EY India
With the significant upswing of the M&A activity in India, India Inc is yearning for the right (now that left parties are also out) reforms.The slogan "Make in India" deserves to be extended even to the deals.
The people of the nation have with their votes, demonstrated that 2015 is expected to be year of changes and directional reforms. Of the many reforms India witnessed in 2014, it witnessed a remarkable evolution in the deal market – M&A deals approximated 1,177 valuing $ 50 billion, an upswing of 26% vis-à-vis 2013. Economists attribute the upswing to resurgence in business sentiments towards the Modi government. However, positive sentiments alone may not be able to sustain the bullish trend – all eyes now on first budget by the, as promised, "growth friendly" government.
Indirect Transfer Tax
Significantly impacting deals today, is the abstruseness of retrospective Indirect Transfer Tax provision introduced in 2012, emanating from Apex Court verdict in the Vodafone case. Clearly defining the "scope" for Indirect Transfer Tax, describing the term "substantial interest", exemption for "group restructurings" and devising a "charge mechanism" are some of the most sought out for answers. Concluded deals, likewise, remain distressed with the introduction of these provisions given their retrospective effect, ambiguities surrounding applicability and interest and penal consequences due to default.
Clarificatory announcements around the topic, would provide guidance to Income Tax Authorities on approach to address cases surrounding Indirect Transfer Tax, and also provide relief to MNCs investing into India of the impact of such provisions while structuring their acquisitions.
Outbound mergers
New Companies law, for the first time, proposes to open avenues for outbound mergers. Acquisitions in the mode of merger could enable non cash consideration discharge by Indian multinationals.Tax provisions as well as Foreign Exchange Regulations would need to undergo a change to make this workable holistically.
Tax exemption on sale of listed securities off exchange
Presently, any acquisition of listed company by non-resident is achieved by off market transaction, since the Foreign Exchange Regulations do not permit the purchase by a new promoter on exchange.The tax exemption for sale of listed company only applies to sale on exchange. An alignment of the above would boost the change in hands of listed companies.
Tax holiday continuity in restructurings
Group restructurings are often impacted due to lapse of tax holiday benefits (such as section 80-IA and 10AA on restructurings).This has been one of the major no-go situations obstructing deals. Extension of benefits despite restructuring would encourage group restructurings.
Treaty Benefits and GAAR
Investors and corporate houses have been hesitatingly investing in India due to long tax litigation cycle in India and Revenue friendly approach of the Indian Tax Authorities, especially at the lower levels. Cross border deals, availing Tax Treaty benefits appears to be the most impacted, being sceptically viewed by the Indian Tax Authorities. The incoherence in the provisions of the Act and approach of the Indian Tax Authorities certainly demand a guidance and alignment of approach.
Uniformity in Stamp Duty provisions
Indian Stamp duty provisions date back to 1958 and though they have been revised along the years, there are various interpretational issues, non-clarity in law and several provisions which are state specific. A uniform stamp duty provision throughout the nation would be ideal eradicating necessity for inter-state set offs as well as ensure clarity in levy and discharge of stamp duty.
Period of holding, convertible instruments
Last year's budget witnessed an unforeseen extension of period of holding of unlisted securities for taxation as long term capital gains, from 12 months to 36 months.This has adversely affected planned exit of strategic investors who had previously, due to commercial considerations, invested through convertible instruments (convertible debentures/ preference shares) and planned exit through transfer of equity pursuant to conversion. Inclusion of pre-conversion holding period to satisfy 36 months criterion, would be welcome.
Minimum Alternative Tax for foreign companies
Applicability of Minimum Alternative Tax (MAT) on foreign companies has been a subject matter for debate long enough. Various FIIs and QFIs have received notices from the Indian Tax Authorities for taxation under MAT. Slight guidance on inclination of the government on this matter is forthcoming.
While we invite the world to invest in India, India Inc looks forward to transparency and certainty in deal making. Will Budget 2015 project that, only time shall tell.
Author is director transaction tax at EY India
(Shimoli Gandhi, senior tax professional, EY contributed to the article)
(Views expressed are personal)
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