Cos may Get a Fairer Deal in M&A Tax­a­tion

If gov­ern­ment adopts a NAV-based ap­proach to ar­rive at the fair value of a deal, only a sec­tion of M&As would come un­der tax­man’s lens

The Economic Times - - Companies: Pursuit Of Profit - Sachin.Dave@ times­

Mum­bai: There may be some good news for cor­po­rate houses and pri­vate eq­uity and ven­ture cap­i­tal funds con­cerned over the gov­ern­ment’s Bud­get 2017 plan to al­low the in­come-tax depart­ment to re­assess the valu­a­tions of merger and ac­qui­si­tion (M&A) deals and tax them ac­cord­ingly.

In a bid to as­sess whether a deal was done at a lower or higher val­u­a­tion for levy­ing tax, the gov­ern­ment may now pre­scribe a net-as­set-value (NAV) method as against the dis­counted-cash­flow (DCF) method to ar­rive at the fair value of the deal, sources said. The move could soothe some nerves, as there were fears of a huge tax bur­den on all con­cluded trans­ac­tions since the tax man had been given a free hand to chal­lenge the valu­a­tions of var­i­ous M&A deals in­clud­ing those be­tween rel­a­tives or sec­ondary pri­va­tee­quity firms.

“If the gov­ern­ment pre­scribes the NAV method as against the DCF method to ar­rive at a fair mar­ket value un­der sec­tion 50CA, this would only tar­get cer­tain sec­tion of M&As. Af­ter the bud­get an­nounce­ment, there was a worry that many M&As done at valu­a­tions lower than the per­ceived fair­mar­ket value could see tax­a­tion. This could also have led to dou­ble tax­a­tion in the hands of the buyer and the sel- ler," said Amit Ma­hesh­wari, part­ner, Ashok Ma­hesh­wary & As­so­ciates LLP.

As per the new sec­tion (50CA), sale trans­ac­tions of un­listed shares of an In­dian com­pany in cases where the fair-mar­ket value is more than the sales con­sid­er­a­tion would be taxed in the hands of the seller.

Tax ex­perts are of the view that un­der the new sec­tion, the in­come-tax of­fi­cer can de­mand tax af­ter any M&A deal, if it is felt that the sale was un­der­val­ued.

“In the con­text of the fact that we should log­i­cally move to a sys­tem of tax­ing real in­come, this pro­vi­sion is un­war­ranted and should be rolled back. There are other pro­vi­sions in the tax law to deal with out­lier sit­u­a­tions, such as where un­der­state­ment of con­sid­er­a­tion is sus­pected,” said Ke­tan Dalal, se­nior tax part­ner, PwC In­dia.

Most of the in­dus­try ex­perts want the gov­ern­ment to roll back the sec­tion en­tirely. In­dus­try ex­perts point out that not only will it im­pact M&A deals but also fam­ily re­struc­tur­ing.

“This pro­vi­sion (50CA) has the un­for­tu­nate con­se­quence of badly im­pact­ing gen­uine deals and, in any case, should not ap­ply to fam­ily re­struc­tur­ing and also where ei­ther of the counter par­ties of the trans­ac­tions are in­sti­tu­tional in- vestors, in­clud­ing pri­vate eq­uity and ven­ture cap­i­tal,” said Dalal. The main dif­fer­ence be­tween NAV and DCF is that the lat­ter ar­rives at a val­u­a­tion based on fu­ture vi­a­bil­ity of the busi­ness. In most cases, say ex­perts, DFC is based on the hy­poth­e­sis that there is a per­pet­ual growth in the busi­ness. This would mean that the val­u­a­tion or fair value of a deal ar­rived at through DCF is likely to be higher as against NAV. Us­ing the NAV could mean that only com­pa­nies with huge real es­tate on their books and shell com­pa­nies that are sell­ing the whole busi­ness to es­cape stamp duty will come un­der tax scru­tiny.

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