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Core cos in a knot over tax holiday
March, 03rd 2007

Infrastructure companies like telecom, power, oil and gas, which enjoy tax holiday under Section 80-IA of the Income Tax Act, may have to rush with their plans of amalgamation or demerger to continue the exemption.

As per amendments proposed in the Finance Bill, any company undergoing an amalgamation or demerger after March 31 will not be able to enjoy the tax holiday. Imposition of a deadline for the tax breaks by inserting a new sub-section, 12A is seen as a major blow to these companies.

Under Section 80-IA, many companies in infrastructure sectors like industrial parks, oil and gas, power distribution and transmission, gas pipelines and storage facilities enjoy a 10-year tax holiday. Telecom firms will be among the worst-hit as many of them have plans to hive off certain segments like towers.

Companies in other sectors are also expected to face the heat. Gail, for example, would be affected when it demerges its pipeline business from marketing activities. As this demerger cannot be done before the governments deadline, the oil sector PSU will lose out on the tax breaks.

AV Birla Group-controlled Idea Cellular would be another victim. Its red herring prospectus indicates that Idea has approved the merger of its three Idea subsidiariesIdea Telecommunications, Idea Mobile Communications and BTA Cellcomwith itself. (Idea Mobile offers cellular services in Haryana, Kerala, UP-West. Idea Telecom, in turn, operates in Rajasthan, Himachal Pradesh and UP-East while BTA Cellcom operates cellular services in Madhya Pradesh.)

While the appointed date of the merger is April 1, 2006, its conclusion is subject to the approval of the high courts concerned. When contacted, AV Birla Group circles were in the dark on whether the tax breaks available to Idea subsidiaries under Section 80-IA would also travel to the merged entity if the ongoing merger exercise misses the new March 31, 2007, deadline.

Explains Bharat Banka, president & head (group finance) of the Aditya Birla Group, The intention of the finance minister appears to be to withdraw the tax breaks available to undertakings under Section 80-IA in case of amalgamation/demerger schemes concluded after March 31, 2007. If this is indeed the case, the FM should ideally review the proposal as there is clearly very little time left. If the proposal is not withdrawn, the government ought to make matters prospective, in that, the tax breaks under 80-IA should be available to the merged entity for amalgamation schemes concluded after March 31, 2007, in the interest of the telecom industry.
 
Mr Banka, however, declined to comment on possible tax impact on the yet-to-be concluded merger exercise of Idea and its subsidiaries.

More importantly, the move would also impact telecom companies planning to hive off their towers/related passive infrastructure assets to separate companies through the demerger route. The likes of Bharti Airtel and Reliance Communications Ltd (RCL) have already announced plans in this light.

While Bharti Airtel plans to transfer all its towers/passive infrastructure to a separate company, Bharti Infratel, RCLs reportedly looking at demerging its passive infrastructure (towers, OFC) to a separate entity, Reliance Telecom Infrastructure, which will be an RCL subsidiary.

 
 
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