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Budget has little for corporate restructuring
March, 08th 2007
Fiscal policy can definitely give a direction to the M&A process through constant appraisal in the light of corporate practices in changing times. MR P. K. VIJAYARAGHAVAN, ASSOCIATE DIRECTOR, PRICEWATERHOUSECOOPERS PRIVATE

Budget 2007 has no proposal advancing the cause of restructuring other than the one specifically covering the merger of Air India and Indian for the purpose of utilisation of carry forward of losses and unabsorbed depreciation under Section 72A of the Income-Tax Act. Thus rues Mr P. K. Vijayaraghavan, Associate Director, PricewaterhouseCoopers Private Ltd. "Also, the proposal denying tax holiday benefit under Section 80IA to companies owning undertakings engaged in the business of infrastructure, industrial parks, generation, distribution or transmission of power will act as a dampener to restructuring," he adds. "The benefit will not be extended to such undertakings if they are transferred in a scheme of amalgamation of de-merger after March 31, 2007." Mr Vijayaraghavan is, however, hopeful that the needs of corporate restructuring will be addressed in the new tax code. Here are his answers to a few questions from Business Line.

Excerpts from the interview:

Why is `corporate restructuring' important as a theme for the Budget?

As global business strategies are moving towards consolidation and redefining core competencies to survive, sustain and achieve scale in a stiff marketplace, there is no second opinion that the corporate sector in India should not be left out in this dynamics witnessed by increased activity over the recent past.

The coveted Corus acquisition by Tata Steel is one outstanding example of Indian corporate thinking, and acting in terms of such global strategy which has prompted the Finance Minister, Mr P. Chidambaram, to hold out an assurance that the Government would do whatever it can to facilitate the acquisition process. Fiscal considerations do play a significant role in such strategies to ensure that the structures remain tax neutral and result in optimised tax cost. Taking into consideration several provisions that have been put in place over a period of time in the statute to ensure neutrality in income-tax assessment between the transferor company, its shareholders and the transferee company in the process of amalgamation and de-merger and also the keenness and encouragement coming from various quarters of the Government, including the Ministry of Commerce, it is manifest that corporate restructuring is an obvious need in the present day context. Fillip to such initiatives through fiscal orientation, in the form of proposals in the annual Finance Bill, is therefore inevitable.

How have the earlier Budgets addressed `corporate restructuring' issues? Is there any trend?

Since the 1990s, various provisions have been introduced from time to time. Recognition of the concept of de-merger as a distinct form of restructuring and further recognising the impact of change in shareholding of an Indian subsidiary company arising out of de-merger of its holding foreign company evidence the thinking of the Government to bring fiscal measures in tandem with corporate practices. These, coupled with various other pro-active measures aimed at promoting corporatisation of businesses, signal an emerging positive trend from the Government to adapt its fiscal policies to facilitate corporate restructuring. Specific provisions on buyback of shares are also noteworthy here.

What were the expectations from Budget 2007?

The expectations may broadly be classified into two categories one on modification of some of the existing provisions and the other in terms of support through further incentives.

Modification of existing provisions:

i) Basis of valuation of assets of the undertaking in de-merger left to shareholders' decision as approved by courts, than mandating it to be at book values;

ii) Stipulation of transfer of all the assets and liabilities of the undertaking in de-merger not addressing the situation of any statutory or contractual covenant prohibiting transfer of any liability or asset;

iii) Relaxation of conditions under Section 72A with regard to utilisation of losses and depreciation of the amalgamating company by the amalgamated company on retention of 75 per cent of the book value of fixed assets of the amalgamating company for a period of five years and the requirement to continue the business of amalgamating company for a minimum period of five years.

iv) Extension of the benefit of carry over of losses in the case of amalgamation to companies in the service sector other than the one already covered;

v) Clarifying that the tax holiday benefit will be available to Section 10A/10B/10AA companies in the event of amalgamation or de-merger happening in course of the previous year split between the pre- and post-periods of such amalgamation or de-merger.

vi) Restriction of Section 79 to curtail carry over of losses in case of change in shareholding of over 49 per cent of a closely-held company be made non-applicable to subsidiary companies of Indian holding companies similar to subsidiary companies of overseas holding companies.

Further incentives:

i) Concession in the matter of treatment of goodwill in the books of resulting company on revaluation of assets of the undertaking.

ii) Designed to promote and encourage overseas acquisitions by Indian corporates. Trade bodies have already made an appeal to the Government to formulate a comprehensive tax code in this direction.

Stamp duty is another area that requires immediate attention. Though this may not form part of the Budgetary exercise, the Union Government may, in consultation with State governments, declare that transfers in a scheme of amalgamation or de-merger approved by the court will be outside the purview of stamp duty. There is no uniformity of this levy among States, and with every State trying to collect duty on these transactions, this one step will remove all ambiguities and be a major incentive. These expectations were not confined to Budget 2007 in view of the forthcoming new tax code.

Are there best practices our fiscal policy can adopt with respect to corporate restructuring?

The policies have to be streamlined and structured without putting shackles through artificial objective parameters to test the genuineness or otherwise of the arrangement. Fiscal policy can definitely give a direction to the process through constant appraisal in the light of corporate practices in changing times.

Is it as easy for foreign companies to acquire businesses in India, as Indian companies do overseas?

The issue is not one of easy or tough. But in the present liberalised foreign direct investment regime of the Government, providing entry of foreign players in almost every sector, except in certain sensitive sectors, the process has been made much simpler. It is now left to the wisdom of shareholders of the target company.

Do costs of corporate restructuring act as impediments?

It's the need of the business, and valuation of assets holds the key.

D. Murali

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