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Services sector need to brought under Section 72A of the Income-Tax Act
January, 19th 2018

With the surge in M&A activities, it is imperative to have a befitting tax regime which gives an added fillip to these activities. There are various provisions under the Income Tax Act which confer tax neutrality to mergers and acquisitions upon fulfilment of specified conditions.

Inorganic growth or external expansion institutes an exponential growth in the businesses by bringing in various synergies. With India Inc witnessing a spur in the growth momentum, mergers and acquisitions have become an integral phenomenon in the economy. Certain acquisition deals in the recent past have made some of the biggest headlines.

With the surge in M&A activities, it is imperative to have a befitting tax regime which gives an added fillip to these activities. There are various provisions under the Indian Income Tax Act (‘the Act’) which confer tax neutrality to mergers and acquisitions upon fulfilment of specified conditions.

Similarly, section 72A of the Act encourages amalgamation and restructuring of a company by allowing carry forward and set-off of accumulated business losses and unabsorbed deprecation of the predecessor to the successor. This basic intent behind introduction of section 72A (s. 72A) was to facilitate the amalgamation of sick industrial units with the profitable undertakings so as to relieve the government of uneconomical burden of running and operating these sick units.

The provisions of s. 72A of the Act, initially conferred this benefit of carry forward and set off of losses only in respect of following amalgamations:

Further in order to avoid disputes in relation to what may constitute an industrial undertaking, the term was defined by Finance Act 2001 to primarily cover certain manufacturing companies. This definition of industrial undertaking was widened by Finance Act 2002 to include companies engaged in the business of telecommunication services. This was done with a view to encourage rapid consolidation and growth in this important infrastructural area as a measure to accelerate economic development. Subsequently, in the year 2007, public sector companies engaged in business of operation of aircraft were also included within the ambit of this section.

As stated earlier, in the current economic situation, consolidation and amalgamation of businesses has become an important tool of economic development. This is now no more a specific sectoral trend but has become a widespread phenomenon across various business lines. The campaign start-up India though launched with a big bang, did not turn out to be as successful owing to various factors – (funding and follow on funding being one of these). This has also led to an uptick in mergers and acquisition deals.

As reported in the Economic Survey 2016 -17[5], the service sector is one of the key drivers of economic growth with a significant contribution to the country’s GVA growth.

It has been represented in various pre-budget recommendations over the years that s. 72A of the Act is restrictive in its application in as much as the benefit of carry forward being available only to company owning industrial undertaking or a ship or a hotel or banking company etc. Due to this, other sectors especially the service sector are confronting an unwarranted rigour by their non-inclusion.

In this scenario, there may not be any more opportune time to revisit the scope of the provisions of s. 72A of the Act and make it more inclusive and comprehensive to cover service sector.

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