India Tax Talks: Key factors driving M&A activity

Significant opportunities thrown up by the Insolvency and Bankruptcy Code and global interest in India’s unicorns have ensured that M&A activity in India always remains in the headlines. Consequently, the impact of India’s tax and regulatory environment on any deals or even corporate restructuring cannot be ignored. With clarity, certainty and reduced complexity probably being the key buzzwords for investors, Indian or global, our third India Tax Talks episode focuses on the key aspects that drive the M&A activity in India and around the world.

1. Tax certainty: Certainty around tax positions is one of the key concerns and about M&A activity, especially for a buyer. To determine potential returns from any acquisition, buyers build in assumptions, and while one cannot factor in all business exigencies, changes in tax laws, which are often retrospective, may completely derail matters for them. The Angel Tax issue is one such example, where, while the intent of the Government was to tax black money, the provisions have impacted genuine investments, especially in start-ups. The Government is now trying to ease this situation, but how this actually pans out remains to be seen. This apart clarity on issues such as depreciation on goodwill and taxation of contingent consideration would go a long way in bringing about certainty.
2. IBC: With the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC), the framework of insolvency and bankruptcy has been consolidated into a single law. With a time-bound process, streamlined resolution, speedy redistribution of assets and business, etc. this is a game changer, which leads to an improvement in non-performing assets.
   However, while an entire framework and ecosystem has been built to speedily resolve matters, and several regulations imposed by SEBI, the Companies Act and exchange control regulations have been amended to smoothen the IBC process. Limited relief is provided in tax laws, especially with reference to taxability of haircuts on loans, including levy of Minimum Alternate Tax (MAT). Moreover, buying out listed companies through the IBC process can trigger tax under the provisions of Section 56(2)(x) for an acquirer, leading to potential acquirers shying away from a deal or considering elaborate structures to achieve their ultimate objective. Streamlining these gaps would go a long way in making the IBC a success.
3. Stamp duty: Currently, except for stamp duty on share issues or transfers, stamp duty on all other M&A activity (business sales, mergers, demergers, etc.) varies across states. The mechanism for determining the amount payable also varies, making determination of stamp duty for M&A a complex exercise. Hence, reforms such as a uniform central stamp duty law, a robust set of provisions, ready reckoner rates made available online and updated in time, the facility of conducting adjudication online, etc. should be considered to improve transparency and ease of doing business.
4. Tax reforms: From the standpoint of M&A, some tax reforms would be change in the ambit of section 72A, to remove the artificial distinction between the service sector and manufacturing companies, and other limited sectors. A radical change that may be considered is tax consolidation. In several countries, a consolidated tax return is filed for a ‘tax group’, which neutralises all inter-company transactions. Profits and losses of companies within a group are offset, reducing the group’s effective tax rate and results in companies becoming more competitive in world markets.
   India now has clear rules in its corporate laws for the layers of companies that may be created.  In this scenario, bringing in fiscal consolidation with adequate anti-abuse rules may be a path- breaking measure, making the need for significant group restructuring or related exemptions redundant.
5. Use of technology: Almost all M&A transaction such as mergers and demergers need the approval of National Company Law Tribunal (NCLT). There is a huge backlog at the NCLT, including on IBC matters, which are time-bound. This throws commercial deadlines out of gear. In any case, documentation-related requirements for filings with NCLT are significant. Wastage of resources due to the backlog and documentation requirements could be avoided by making the process an online and single window one, with little or no human interface. The savings are likely to be multifold as far as the environment, time, efforts, ease of doing business, etc. is concerned.
   M&A activity in India will always continue to elicit interest. However, some streamlining of the tax and regulatory environment would be welcome.