Budget Impact on Companies: Goodwill depreciation out; companies face higher tax outgo

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/goodwill-depreciation-out-cos-face-higher-tax-outgo/articleshow/80659732.cmsSynopsis

The proposal would influence some of the ongoing M&A deals and discussions on taking over companies going through bankruptcy proceedings.

Many companies will have to fork out higher tax on past M&A deals while some may renegotiate valuations of ongoing and future transactions with the budget ending Corporate India’s age-old practice on ‘goodwill’ accounting.

In a balance-sheet, goodwill is typically captured as the extra amount a company pays —either as stock or cash — over the net worth of the entity that is acquired. After the acquisition or merger, the goodwill is treated as an ‘intangible asset’ and the depreciation claimed on it lets the acquiring company or resulting or surviving entity lower its taxable income.

That depreciation on goodwill will now be disallowed — not just for future deals but even those cut during the financial year 2020-21. Also, depreciation on goodwill on M&A deals done earlier cannot be claimed from 2020-21. The measure proposed in the budget would hurt profitability of several listed and unlisted companies.

“The proposal is applicable to all such claims of depreciation on goodwill from the current financial year itself; hence, even goodwill acquired before 2020, and in fact, depreciation claim for this financial year, will be hit,” said Ketan Dalal, managing partner, Katalyst Advisors.

To Impact Ongoing Negotiations
“This is clearly retroactive, if not retrospective, and should be reconsidered; if at all, it should apply only to acquisition post the budget.”

Consider the case of Unilever-GSK transaction. The merger of the two multinationals resulted in the creation of accounting goodwill and other intangibles in the books of HUL. “Based on a Supreme Court decision, HUL had the opportunity to claim tax depreciation (25% on written down value basis),” a person with direct knowledge of the matter said. The company may have to readjust the depreciation claimed during the current year. HUL did not respond to ET’s questionnaire on the issue.

“In all the large M&A that were done in the past but where goodwill was carried forward and depreciation was claimed on that, will now have to be rolled back and reworked for the last nine months. This will not only increase tax liability of such companies but will even impact earnings per share of these companies,” said Girish Vanvari, the founder of tax advisory firm, Transaction Square.

The proposal would influence some of the ongoing M&A deals and discussions on taking over companies going through bankruptcy proceedings.


Tax experts claim that the Supreme Court had already given an order favouring depreciation on goodwill and the new regulation will lead to confusion. “A retrospective amendment to overrule the decision of the Supreme Court, and disturbing the restructuring process of corporate India is not fair and justified,” said Dilip Lakhani, a senior chartered accountant.

Conglomerates often used the provision under goodwill depreciation to merge a loss-making group entity with a profitable group company to claim depreciation and significantly lower the tax outgo of merged entities. “Since Indian laws do not allow group consolidation, it was a technique some businesses adopted, based on favourable judgements, to lower overall tax outgo legitimately. But the proposal could have an impact on several business acquisitions between unrelated parties where a significant portion of the price paid relates to goodwill. Though the amendments are prospective, they will apply to deny depreciation to goodwill acquired in past transactions as well. This in turn could affect the projections and returns on such acquisitions, since these would have been made on the assumption that depreciation was available. A carve-out for such transactions should ideally be considered,” said Hitesh Gajaria, partner, KPMG.

India saw M&A deals worth $80 billion during 2020, according to a PwC report. Large deals including Adani Ports’ acquisition of Krishnapatnam will also have to factor the proposed change in tax regulation.

Adani Group didn’t comment on the story as it is still studying the implications of the budget proposal.

“In most deal negotiations, the final step is to rope in accountants who would arrive at a price (selling price, or price per share) based on how much goodwill can be created as per the Indian auditing standards and the company’s comfort. Hardly any company would let go of this opportunity to save tax,” said an auditor of a large oil and gas company that is restructuring its group companies.

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