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Total Number of Subscribers: 426 |
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Date: 14 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Is `demerger' route completely tax neutral ? Demerger does not find a specific reference in Section
49 with the result it is a mystery whether the original cost of acquisition
for capital assets in the hands of the demerged company can be deemed to be
the cost of acquisition for the resulting company.
While joining up two companies (via the amalgamation
route) enjoys tax benefits, the case of demerger does not find a specific
reference in Section 49 of the Income-tax Act, 1961, he told Business Line in
a Q&A session done over e-mail. Excerpts from the interview: Tell us about demerger from the tax
perspective. The concept of `demerger' of companies under the
income-tax law was introduced by `The Finance Act, 1999' with effect from
assessment year 2000-01. Simultaneous insertions were made in the I-T Act, and
these included provisions relating to definition of `demerger', transfer of
capital assets in a demerger, computation of depreciation allowance,
written-down value of depreciable assets. You were talking about an amendment that
may have led to confusion. Yes. One such amendment was to exclude any transfer of a
capital asset in a demerger from the purview of `transfer' for the purposes
of determining capital gains under the Act to the resulting Indian company.
This was enshrined in the law by insertion of clause (vi-b) to Section 47 of
the Act, thereby making the transfer of such assets, tax neutral. What about in the case of an amalgamation? As is also the case with `amalgamation' of companies,
any transfer of capital assets to the amalgamated company being an Indian
company is not regarded as a `transfer' for the purposes of the Act. This is in terms of clause (vi) of Section 47. The
question which has always been a concern for companies undergoing demergers
is whether the process of demerger can be said to be completely tax neutral. How does the taxman look at amalgamation? Companies which undergo restructuring in the form of
amalgamation enjoy tax benefits on account of transfer of capital assets made
pursuant to the amalgamation. Further, the cost of acquisition of these assets in the
hands of the amalgamated company is deemed to be the original cost of
acquisition to the previous owner (amalgamating company). This is by virtue of Section 49(1)(iii)(e) of the Act.
This section allows substitution of the original cost of the capital asset in
case the asset is sold by the amalgamated company subsequent to the
amalgamation. Section 49 of the Act enables one to determine the cost
of acquisition with reference to certain specified modes of acquisition. The
modes of acquisition referred to in this section include a case of transfer
by succession, inheritance, devolution, dissolution, distribution of assets
or liquidation of a company. It also includes transfers arising pursuant to an
amalgamation, transfers between parent and subsidiary companies. And demergers, too? No, the case of demerger does not find a specific
reference in Section 49 with the result it is a mystery whether the original
cost of acquisition for capital assets in the hands of the demerged company
can be deemed to be the cost of acquisition for the resulting company. The issue then is with absence of mention in the Section
49, right? Yes. The absence of a clear reference to a case of
demerger in Section 49 is now a common concern for companies using this route
to restructure themselves. This concern has dual implications. One is with regard to arriving at the cost of
acquisition of the capital assets acquired by way of demerger for computing
the capital gains on their subsequent sale as narrated above. The second implication is in determining the period of
holding of these assets on their subsequent sale. The short- and long-term difference? Yes. The Act provides for differential tax rates on sale
of assets based on their period of holding. Section 2(42A) of the Act, which
explains what a `short term capital asset' is, specifies circumstances where
the period of holding of the previous owner of the asset has to be reckoned
in determining whether a particular asset is a `short-term capital asset' or
not. Although Section 49(1) of the Act finds place as one such circumstance,
the case of transfer of capital assets pursuant to a demerger is again not
clearly specified in Section 2(42A). What are the implications of the `mystery'? The specific concern here is that in a case where
investments forming part of the capital assets are transferred to the
resulting company in a demerger and soon after the demerger these investments
are sold, whether the period of holding of these investments by the demerged
company need to be considered while determining if these investments are
short term or long term in nature. Considering the variation in the tax rates of short term
and long-term capital assets, the above concern could be a deal breaker
depending upon the stakes involved. A number of companies are proceeding on
the basis of giving themselves the benefit of doubt by considering that a
case of demerger would fall within the modes covered by Section 49. Is a solution in sight? As the above stands un-clarified even by the recent
Finance Bill, 2008, it would be appropriate to retrospectively amend the law clarifying
this proposition to avoid any confusion or differences of interpretation.
Courtesy : Mr. Anil Talreja, Senior Manager M & A Tax , Deloitte Haskins & Sells |
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