions driven by genuine commercial rationale.

Is there a need for a re-look at Section 72A in the context of a rise in M&A (merger and acquisition) activity?

Yes, in the run-up to the Budget, it may be useful to review whether the ambit of the Section should be expanded to include other sectors, such as the service sector and as to whether the conditions for carry forward should be liberalised.

D. Murali

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