The Hindu Business Line : Chamber wants ownership change clause replaced

THE Associated Chambers of Commerce and Industry of India (Assocham) has suggested replacement of the current provisions in the Companies Act restricting change of ownership of companies by anti-abuse measures such as mandatory continuity of business with assets including substance tests for ownership change.

The chamber has stated that under the current provisions entities enjoying tax incentives under Section 10A and 10B of the Income-Tax Act, 1961, stand to lose these incentives, if there is a change in ownership interest by 49 per cent or more. These anti-abuse measures have been partially relaxed by the Union Budget but in most cases of change in ownership, even pursuant to a court-approved merger or demerger, the entire tax incentive stands forfeited.

Further, under the prevailing tax laws, past tax losses of companies not owning `industrial undertakings' are given a fresh lease of life for a further period of eight years. Industrial undertakings are defined in the Income-Tax Act in restrictive sense, the chamber said. Although the apex court has tried to interpret this term liberally, as the law currently stands, service companies, trading and non-manufacturing entities lose their past tax losses if they merge. This restriction greatly hampers any effort for restructuring of these entities, the chamber said.

The chamber has recommended that it is essential to widen the ambit of this definition. Alternatively, such losses may be transferred to the merged entity and allowed to be carried forward for their remaining duration (if a fresh lease of eight years is considered by the Government as an incentive to be restricted to a few identified sectors) in a manner similar to that prescribed for demergers.

Assocham further said that to prevent trading in tax losses, the Government had introduced provisions for restricting carry forward of tax losses, in a situation where there is a change of more than 49 per cent shareholding of a closely held company. This anti-abuse provision, when applied enmasse, sweeps in its ambit a whole host of genuine restructuring, the chamber said.

It is clear that transactions within the same group, often with the same parent entity were clearly not intended to be covered within the anti-abuse provision. Although, this provision provides for an exception for change in shareholding of companies on parent company restructuring, this benefit is available only to foreign parents, Assocham said, adding that the Government should consider extending this to Indian companies as well.

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