By Vaibhav Gupta & Vibhor Jain
Indian Union Budget 2021-22: Budget FY22 has proposed amendments to boost the tax administration in the nation and gives incentives to market foreign investments, investments in the Present City, and in the insurance coverage sector. From an M&A viewpoint, it seeks to bring in considerable adjustments that are most likely to effect deal structures.
In a far-reaching modify, depreciation on goodwill will no longer be accessible as a deduction against the taxable revenue from the existing year. Seeking to overrule a Supreme Court ruling, the amendment is presumably aimed at curbing depreciation on goodwill developed by way of internal restructuring. However, it will also effect transactions involving payment for goodwill pursuant to small business acquisition by third-party purchasers, exactly where goodwill is recorded on account of obtain price tag allocation of the consideration paid. In such situations, the worth of goodwill will only be accessible as a expense on subsequent sale. Interestingly, one of the arguments of the government is that goodwill can only appreciate in worth and therefore, depreciation ought to not be permitted. Given the way the several provisions carrying out the amendment are worded, it will be fascinating to see whether or not Revenue seeks to challenge depreciation claims of previous years also.
Another modify relates to small business transfers structured as slump exchange. In the previous, some courts have taken a view that a slump exchange involving issuance of securities as consideration is not taxable considering that the current provisions cover taxation of a slump sale. With the proposed expansion of the definition of slump sale to contain any indicates of transfer, the government has plugged this anomaly in law. This amendment gives clarity, very welcome for the deal-creating atmosphere. While the amendment is meant to be helpful prospectively, it will be fascinating to see the position that gets taken for previous transactions, like matters pending ahead of the Supreme Court.
Taxation of partnerships upon dissolution or reconstitution has been changed to contain distribution of money or any asset by the firm to partners as capital gains for the firm. The modify covers situations exactly where revaluation of assets or valuation of goodwill of the firm was used to impact a tax-totally free distribution to the partners. Structures extensively prevalent, specifically in the true estate sector, are now covered inside the ambit of tax.
Similar to tax collected at supply (TCS) on sale of goods, a new provision has been proposed covering deduction of tax at supply on obtain of any goods from a resident seller. The CBDT had earlier clarified that TCS provisions shall not apply on transactions in securities traded on recognised stock exchanges. In light of a wider which means of ‘goods’ and the CBDT clarification, transfer of securities by resident-sellers may grow to be liable to a .1% TDS. The TCS provisions will no longer apply on such transactions. From an M&A viewpoint, this amendment is most likely to get rid of the difficulty exactly where a non-resident purchaser of shares is necessary to claim a refund of the TCS quantity. Introduction of section 206AB which increases TDS price for non-filers of return of revenue is one more provision which may perhaps effect indemnity elements in transactions considering that the obligation to withhold a larger tax falls on the payer.
Availability of advantage of treaty withholding tax prices on dividend revenue to FPIs is incredibly welcome—an ask of the FPI fraternity to set to rest the controversy developed by the PILCOM ruling by the Supreme Court. With a view to encourage true estate investment trusts (REITs) and infrastructure investment trusts (InvITs), TDS has been removed from dividend paid to them. Coupled with the proposal to permit such trusts to raise debt from FPIs, the Budget reaffirms the government’s commitment to market India as a vibrant REIT market place and attract foreign capital in the sector.
Other proposals such as raising FDI limit in insurance coverage, disinvestment of two banks and a common insurance coverage firm, launch of InvITs by Power Grid and NHAI are once more meant to provide a positive path and enhance foreign capital inflows. While an announcement on overseas listing was also anticipated, we hope that the Government would come out with suggestions on it sooner this year.
Gupta is companion & Jain is senior associate, Dhruva Advisors Views are private