Mergers and acquisition deals can be complex and understanding the tax exemptions in M&A transactions in India is crucial for unlocking its true value.
Here, we break down the key provisions that can save you money and streamline your M&A transactions. From asset transfers to loss carryforwards, we uncover all the tax benefits of M&A deals in India.
Top Benefits & Tax Exemptions in M&A Transactions in India
Mergers and acquisitions in India offer numerous tax benefits and exemptions.
The following exemptions can be leveraged by businesses to optimize the financial outcomes of such transactions:
1.
Capital Gains Exemption on Transfer of Shares in Amalgamation/Merger
Under Section 47(vi) of the Income Tax Act, the transfer of shares during an amalgamation or merger may be exempt from capital gains tax if shareholders receive shares in the amalgamated company in exchange for their shares in the merging entity.
This benefit is available to both the transferring and the receiving company, making the transaction more tax-efficient.
2.
Exemption on Transfer of Assets in Demerger
Section 47(vib) provides a tax exemption on the transfer of assets during a demerger. This exemption can be availed if after the demerger the resulting company is an Indian company.
This means a company can separate their businesses without incurring tax liabilities on the transfer of assets between the demerged company and the resultant company.
3.
Carry Forward and Set-off of Losses
Section 72A allows companies involved in a merger or demerger to carry forward and set off their accumulated business losses and unabsorbed depreciation against future profits.
It helps the companies reduce future tax liabilities by offsetting losses, thereby making the transaction financially more attractive.
4.
Tax Neutrality in Slump Sale
In a slump sale, where an entire business is sold as a going concern, Section 50B provides tax neutrality provided the amalgamated company is an Indian company.
This means that the transaction will be treated as a single asset transfer for tax purposes and no immediate capital gains tax will be levied on the seller at the time of sale.
Also Helpful:
Tax structuring in Indian M&A deals
5.
Stamp Duty Exemption
M&A transactions may also qualify for stamp duty exemptions under various state laws in India.
This exemption applies primarily to transactions involving the transfer of shares, property, and assets in the course of a merger or demerger.
6.
GST Benefits
In M&A transactions, the Goods and Services Tax (GST) may apply to the transfer of business assets.
Specific exemptions or benefits exist for certain types of transfers, like the transfer of a going concern or business as a whole. This can reduce tax liabilities and make the deal more favorable.
7.
Industry-Specific Benefits
Certain industries may enjoy tax incentives or exemptions for M&A transactions. For example, sectors like manufacturing, infrastructure, and IT/ITeS are often eligible for special benefits under various government schemes.
These can reduce the tax burden for businesses in these sectors, promoting growth and investment.
7.
Tax Exemption for Foreign Acquisitions
Foreign entities investing in or acquiring Indian businesses (inbound merger) may benefit from provisions such as exemptions under the Double Taxation Avoidance Agreements (DTAA).
Other exemptions include those on withholding tax rates and capital gains tax in certain situations.
It encourages foreign direct investment (FDI) in India by reducing the tax burden on cross-border acquisitions, making the market more attractive for global investors.
8.
Tax Exemption for SEZ Units
Special Economic Zones (SEZ) offer tax exemptions to companies operating within them, including those involved in M&A transactions.
These benefits are aimed at promoting investment and economic activity within SEZs, allowing companies to restructure without incurring additional tax liabilities.
Exemptions are available for income tax, customs duties, and other levies, which can be extended during mergers or acquisitions.
9.
Start-up Related Benefits
M&A transactions involving start-ups can be more tax-efficient, with reduced tax burdens and increased opportunities for scaling.
They can leverage specific incentives aimed at fostering innovation and growth within this sector.
These may include exemptions on capital gains, tax holidays, and other incentives aimed at fostering the growth of start-ups.
10.
Scientific Research Tax Benefits
Tax benefits under Section 35(5) related to scientific research can be transferred to the amalgamated company.
This allows the new entity to benefit from any unutilized research expenditure, promoting continued investment in innovation.
11.
Tax Holiday Benefits
Companies can continue to enjoy tax holiday benefits under Sections 80-IA and 80-IB after amalgamation.
This is especially beneficial for businesses engaged in infrastructure development and certain manufacturing sectors, allowing them to reduce taxable income for a specified period.
12.
MAT Credit
Companies that have paid MAT can carry forward and set off this credit against future tax liabilities.
This helps companies optimize their tax position post-M&A, especially if they expect increased profitability in the future.
How To Ensure That You’re Availing All M&A Tax Exemptions?
To ensure that you are availing all M&A tax benefits and exemptions in India, consider the following:
- Understand Relevant Tax Provisions: Acquaint yourself with the relevant sections like Section 47, Section 72A, and Section 2(19AA) for tax exemptions in mergers, demergers, and amalgamations.
- Design the Right Transaction Structure: Choose the correct structure (amalgamation, demerger, or asset transfer) and ensure it meets exemption conditions (e.g., shareholding continuity, business reorganization).
- Review Ownership and Holding Period: Maintain 51% shareholding continuity and ensure the requisite holding period for capital gains exemptions.
- Engage Professional Advisors: Work with professionals like PKC Management Consulting. Their tax advisors, legal counsel, and transfer pricing experts help you structure the deal efficiently and ensure compliance.
- Obtain Necessary Approvals: Secure approvals from NCLT, SEBI, and other regulators to validate the tax exemptions in your M&A transaction.
- Draft Transaction Documents Carefully: Ensure agreements reflect the necessary conditions for tax exemptions, such as asset treatment and shareholding details.
- Prepare for Post-Transaction Compliance: Ensure continued compliance and maintain documentation for potential audits.
Frequently Asked Questions
- What are the tax benefits of merger transactions?
Merger transactions in India offer several tax benefits, including exemption from capital gains tax under, carry forward of business losses and unabsorbed depreciation and claim depreciation on the assets acquired in the merger. Mergers may also qualify for tax-neutral treatment, avoiding immediate tax liabilities.
- Can foreign companies benefit from M&A tax exemptions in India?
Foreign companies can benefit from certain exemptions under Indian tax law, particularly if they meet conditions related to capital gains tax during cross-border mergers. However, outbound mergers lack specific exemptions under current regulations.
- Why is documentation important in M&A transactions?
Proper documentation is essential for substantiating claims for tax exemptions and deductions during audits or assessments by tax authorities, ensuring compliance with regulations.
- Can an M&A deal be structured to minimize tax liabilities?
Yes, structuring the deal as a tax-neutral merger or demerger, or choosing between an asset or share deal, can help minimize tax liabilities.
