Budget 2018: Tax uncertainty over insolvency deals likely to go – The Economic Times–30.01.2018-1

The government may consider resolving two of the biggest tax roadblocks looming over a successful conclusion of the insolvency process in the upcoming Budget, two people close to the development said.
 
The government may allow carrying forward of losses for eight years for buyers of companies in the insolvency process. This is not allowed under the current tax laws and buyers have been asking for such a relief.
 
It may also address industry fears of the income tax department challenging the valuations after the conclusion of deals. “The government allowed carrying forward of losses for eight years for the startups last year. Similar exception is being considered for deals happening in insolvency,” a person close to the development said.
 
Industry trackers said the tax outgo could be higher if the buyer of an insolvent company is unable to set off losses or carry it forward on the balance sheet.
 
“Section 79 of the I-T Act specifically states that losses cannot be carried forward if majority shareholding changes hands. The government had given a leeway to startups from this section and the same could also be done for companies under Insolvency and Bankruptcy Code, otherwise, it may lead be huge tax liability,” said Paras Savla, partner, KPB & Associates.
 
Ambiguities about MAT
Take, for example, the case of an insolvent company with a loss of about Rs 8,000 crore that has changed hands. Under current regulations, this loss cannot be carried forward and will be set off in one financial year.
Now, if this company incurs a profit of Rs 800 crore in the next year, it will be liable to pay a 30% tax. If carrying forward of losses is allowed even in cases where majority shareholding has changed hands, the company can carry forward the loss of Rs 8,000 crore and could save on income tax of 30%.
 
“We have made representations to the government to give leeway to carry forward losses for the new buyer even in situations where a majority shareholding has changed hands. Also, the risk of tax officials levying minimum alternate tax (MAT) continues to hover over insolvency deals and an additional clarification is required,” said Abizer Diwanji, partner and national leader-Financial Services, EY.
 
ET was the first to report on August 29 about the MAT issue in insolvency cases.
 
The problem, say industry trackers, is that the purchase of a distressed asset triggers writedowns in the profit and loss (P&L) accounts of companies, resulting in likely book profits. Existing laws require that MAT be paid on book profits.
 
While the government has come out with clarification, industry experts say the tax authorities could still trigger MAT as some ambiguity around treatment of the said buyouts remain.
 
Many potential buyers of insolvent companies also fear that the tax authorities could also challenge valuations in such deals. Under the newly introduced sections like 50CA, revenue authorities can slap tax of up to 30% in cases where they feel that the buyer has paid less for an asset. So if a company buys another insolvent company for Rs 10,000 crore, tax authorities can challenge the valuation.
 
If tax authorities feel the value of the company should be Rs 20,000 crore, a 30% tax can be levied on Rs 10,000 crore.
 
Fair value formula
Tax experts point out that the revenue authorities’ formula to arrive at the fair value may not be consistent with commercial realities.”
 
The impact is quite severe in case of transactions of shares under Insolvency and Bankruptcy Code (IBC), as the deal price could be much lower as compared to the quoted price of the shares,” said Punit Shah, partner, Dhruva Advisors.
 
According to another person close to the development, the government is looking to exempt insolvency deals from such scrutiny. The fear is valuations of insolvency deals could be challenged by tax department in future.
 
This fear is amplified as tax department has started scrutinising valuation of all M&A deals where transfer of shares, second round of funding, or fresh fund infusion, has taken place.
 

ET on January 27 reported that the income tax scrutiny is being carried out to identify deals where transactions have happened at a price which is either substantially less than or much higher than the fair market value.

via Budget 2018: Tax uncertainty over insolvency deals likely to go – The Economic Times

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s