Tax Impact in India and Abroad in M&A

By Hitesh Kumar & Shradha Dubey

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Mergers & Acquisitions (M&A)

M&A recognized by Income Tax Act,1961 (ITA)  Amalgamation/Merger  Acquisition (transfer) of shares  Demerger  Sump sale/Itemized sale

TAX IMPLICATIONS IN MERGER/AMALGAMATIONS

Definition and Chargeability Merger not defined. Amalgamation as per Section 2(1B) of ITA Under ITA, Capital gains are charged to tax u/s 45. S. 45 Profits & gains taxable when arising from transfer of capital asset in India. Transactions tax free only on merger of a foreign company into an Indian company.

Exemption from CGT No CGT implications on mergers/amalgamations provided they satisfy conditions of S. 47 of ITA. Conditions for exemptions from CGT  transfer of capital asset from amalgamating co. to amalgamated co. is exempt if amalgamated co. is an Indian company. {S. 47(vi)}  transfer of share(s) in amalgamating co. is exempt if (i) transfer is for consideration of share(s) allotted to the shareholders of amalgamating co. in amalgamated co., and (ii) amalgamated co. is an Indian company. {S. 47 (vii)} Contd..
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Contd.  Exemption from CGT is applicable at shareholder level to the extent shareholders receive shares as consideration.  Transfer of share(s) held in Indian co., by amalgamating foreign co. to amalgamated foreign co. is exempt if (i) at least 25% of shareholders of amalgamating foreign co. become the shareholders of amalgamated foreign co., and (ii) such transfer is not subject to capital gains tax in the home country of amalgamating foreign co. {S. 47 (via)}.

Treatment of accumulated losses & unabsorbed depreciation (S. 72A) Accumulated loss (AL) & Unabsorbed depreciation (UD) of amalgamating co. deemed to be AL & UD of amalgamated co. Entitlement is available if following conditions are fulfilled: Amalgamating co.  has been in that business for at least 3 years,  has held at least 3/4th of book value of fixed assets for 2 years. Contd..
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Contd. Amalgamated co.  to continue the business (all businesses) of amalgamating co. for at least 5 years,  to hold least 3/4th of book value of fixed assets of amalgamating co. for 5 years,  to fulfill such other conditions as may be prescribed to ensure the revival of business of amalgamating co. or that amalgamation is for genuine business purpose.

Other Tax Benefits Amalgamated co. can claim deduction for:  Expenditure incurred on scientific research (S. 35)  Expenditure for obtaining license to operate telecommunications services (S. 35ABB)  Preliminary expenses (S. 35D)  Expenditure incurred for amalgamation (S. 35DD)  Expenditure incurred under VRS(S. 35DDA)  Expenditure on prospecting, etc., for certain minerals (S. 35E) Amalgamated co. is eligible for unexpired tax holidays under sections 10A, 10AA and 10B.
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TAX IMPLICATIONS IN ACQUISITIONS

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Modes of Acquisition & Classification of assets Acquisitions may generally take following forms:  Acquisition of shares  Acquisition of assets  Acquisition of business (slump sale) Tax treatment and applicable rates under ITA depend upon type of acquisition and period of holding of a particular asset. Long term capital asset (LTCA) and Short term capital asset (STCA) are defined under S.2(29A) and S. 2(42A) of ITA. Gains arising from transfer of LTCA are Long Term Capital Gain (LTCG). Gains arising from transfer of STCA are Short Term Capital 11 Gain (STCG).

Tax impact of Acquisition of shares Shares held for 12 months or less Short term capital asset. Shares held for more than 12 months Long term capital asset. Sellers perspective :  Chargeable under section 45 of ITA.  STCG & LTCG rates depend upon whether shares are listed or unlisted and also upon whether seller is resident or non-resident (refer to Tables on next slides)  DTAA (Mauritius) Article 13 Capital gains derived by a resident of a State chargeable to tax in that State only.
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STCG on Sale of Shares

Nature of share Unlisted Unlisted Listed (if STT is paid) Listed if STT is paid) Listed (if STT is not paid) Listed (if STT is not paid) Resident status Resident Co. Non-resident Co. Resident Co. Tax Rate (%) 33.22 42.23 16.61 Section Finance Act Finance Act 111A

Non-resident Co. Resident Co. Non-resident Co.

15.84 33.22 42.23

111A Finance Act Finance Act

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LTCG on Sale of Shares

Nature of share Unlisted Unlisted Listed (if STT is paid) Listed if STT is paid) Listed (if STT is not paid) Listed (if STT is not paid) Resident status Resident Co. Non-resident Co. Resident Co. Tax Rate (%) 22.15 21.12 Nil Section 112 112 10(38)

Non-resident Co. Resident Co. Non-resident Co.

Nil 11.07 10.56

10(38) 112 Proviso 112 Proviso

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Buyers perspective:  Section 195: Withholding tax  Honble Supreme Court held in G.E. India Technology Centre Private Ltd. Vs CIT & Anr. [MANU/SC/0688/2010] that the payer is bound to deduct Tax at Source (TAS) only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted.  Vodafone acquisition of shares of Hutch raises a controversy over jurisdiction of IT Dept.- whether acquisition of shares by a non-resident entity from another non-resident entity is taxable in India in respect of capital gains of the non-resident seller and if so, does the non-resident buyer have a withholdings obligation u/s 195. 15

Vodafone transaction
Transfer of shares by HTIL (A Cayman Islands) Co.)

Vodafone (Netherlands)

CGP Investments (Cayman Islands)

Mauritian Cos.

Indian Cos.

Vodafone Essar Ltd. (Indian Co.)

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Issues arising from Vodafone transaction Jurisdiction over cross border transactions between non-residents. Extra territorial operation of Indian Laws. Implications for overseas investors. Possibility of other similar transactions to come under tax scanner - Indemnity from the buyer.

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Tax impact of Acquisition of assets Acquisition of assets may take place either as a purchase of one or more individual assets or as purchase of whole of the undertaking as a going concern (slump sale). Assets held for 36 months or less Short term capital asset. Assets held for more than 36 months Long term capital asset. Sellers perspective in case of itemized sale of assets:  Chargeable under section 45  In case of non-resident seller, gains from transfer of (i) short term capital asset chargeable @ 42.23%, (ii) long term capital asset chargeable @ 21.22%.
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 In case of resident seller, gains from transfer of (i) short term capital asset chargeable @ 33.22%, (ii) long term capital asset are chargeable @ 22.15%. Buyers perspective:  Section 195: Withholding tax

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Tax impact of Slump Sale Slump Sale as per S. 2(42C) of ITA The transaction of Slump Sale is chargeable under section 50B of ITA. Computation of capital gains in Slump Sale:  If the capital asset being undertaking has been held for more than 36 months long term capital gain.  If the capital asset being undertaking has been held for 36 months or less short term capital gain.
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Slump Sale
Sale proceeds Net worth Capital gains

Value of assets

Value of liabilities

WDV (depreciable assets)

Nil (capital assets deduction allowable u/s 35AD)

Book Value (other assets)

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TAX IMPLICATIONS IN DEMERGERS

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Definition and Chargeability Demerger as per Section 2(19AA) of ITA  All properties of undertaking before demerger become properties of resulting co.  All liabilities of undertaking before demerger become liabilities of resulting co.  Resulting co. issues shares in consideration.  Shareholders (at least 3/4th in value) in demerged co. become shareholder in resulting co.  Transfer of undertaking is on a going concern basis. Under ITA, Capital gains are charged to tax u/s 45. Section 45 Profits & gains taxable when arising from transfer of capital asset in India 23

Exemption from CGT No CGT implications on demergers provided they satisfy conditions of S. 47 of the ITA. Conditions for exemptions from CGT  transfer of capital asset by demerged co. to resulting co. is exempt if resulting co. is an Indian company. {S. 47 (vib)}  transfer or issue of share(s) by resulting co. to the shareholders of demerged co. is exempt if transfer or issue is in consideration of demerger. {S. 47 (vid)} Contd..
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Contd..  Transfer of share(s) held in Indian co. by demerged foreign co. to resulting foreign co. is exempt if (i) shareholders holding at least 3/4th in value continue to remain the shareholders of resulting foreign co., and (ii) such transfer is not subject to capital gain tax in the home country of demerged foreign co. {S. 47 (vic)}

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Treatment of accumulated losses & unabsorbed depreciation (S. 72A) Resulting co. is allowed to carry forward and set off accumulated loss & unabsorbed depreciation of demerged co. in following manner:  If loss/unabsorbed depreciation is directly relatable to undertaking transferred to resulting co. entirely allowed to be carried forward and set off.  If not directly relatable then proportionately allowed to be carried forward and set off.  No such conditions like holding of at least 3/4th of book value of fixed assets for 2 years or continuance of business for a minimum specified period are applicable. 26

Other Tax Benefits Resulting co. is eligible to claim deduction for:  Expenditure for obtaining license to operate telecommunications services (S. 35ABB)  Preliminary expenses (S. 35D)  Expenditure incurred for demerger (S. 35DD)  Expenditure incurred under VRS (S. 35DDA)  Expenditure on prospecting, etc., for certain minerals (S. 35E) Resulting co. is eligible for the unexpired tax holidays under sections 10A, 10AA and 10B.

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