The initial judgment of the exchange and market participants seems to suggest that the 2021 Finance Act is indeed the budget of the new decade.
The Union budget appears to have addressed several issues such as affordable housing, stimulating the economy through strategic divestment and infrastructure development, and streamlining various tax rules to reduce tax disputes, etc.
At the same time, it has also clarified the intention of the legislature regarding the tax liability or the obligation of taxpayers to carry out certain transactions.
Some of the key 2021 budget tax highlights that affect corporate mergers and acquisitions are discussed below:
Incentives for startups
According to current law, the deduction of 100% profit and profit of an eligible company by an eligible startup is permitted for three consecutive assessment years of 10 years at the taxpayer’s choice, provided the startup was founded on or after April 1st. 2016 but before April 1, 2021.
The 2021 budget proposes to extend the founding date of startups for another year, meaning startups founded before April 1, 2022 can also take advantage of the above benefits.
REIT, InvIT
Last year’s budget changed the tax regime declared by Indian companies for taxing dividends. The dividends were made taxable in the hands of the recipient and the company’s obligation to declare a dividend was withheld at the statutory tax rate depending on the recipient’s residential status.
With regard to receipt of the dividend by InvIT and REIT from the operating companies, while the exemption was provided for InvITs and REITs, companies that declare a dividend from withholding tax on InvIT and REIT were not granted a corresponding exemption.
In the 2021 budget, it is proposed to provide for an exemption from withholding tax when the dividend is paid to REIT and InvIT.
State funds, pension funds
To stimulate investment in the infrastructure sector, the budget last year had included a provision under Indian tax law that exempts sovereign wealth funds (SWFs) and pension funds (PFs) (subject to the fulfillment of prescribed conditions) from income in nature from dividends, Interest or long term capital gains on an investment you make in India. There were certain questions that went unanswered during the year.
On the basis of the declarations received, the 2021 budget proposes to streamline certain provisions in order to remove difficulties in meeting the necessary conditions for the benefit of the exemption. Some of the proposed changes are as follows:
- Allow the Alternative Investment Fund (AIF) to invest up to 50% in ineligible assets
- Investment by holding company
- Permit to invest in NBFC-IDF / IDC (Non-Bank Financing Company – Infrastructure Debt Fund / Infrastructure Financing Company).
The aforementioned easing would make it possible to structure investment in India according to commercial objectives and stimulate foreign investment in the country and lead to infrastructure development and employment opportunities.
Infra Debt Fund zero coupon bond
The government has notified the Infrastructure Debt Fund (IDF) of the issuance of a zero coupon bond in accordance with Indian tax laws. However, the definition of the zero coupon bond has not been changed accordingly.
It is proposed that this anomaly be corrected by the 2021 budget by making necessary changes to the definition of the zero coupon bond to include an IDF as well. It is also proposed to exclude income from zero coupon bonds from the withholding tax regime.
This will give the infrastructure sector a huge boost and invite more companies to create infrastructure debt funds and raise funds by issuing zero coupon bonds for long term purposes.
Slump Exchange included in the definition of Slump Sale
Burglary sale means the transfer of one or more businesses as a result of a sale for a lump sum without any value being assigned to individual assets and liabilities.
However, a transfer of any business other than through sale (commonly known as the Slump Exchange) was not provided for in Indian tax laws.
The question of whether a transaction is a break-in or a break-in has been controversial. As a result, certain high value transactions were conducted as part of a burglary exchange.
In ruling on the tax liability of such transactions, the Bombay Supreme Court ruled in the case of Bharat Bijlee Limited that the transaction to transfer the business, if carried out in any manner other than sale, cannot be considered a burglary and taxed.
As a result, the concept of burglary exchange evolved and differed from burglary selling. As a result, it was found that the burglary was not taxable.
The Treasury Department’s appeal against the Bombay High Court ruling was pending in the Supreme Court, and therefore it has always been controversial to conduct a transaction by way of a break-in (other than for commercial reasons).
The 2021 budget has addressed this uncertainty. It is now proposed to tax all transactions that fall under the definition of transfer, i.e. H. Exchange, deletion, abandonment, etc.
The above change is in line with the phrase “substance over form”. This change will take effect from the fiscal year starting April 1, 2020. Therefore, a burglary transaction already carried out in the current financial year (2020-21) cannot be regarded as tax-free.
Goodwill amortization
This is another topic that has been debated for a long time.
The question is whether the goodwill that is similar to business or commercial law is a depreciable asset under Indian tax laws. That question was raised in the Supreme Court of Smiffs Securities Limited. The Supreme Court ruled that goodwill is a depreciable asset that can be written off under Indian tax laws.
To negate the above decision, the 2021 budget has proposed:
- The goodwill of a company or profession is not considered a depreciable asset, so no depreciation can be claimed
- Even in cases in which goodwill is acquired, the purchase price of the goodwill is regarded as the acquisition cost for the calculation of capital gains, provided that the amortization of this goodwill in previous years is based on the purchase price to be deducted from goodwill
- It has also been suggested, in a case where a write-off was made on the goodwill of a business or profession that was part of a block of assets for previous years, the depreciated value of that block of assets and the short-term capital gain if each is in determined in the prescribed manner
While the above two changes to the taxation of burglary and goodwill amortization confirm the intent of lawmakers, it can be cause for concern for businesses as the changes are aimed at reducing the High Court’s decision. of the Supreme Court.
In addition, the 2021 budget did not address the concerns of stressed companies, in particular related to:
- Inapplicability of gift tax provisions for:
- Selling stocks of stressed companies
- Issued shares by stressed companies as part of a resolution plan that raises funds to survive or raise capital.
- Use of the loss carryforward to stressed companies that have not taken the IBC route, with adequate protection
- Tax liability on reversal of loans
Final remarks
The 2021 budget can be described simply as the “vaccine shot for corporate M&A”. While the Union’s 2021 budget has not brought about any breathtaking easing, it has made the legislature’s intent loud and clear by proposing changes to the taxation of burglary and the unavailability of depreciation on the goodwill of a company or profession.
The government’s proposed affordable housing incentives and plans for strategic divestment suggest the intent is to fight the pandemic and emerge victorious.
Given the government’s actions on certain aspects mentioned above, only time will tell whether India Inc sees the Union’s 2021 budget as a blessing or a curse.
Anil Talreja is a partner, Pushkar Khire is a director and Ankit Panchal is a manager at Deloitte Haskins and Sells LLP.