While the financial sector is facing headwinds including increase in non-performing assets resulting in increased losses and shortage of liquidity, the real estate sector too has witnessed a tough time due to disruptions in labour supply, logistics and increasing finance cost on unsold inventory.

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Budget wish list to augment M&A activity
Authors: Mitesh Chauhan, Partner & Sumeet Agrawal, Principal Associate of Economic
Laws Practice
Carry forward of tax losses on the merger of a transferor company in the services sector
The Pandemic has had an adverse impact across all sectors with the service industry not being an
exception. While the financial sector is facing headwinds including increase in non-performing assets
resulting in increased losses and shortage of liquidity, the real estate sector too has witnessed a tough
time due to disruptions in labour supply, logistics and increasing finance cost on unsold inventory.
In the extant Income-tax Act, 1961 (“Act’), on amalgamation, the transferee company can carry
forward the accumulated tax losses of the transferor company only where the transferor company
owns an ‘Industrial Undertaking’. In other words, if the transferor company is part of a service sector
such as the financial sector or real estate, the transferee company would not be able to carry forward
the accumulated tax losses of the transferor company pursuant to amalgamation.
To gain M&A traction, particularly in the service industry, it is important that section 72A of the Act is
amended and the requirement to own an ‘industrial undertaking’ is deleted. The benefit of carry
forward of accumulated tax losses by the transferee company should be allowed across all sectors
upon amalgamation.
Exemption for Merger of overseas investee company / overseas subsidiaries
While there are clauses under section 47 of the Act which exempts direct or indirect transfer of shares
of an Indian Company pursuant to amalgamation of two foreign companies (subject to fulfillment of
prescribed conditions), the said section does not provide relief to the Indian shareholder in a tax
neutral amalgamation of two foreign subsidiary companies. Consequently, there is a tax cash outflow
in the hands of such shareholders without there being any real cash income.
This seems to be an oversight rather than intentional. A missing piece which was inadvertently not
addressed amongst the other reliefs provided under the Act upon merger of two foreign companies.
Insertion of specific exemption provision under section 47 of the Act would provide a much-needed
relief to Indian shareholders, protecting them from uncalled for tax leakages.
Abolition of buyback tax under section 115QA
Currently, companies have to pay buyback tax @ 20% under section 115QA on ‘Distributed income’.
‘Distributed income’ is the difference between amount paid on buyback to shareholders minus
amount received by the Company at the time of issue of such shares originally. Such buyback proceeds
are exempt in the hands of the shareholder. It is pertinent to note that the benefit of exemption is
restricted only to the extent of initial investment amount that the Company has received at the time
of issue of such shares.
This results in double taxation particularly when shares are bought back from shareholders who have
acquired shares in a Company by way of secondary purchase.
Further, non-resident shareholders are not keen for buyback of shares to repatriate profits as dividend
option gives them benefit of lower tax outflow.

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Also, where shares are held in dematerialized form, it is practically difficult to compute buyback tax
accurately as company may not be able to identify which shares they are buying back.
It would be beneficial for the shareholders as well as the Revenue if such buyback tax is abolished. If
done so, the shareholders shall be taxed under the head Capital gains and thus be eligible to claim
deduction for actual investment amount, while at the same time Revenue could benefit in terms of
higher tax chargeability in cases where such buyback leads to short term capital gains.
Reduction in dividend tax rate
The Finance Act 2020 abolished the imposition of Dividend Distribution Tax (DDT) on a Company and
shifted the dividend tax burden to recipient shareholders. This has been unreasonably detrimental to
the resident shareholders so far as the taxation of dividend is now based on applicable slab rates to
the resident shareholders, highest rate being 35.88%
It would be a major relief to the shareholders and at the same time give status quo to the revenue if
the dividend tax rate in the hands of shareholders is rationalized in sync with what was originally the
tax rate in the hands of the Company by way of DDT.
Specific provision for taxability of Capital reduction under Income Tax Act
Currently, there is no specific provision under the Act to charge Capital Gains or Capital loss arising in
the hands of the shareholders pursuant to cancellation of shares undertaken by the Company by way
of cancellation of shares.
This has led to divergent judicial views on eligibility of the shareholder in case of claim of capital loss
specifically in cases where such capital reduction is carried out without payment inspite of the fact
that cancellation is a ‘transfer’ is not denied by tax authorities.
Insertion of specific provisions under the Act would provide the much-needed clarity on the said issue.
Removal of income / asset threshold for conversion of Company into LLP
Currently, the provisions of section 47(xiiib) of the Act imposes stringent conditions on tax neutral
conversion of a Company into an LLP. Further, the ceiling limit for Turnover and Asset criteria are
considerably low such that many Companies fail to meet the turnover and asset criteria.
This not only discourages legitimate commercial growth of businesses but also deprives business
community from obtaining inherent benefits that an LLP can provide such as ease of doing business in
terms of lesser regulatory compliances, tax benefits, etc.
Removal of this criteria would also be beneficial from revenue stand-point as LLPs are taxed at 30% as
compared to Companies which are now taxed at much lower rate.
One hopes that Budget 2022 -2023 will consider and resolve some of these issues.