MR AMRISH SHAH, Executive Director, PwC.

Though there are many provisions in the Income Tax Act to encourage M&A (mergers and acquisitions) and internal corporate restructuring, we need much more, considering international practices, says Mr Amrish Shah, Executive Director, PricewaterhouseCoopers.

"Income-tax and stamp duty are the most important costs of executing an M&A deal. Significant opportunities exist for structuring a deal efficiently from a tax perspective, especially in the case of cross-border transactions as well as mergers and demergers," says Mr Shah, in a recent interaction with Business Line. Excerpts from the interview:

M&A sops aren't available to all the sectors. Your comment.

The current law provides that in the case of a merger, carried forward business losses and unabsorbed depreciation of the merging company is available for carry forward and set off against the profits of the merged entity, provided certain conditions are fulfilled. One of the conditions is that such benefit is available to only certain sectors viz. manufacturing, telecom, software, shipping, hotels, etc.

The question that arises is why this benefit is not available to the service sector as a whole, especially when service sector in India is growing at a frenetic space. M&A has become a compelling necessity. Accordingly, the tax benefits should be extended to the service sector as a whole, including airlines, healthcare, financial services, etc.

Any ambiguities that merit clarification.

In the case of merger/ demerger, there are ambiguities in relation to continuance of tax holidays under Sections 10A/ 80IB and so on, because of the typical language of the provisions. Tax holiday is not available to the amalgamating/ demerged company in the year of amalgamation/ demerger. Accordingly, in case the merger/ demerger is effective from a date other than April 1, the tax holiday is not available to either of the companies for the period beginning April 1 till the date of effect. A more rational approach would be to allow the tax benefit for the year to be split between the companies based on the date of effect, as is allowed in case of current year depreciation.

Another ambiguity exists in the formula used for splitting the shares of a demerged company between the demerged and the resulting companies, in the case of a demerger. The formula is based on the net worth of the demerged company in comparison to the net book value of the assets of the undertaking. It would be beneficial if a single criterion were used, in order to avoid illogical results from the formula.

Can our treatment of `goodwill' be better? How?

Goodwill that arises in an acquisition is `acquired goodwill', and internationally it is treated differently from the way we do. For instance, in the US, in the case of business/ asset acquisition, the difference between the fair value of assets acquired and the consideration is attributed to goodwill. Though the Indian law is not very clear, the same principle is followed, based on the accounting treatment and the legal precedents. However, the important difference is that the US allows `tax' amortisation over a 15-year period even for goodwill, while India allows depreciation at 25 per cent only for intangibles other than goodwill. This is a major deterrent to business/ asset acquisitions, as some part of the purchase cost is `sunk' from a tax perspective.

Any other practice that we may adopt?

In the US, again, it is possible for a target to merge with a 100 per cent subsidiary of the acquirer, wherein the shares of the acquirer (which is the parent of the merged entity) are directly issued to the shareholders of the target. The merger still remains `tax-neutral'. Such an option, however, is not available in India.

One other example is of `share swaps'. In countries such as the US, share swaps, subject to certain conditions, are exempt from tax. Of course, the cost of the acquired shares remains the same as the swapped shares, i.e. no step up in cost basis is available. India considers share swaps as `taxable events', resulting in capital gains even where cash consideration does not pass.

The only exception to this rule is where share swap happens as a result of a merger. Adopting the international model will provide greater flexibility in structuring M&A deals. In order to prevent misuse, it can be provided that only those deals where share swaps form more than 50 per cent of the consideration should be exempt for the `share swap' portion; the cash portion should be taxed as per the normal provisions.

On restrictive conditions governing mergers that may require relaxation.

To claim benefit of losses on merger, there are certain conditions that need to be complied with. The post-merger conditions are especially quite restrictive - the condition for continuing the loss-making business for 5 years and owning 75 per cent of the fixed assets for 5 years. These should be diluted significantly (period may be reduced 2 or 3 years) or may be removed completely. There is also a condition relating to achieving certain capacity utilisation, which is totally irrelevant to the service sector and needs to be removed.

And, in the case of demergers?

Currently, there are no restrictive conditions for claiming the benefit of tax losses, in the case of demergers. However to qualify as a `demerger', and therefore in order to claim the benefit of tax losses of the demerged company, there are conditions which one may consider logic - defying. For example, one of the conditions is that assets and liabilities need to be transferred at book value.

This unnecessarily restricts fair value accounting, especially when anyway now under the tax law, the depreciation is not linked to such book value. Another condition relates to bifurcation of common borrowings based on an 'asset' formula. Why the tax law should provide for what is essentially a commercial decision, is not clear.

D. Murali