Taxation – Merger/Acquisition

Once characterized by competition, today’s business landscape favors collaboration. Mergers and Acquisitions (M&A) have become essential strategies for businesses seeking to thrive amidst fierce competition. They enable synergy gains, reduce competition through collaboration or acquisition, and provide competitive advantages through vertical and horizontal expansion. However, a crucial aspect of M&A transactions lies in their tax implications. When mergers occur, various sections of tax laws come into play. Let’s delve into a comprehensive understanding of the taxation aspects of mergers and acquisitions.

Income Tax Act, 1961 The Income Tax Act, 1961 employs the term “amalgamation” to describe M&A transactions. It’s important to grasp specific definitions before examining the tax implications:

Glossary

Amalgamation: As defined by Section 2(1B) of the Act, “amalgamation” concerning companies refers to the merger of one or more companies with another company or the merging of two or more companies to form one entity. The company or companies merging are referred to as the amalgamating company or companies, and the resultant entity is the amalgamated company. This transfer involves:

• All assets and liabilities of the amalgamating company becoming those of the amalgamated company.
• Shareholders holding at least 3/4th in value of shares in the amalgamating company becoming shareholders in the amalgamated company, except through property acquisition or distribution post-liquidation.

Amalgamating Company: This term refers to the company being transferred or sold to another entity. It may or may not retain its legal identity.

Amalgamated Company: This refers to the acquiring company that retains its legal identity.

Capital Asset: Defined by Section 2(14), “capital asset” includes any property held by an assessee, excluding stock-in-trade and personal effects like jewelry or artworks.

Tax Implications

The Income Tax Act provides various tax reliefs for M&A transactions meeting the above definitions. The following sections govern the taxation of such transactions:

Capital Gains
Capital gains tax relief is available in several scenarios:

Section 47(vi): Transfer of capital assets by the amalgamating company to the Indian amalgamated company.

Section 47(via): Transfer of capital assets (shares in an Indian company) between two foreign companies, provided at least 25% shareholders continue and no capital gains tax in the amalgamating company’s jurisdiction.

Section 47(viaa): Transfer of capital assets by a banking company to a banking institution under Central Government sanction.

Section 47(viab): Transfer of capital assets by a foreign company to another, where assets derive value from Indian company shares, meeting shareholder and tax criteria.

Section 47(vii): Shareholders are exempt from capital gains tax when transferring shares to the amalgamated company, subject to specific conditions.

Tax Relief for Losses and Depreciation

Section 72A: Accumulated losses and unabsorbed depreciation of the amalgamating company transfer to the amalgamated company, with provisions for set-off and carry-forward.

Section 72AA: Overrides specific sections for government-sanctioned amalgamations, transferring losses and depreciation.

Business and Profession Provisions Relaxations

Additional tax relaxations under PGBP income:

Section 35(5): Allows deductions for scientific research assets transferred during amalgamation, with restrictions for the amalgamating company.

Section 35DD: Allows deductions for amalgamation-related expenditure over five years.

Section 35D(5): Allows deduction of preliminary expenses over five years, even if amalgamation occurs before the term ends.

Goods and Services Tax Act, 2017
GST provisions allow for credit transfer in mergers and amalgamations:

Under Section 18(4) of the CGST Act 2017, input tax credit can be transferred to the amalgamated entity if liabilities transfer with the merger, subject to specific procedures under Rule 41.