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.
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.
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