DTC's unstinted leg-up for reorganisation

Apart from categorically stating that the tax benefits reserved for business reorganisation are available only if the two or more companies involved in the exercise are residents, meaning Indian companies, the Direct Taxes Code Bill, 2010 (the DTC) gives a no-holds-barred support for amalgamations and demergers. The extant law allows the losses of an amalgamating company to be carried forward for set-off by the amalgamated company only if the amalgamating company was in the business of owning an industrial undertaking or a ship or a hotel or a bank.

The DTC, on the contrary, uses the umbrella expression ‘business' which subsumes all these besides the others left behind by its predecessor, notably those in the business of providing services. Thus irrespective of the business, the amalgamating company's losses can be carried forward by the amalgamated company so long as both are Indian residents.

And all losses of all hues of an amalgamating company as well as of the demerged company would be available for carry forward and set-off by the amalgamated company and the resulting company respectively. In the process, the invidious distinction between unabsorbed depreciation and unabsorbed cash losses goes. So does the artificial and arbitrary eight-year time barrier. Loss from one head of income can seamlessly merge with another head of income and can be carried forward . This is as it should be.

Throwing caution to wind

The DTC, however, throws all cautions to wind. In the present law, the amalgamated company has to keep at least three-fourth of the assets in terms of value in tact for at least five years. The idea is to stop asset stripping which consists in coveting prime assets of the amalgamating company instead of its business so as to make a killing in the immediate aftermath of the acquisition. In addition, the amalgamated company is also called upon to restore at least 50 per cent of the productive capacity within four years.

Both these conditions seek to extract a price for the huge tax sop given to the amalgamated companies. Curiously, the DTC has jettisoned these conditions so much so that an acquirer company can not only pocket the tax benefits accruing out of set-off of losses of the amalgamating company, but also the proceeds of assets sale.

Demergers in this country have been taking place more to carve out business among siblings of the promoter family rather than to reap the benefits of core competence.The DTC ought to have put its foot down and said that if a demerger follows a family settlement, no tax benefits would ensue.

Acquisition of undertaking is resorted to overcome the ticklish problems inherent in share valuation whereas an undertaking together with its intangible assets can be scientifically valued by independent appraisers that much more easily.

The point is all the three forms of reorganisation involving transfer of undertaking — merger, demerger and sale of undertaking — are aimed at putting the national assets to more productive use. In the event, all the three should get the same tax treatment.

(The author is a Delhi-based chartered accountant.)

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