Education

Tax law as M&A facilitator

D. MURALI | Updated on January 21, 2011 Published on January 21, 2011

Sujit Sircar, CFO, iGATE

Much has been written about the funding aspects of the iGATE-Patni deal. Here is a look at the transaction from a taxation perspective, as extracted from a recent email exchange between Business Line and Mr Sujit Sircar, CFO, iGATE ( >http://bit.ly/F4TSujitSircar ). Excerpts from the interview:

What are the taxation issues of interest in the deal?

As a philosophy, we are conservative in our tax position as a company, and always go on the side of cautiousness in taking any positions.

The share purchase agreements in this particular transaction are with Indian residents, non-resident Indians and overseas companies. Also, separately, the open offer triggers separate tax rates for the sellers. While the compliance on all the above is of paramount importance, it is also complex. The repatriation of funds for servicing debt also creates challenges on the tax front.

Your suggestions on policy changes in the tax regime that can facilitate M&A.

While it is accepted and understood that tax laws in many countries tend to be complex, India is beginning to occupy an increasingly important place on the world stage, especially in IT (information technology). Given this changing landscape, my view is that the benchmark for comparison has to be changed, and there is a need for a little more clarity in relation to administration of tax laws.

I would say that there are two important immediate requirements: (a) there is a pressing need for laws that are clear; and (b) there is a need for a mechanism to provide taxpayers with upfront clarity as well an immediate dispute resolution methodology.

Several multinational companies doing business in India, across a broad spectrum of industries, are saddled with ever-increasing number of tax audits and prolonged tax litigation in India. It would help organisations across sectors if internationally-accepted standards in treaty interpretation and transfer pricing are followed.

At present, there are also challenges relating to dispute resolution mechanism in India with some assessment proceedings prolonging for a lengthy period. The fact that these issues take away a lot of management time and effort is a matter of concern.

There is a need to speed up the litigation procedure. It would be good to have a ‘limitation period' on disposal of appeals. The other policy regulation that could be looked at is clarity on tax rules in cross-border M&As, especially those that have an underlying component in India, as currently such transactions are looked upon with suspicion.

Even after a High Court has approved the merger, income tax law (Section 72A) imposes a lot of conditions, such as shareholding pattern and continuity of business, among others, for claiming tax losses of the merged entity. I do believe this needs to be liberalised.

Sometimes, in M&A transactions, carry forward of exemptions under the Income-Tax Act are lost. This too could be looked into.

>Detaxification.blogspot.com

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Published on January 21, 2011
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