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
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.