Cos Rush to Merge Arms for Bet­ter Ef­fi­ciency Un­der GST

Ex­perts say sub­sidiaries cre­ated to avail of ex­cise duty in­cen­tives will be ir­rel­e­vant, and merg­ers will help re­duce com­pli­ance work

The Economic Times - - Smart -

Mumbai: Var­i­ous com­pa­nies are rush­ing to merge their sub­sidiaries with them­selves ahead of the im­ple­men­ta­tion of Goods and Ser­vices Tax (GST) to re­duce tax, op­er­a­tional and ad­min­is­tra­tive costs and to elim­i­nate mul­ti­ple le­gal en­ti­ties. At least 100 com­pa­nies, such as Asian Paints, Sun Pharma, L&T, BPCL, Sun­daram Fi­nance, Reli­gare En­ter­prises and Arvind, have an­nounced the merger of their sub­sidiaries with the par­ent in the last three months.

Many of the com­pa­nies had cre­ated mul­ti­ple units in the past to save on taxes but such in­cen­tives will cease to ex­ist un­der GST.

“With the im­ple­men­ta­tion of GST, all the tax plan­ning and tax sav­ings struc­ture would be in­valid and those sub­sidiaries which were cre­ated for avail­ing the ex­cise duty in­cen­tives will be ir­rel­e­vant,” said Sachin Menon, head–in­di­rect tax, KPMG. “GST would also curb scope of var­i­ous tax eva­sion prac­tices such as cre­ation of mul­ti­ple en­ti­ties to en­joy high ex­emp­tion thresh­olds.”

En­gi­neer­ing-to-soft­ware con­glom­er­ate L&T, while merg­ing its sub­sidiary Spec­trum In­fotech with it­self, said that the pro­posed amal­ga­ma­tion will re­sult in ad­min­is­tra­tive and op­er­a­tions ra­tio­nal­i­sa­tion, or­gan­i­sa­tional ef­fi­cien­cies, re­duc­tion in over­heads, per­son­nel costs, com­pli­ance cost and other ad­min­is­tra­tive ex­penses. Sun Phar ma has pro­posed to merge four of its sub­sidiaries — Sun Pharma Medisales, Ran­baxy Drugs, Gufic Pharma and Vidyut In­ves­ment — with it­self.

“When all the cas­cad­ing ef­fects of CENVAT and Ser­vice Tax would be re­moved with a con­tin­u­ous chain of setoff from the pro­ducer’s point to the re­tailer’s point un­der GST regime, merger of sub­sidiaries in any form would only help to re­duce the num­ber of com­pli­ances to be made, keep­ing the GST kitty of the gov­ern­ment tax neu­tral,” said Nishit Dhruva, man­ag­ing par tner, MDP & Par tners (Ad­vo­cates & So­lic­i­tors).

Un­der GST, all trans­ac­tions done within group en­ti­ties are li­able to pay taxes as per var­i­ous val­u­a­tion method­olo­gies, said tax ex­perts.

“Un­der GST, in the event of re­lated party trans­ac­tions like sale or trans­fer of busi­ness or prod­ucts or as­sets within sub­sidiaries, the trans­ac­tion shall be treated as sup­ply even when these are trans­ferred with­out con­sid­er­a­tion, and the busi­ness is li­able to pay GST,” said Ra­man Singla, part­ner - in­di­rect tax & GST, De­valya Ad­vi­sory LLP. “Also, for multi-sub­sidiaries, there are many other prob­lems like var­i­ous state ju­ris­dic­tions to sep­a­rately as­sess trans­ac­tions which make com­pa­nies’ work cum­ber­some.”

Reli­gareEn­ter­pris­es­re­cent­ly­merged 11 fully-owned sub­sidiaries with it­self cit­ing or­gan­i­sa­tion stream­lin­ing.

Reli­gare En­ter­prises re­cently merged 11 fully-owned sub­sidiaries with it­self

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