Bidders for stressed assets face income tax hurdle
The sale of stressed assets by lenders could face a serious problem if the income tax( I-T) department demands a levy on the haircut and interest fore gone by them on these assets once a new owner takes over.
Bidders, private equity companies, and lawyers said while the erstwhile Sick Industrial Companies Act (SICA) had exempted the I-T for sick companies, those under the Insolvency and Bankruptcy Code (IBC) were not getting any tax breaks. This could lead to a lower valuation of these assets by potential bidders.
Citing an example, a bidder said if a stressed company had an outstanding debt of ~50,000 cr ore and an acquirer were to bid ~30,000 cr ore to take over these loans, then the remaining portion of the debt (~20,000 crore) would be treated as income of the target company, on which t he acquirer would have to pay the I-Tor Minimum Alternate Tax in accordance with the applicable rate.
“This could be a big negative for the acquire rand it will have to bear this expense in mind while making a bid ,” said JSW Steel’ s Joint Managing Director, Seshagiri Rao.
JSW Steel has emerged as the biggest potential acquirer of stressed assets as it plans to bid for Bhushan Steel, Bhushan Power and Steel, Monnet Ispat, and Jay pee Infra tech by tying up with private equity players such A ion Capital, Pi ram al-Ba in Capital Credit, and Jaypee’s promoter.
Other bidders for steel companies are Arcelor Mittal, Vedanta, and Tata Steel, apart from several private equity funds.
“The I-T law says any gains that accrue due to a hair cut taken by a lender or interest fore gone would be treated as income and hence would be taxed ,” said Bhavin Shah, partner and leader, financial services, tax, at PwC India. “This is an issue which needs clarity from thegovernment.”
Section 238 of the I BC over rides other laws but at the same time another section in the code says it would have to meet all the existing laws .“We have received two contrary opinions from our lawyers and this could lead to litigation in the future ,” said a bidder, asking not to be quoted.
Riaz Thingna, director, Grant Thornton Advisory, said as of now, the I-T law provided the hair cut from lenders is income under the IBC and it would be taxed accordingly.
“If there is any reduction in the interest rate by the lenders in the form of discounted debt instruments, by virtue of the provisions of Indian Accounting Standards( Ind-AS ), th evaluation in the financial statements will increase the company’s profit. In such cases, if the company is under MAT, it will be subject to tax on such profits. This would create a doublewhammy,” hesaid.
Another bidder said if all these hurdles were not addressed, banks would beat a loss, as potential bidders would factor in these negative sin the bid value. This means that lenders will not get a good deal ." Hence, it' s in the interest of the government to push for these changes which are of public interest ,” said a bidder asking not to be quoted.
Competition law also an issue
Bidders said unlike the SICA, the IBC code makes it mandatory for a bidder to take permissionfrom the Competition Commission of India if they take over a company which has been referred to the NCLT.
“If the exemption was granted under the Board for Industrial and Financial Reconstruction, then why not under NCLT?” asked a bidder.
The competition law could impact both JSW Steel, which is bidding for three steel assets, and Tata Steel, which is bidding for Essar Steel’s facilities in Gujarat. Companies now plan to write to the government seeking an exemption from CCI provisions as well.