M&A costs to go up as tax relief on goodwill junked
Amendment is to be effective from FY21 and also applies to earlier acquisitions
Transactions on mergers and acquisitions (M&AS) are set to become costlier because the Budget has proposed that goodwill, whether of a product or company, will not be eligible for tax depreciation. The amendment is to be effective from FY21 and applies also to earlier acquisitions.
Transactions on mergers and acquisitions (M&AS) are set to become costlier because the Budget has proposed that goodwill, whether of a product or company, will not be eligible for tax depreciation.
The amendment is to be effective from FY21 and applies also to earlier acquisitions, and the consequent goodwill related to such transactions. Depreciation on any past goodwill, even if partly claimed, will not be available because the amendment takes effect from April 1, 1998, said tax experts.
This will affect also internal corporate restructuring where goodwill was claimed. “This may lead to more litigation,” said a top tax expert.
Several M&A transactions signed in the past, including Hindustan Unilever’s acquisition of Horlicks in December 2018 from Glaxosmithkline Plc, had claimed high goodwill as depreciation and will now be affected by this amendment.
Hindustan Unilever had expected goodwill measured at around 1.3 billion euros to be deductible for tax purposes from the Horlicks deal.
“Depreciation is allowable on intangible assets such as goodwill, and there are judicial precedents on that, arising as a result of an acquisition and/or merger. The amendment seeks to do away with that, and will impact M&AS, especially in relation to transactions where intangibles are the predominant chunk of the acquisition price. The ability of the seller to negotiate with the buyer to share the benefit of the tax break will be affected,” said Ketan Dalal, managing partner of
tax advisory firm Katalyst.
“In that sense, the amendment is retroactive, and one wishes this was reconsidered and existing positions grandfathered,” he said.
Tax experts said the proposed amendments would render ineffective the judgment of the Supreme Court and various other subsequent verdicts. Consequently, the sound principles of commercial prudence evolved in the past, and especially over the past nine years, in relation to depreciation on goodwill, specifically in cases of acquisition of businesses between third parties, and the valuation of which is at arm’s length, would be neutralised by this amendment.
The axiom of “intended consequences” would squarely apply here since the benefit of tax breaks available to the acquirer on account of depreciation on goodwill would not be available and, therefore, result in lower negotiating power to the seller while valuing the business.
“This will affect big-ticket transactions,” said Mahindra Chhajed, partner of Chhajed & Doshi and a noted tax expert.
According to Katalyst, the extant provisions of the Income Tax Act provide for depreciation on tangible as well as intangible assets. Intangible assets include know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. However, the goodwill of a business was not specifically included in the definition of intangible assets.
After long litigation on whether goodwill should be considered an intangible asset and eligible for depreciation, the Supreme Court had held goodwill was a depreciable asset under the Income Tax Act.