Taxation Aspects of M&A
and Stamp duty
February 2011
Prashant Kapoor
Presentation Outline
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1
Taxation Aspects
2
Stamp Duty Aspects
1
Taxation Aspects
of M&A
Mergers & Acquisitions (‘M&A’)
Modes of M&A
Amalgamations
/ Merger
De-merger
Asset Purchase
Slump Sale
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Itemized Sale
Acquisitions
Share Purchase
Buy-back
Capital
Reduction
3
Key Considerations
Tax Neutrality
Carry forward losses &
unabsorbed depreciation
Appointed Date
Key
Considerations
Continuity of tax
incentives/ benefits
Deemed Dividend
Minimum Alternate Tax
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
Taxation Aspects of M&A
Tax Neutrality
ƒ Compliance with specific definitions/ conditions of Amalgamation / Demerger
ƒ Compliance with definitions / conditions results into a no tax position to
the Company(s) and their shareholders
ƒ Specific benefits available under the Act
Prudent to specifically mention in the Scheme that the Amalgamation and De-merger is in
Compliance with the conditions prescribed under Sec 2(1B) and 2(19AA) of the Act
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
Taxation Aspects of M&A
Appointed
Date
ƒ Choice of Appointed date
ƒ Not specifically defined in the Act
ƒ Interpreted based on rulings of the Apex High Court
- The date of amalgamation is the date mentioned in the scheme
and approved by the court unless the Court specifies any other
date*
ƒ Relevant for tax purposes as it is classified as the date of
amalgamation / de-merger
* Marshall sons and co. (India) ltd. vs ITO 223 ITR 809
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
Taxation Aspects of M&A
Utilization of
losses &
unabsorbed
depreciation
Section 72A of the Act
Amalgamation/ Merger
ƒ Carry forward of accumulated business losses and unabsorbed
depreciation allowed to Amalgamating Company
- Subject to compliance of conditions by the Amalgamating and
Amalgamated Company pre and post merger
ƒ Fresh lease of life of 8 years to business losses of Amalgamated
Company from date of amalgamation
De-merger
ƒ Benefit of set-off of accumulated business losses & unabsorbed
depreciation related to the De-merged undertaking available to the
Resultant Co
- Not directly relatable – brought forward losses & unabsorbed
depreciation proportionate to the assets transferred
ƒ Undertaking need not be an ‘Industrial Undertaking’, unlike in
Amalgamation
ƒ No fresh lease of life available for carry forward of business losses
on de-merger
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Taxation Aspects of M&A
Utilization of
losses &
unabsorbed
depreciation
Section 79 of the Act
ƒ Applicable to closely held companies
- companies other than companies in which public are substantially
interested
ƒ No carry forward / set off of accumulated business losses
- in case common shareholding of 51% is not maintained as on last
day of the financial year
ƒ Does not affect the losses of the year in which change in shareholding
takes place
ƒ Includes all losses except carry forward / set off of unabsorbed
depreciation*
* CIT v Kalpaka enterprises (P) Ltd (157 ITR 658), CIT v Concord Industries (119 ITR 458
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
Sec 72A vs. Sec 79
Case Study# 1
ABC Co
XYZ Co
A Co
X Co
Services &
Investment business
Manufacturing
business
Facts of the Case
ƒ A Co & X Co are closely held
companies
ƒ A Co has accumulated losses in
services business
1
Merger of A Co with X Co
2
Reverse merger of X Co with A Co
3
De-merger of Services business of A Co into X Co
ƒ Proposal to consolidate A Co and X Co
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
Sec 72A vs. Sec 79
Case Study# 2
Facts of the case
ƒ P Co acquired 100% stake in Q Co (a
private company) on 30th September 2010
P Co
ƒ It is proposed to merge Q Co into P Co
ƒ Q Co have accumulated losses for the FY
2008-09 and FY 2009-10
100%
1
• Applicability of Sec 72A vs. Sec 79
Q Co
2
• Appointed Date: 1st April 2010 or 1st April 2011?
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
Taxation Aspects of M&A
Continuity of
Tax
Incentives /
benefits
ƒ Tax Incentives are either based on business (u/s 80-IA/80IB/10B) or
Area/ Region based (u/s 80-IC/10A /10C)
ƒ Continuity of unexpired period of tax holiday to the transferee
company in amalgamation / de-merger except u/s Section 80-IA(12A)
ƒ Explicit provisions are not provided for Slump sale in the Act
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
Taxation Aspects of M&A
Transfer of
MAT Credit
ƒ MAT payable on book profits in the absence of Nil/lower tax profits
ƒ Credit for MAT allowable to the assessee company who has paid such
taxes
- Amalgamating Co ceases to exists after amalgamation.
ƒ No specific provision for carry forward of MAT credit in case of
amalgamation or de-merger
ƒ Recent Judicial precedents allowing the credit to Transferee
Company*
ƒ Set-off of brought forward losses of Transferor Co for MAT purposes#
* 28 ITAT India 998 (Mum.) ITA No. 313/Mum./07 A.Y. 2003-04
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
# DCIT Vs Beck India Limited
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Taxation Aspects of M&A
Deemed
Dividend
ƒ Definition includes certain distributions or payments made by a
company and the same are deemed to be dividends in the hands of
receiver
- Distribution of accumulated profits entailing to release of Assets
- Distribution of debentures etc and bonus shares
to preference share holders
- Distribution on liquidation
- Distribution on Capital Reduction
Deemed
dividend to
the extent of
accumulated
profits
- Payment of any sum by way of advance or loan
ƒ Deeming provisions only applicable to closely held companies
ƒ Exclusions : Buy-back u/s 77A of the Companies Act.1956 and issue
of shares by the resultant company in de-merger
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
Issues:
1
Issue of consideration other than equity shares in Amalgamations/ De-mergers viz.,
preference share or cash
2
Amalgamation/ De-mergers from subsidiary company into holding company
3
Override effect: Section 79 vs Section 72A
4
Whether Sec 79 would get triggered on inter se transfer of shares between the same group
of shareholders?
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
Stamp Duty Aspects
Stamp Duty Aspects
Constitutional Powers and The Legislature
States specific entries for conveyance on merger or de-merger
Past litigations on levy of stamp on High Court Order for merger
or de-merger
Draft amendment bill released containing the proposed
amendments in Indian Stamp Act, 1899 (‘ISA’)
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Constitutional Powers and The Legislature
Enacted separate Acts
State
Enactment
ƒ Maharashtra, Gujarat, Karnataka, Kerala, Rajasthan, Jammu & Kashmir
Schedule 1-A added to the ISA by State amendments
ƒ Andhra Pradesh, Madhya Pradesh, Bihar, Orissa, West Bengal, Punjab,
Haryana, Himachal Pradesh, Chandigarh & Delhi etc
Changes made in the Articles of Schedule 1 itself
ƒ Tamil Nadu, Assam & other North Eastern States
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17
Levy of Stamp Duty
Liability to pay stamp duty arises in state if
The Instrument is mentioned in the Schedule to the (State) Stamp Act
AND
The Instrument is executed in that State
ƒ
Location of the property is not relevant
OR
Having executed outside the State, the instrument is brought or received in the State & relates to
ƒ
any property situated in the State; or
ƒ
any matter or thing done or to be done in the State
Stamp duty is levied on the instrument and not on the transaction
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18
Stamp Duty – Merger/ De-merger
ƒ Approval of the High Courts having jurisdiction over registered office of transferor &
transferee company
ƒ Provisions levying duty on High Court Order under Sec 394 of the Companies Act, 1956
States where there is a
specific entry for
conveyance on merger or
demerger
Maharashtra, Gujarat,
Karnataka, Madhya Pradesh,
West Bengal, Andhra Pradesh
& Rajasthan
States where there is no
specific entries & High Court
have ordered for payment of
stamp duty
States where there is no
specific entry for
conveyance on merger or
demerger
Delhi (Delhi Tower Limited)
Uttar Pradesh (Hero Motors
and other Applicants)
Duty may be payable as per
Supreme Court’s judgment in
Hindustan Levers Limited Vs
State of Maharashtra at Stamp
Duty rates applicable for
Conveyance
Indian Stamp (Delhi
Amendment) Bill 2010
provides for levy of stamp duty
on High Court Order u/s 394
Increasing trend towards levy of stamp duty on High Court Order
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
19
State Specific Stamp Duty entries on High Court Order
Based on value of shares
Maharashtra
A. 10% of MV of shares issued or allotted and consideration paid on merger/demerger
(Merger &
De-merger)
B. 5% of the MV of immovable property located in Maharashtra
C. 0.7% of the MV of shares issued or allotted and consideration paid on
merger/demerger
Higher of B or C shall not exceed A (Overall cap of Rs 25 Cr)
West Bengal
A. 8% of MV of shares issued or allotted and consideration paid on merger/demerger
(Merger &
De-merger)
B. 2% of the MV of immovable property located in West Bengal
C. 0.5% of MV of shares issued or allotted & consideration paid on merger/demerger
Higher of B or C shall not exceed A (Overall cap of Rs 25 Cr)
Madhya
Pradesh
(Merger &
De-merger)
A. 8% of MV of shares issued or allotted and consideration paid on merger
B. 7% of the MV of immovable property located in Madhya Pradesh
C. 0.7% of MV of shares issued or allotted & consideration paid on merger/demerger
Higher of B or C shall not exceed A
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20
State Specific Stamp Duty entries on High Court Order
Based on value of shares
Gujarat
A. 1% of MV of shares or the face value of shares issued or allotted (as the case may
be) and the amount of consideration
(Reconstruction
& Merger)
B. 1% of the MV of immovable property located in Gujarat
Higher of A or B, (Overall cap of Rs 10 Cr
Karnataka
A. 7% of the MV of immovable property located in Karnataka
(Merger &
De-merger)
B. 0.7% of MV of shares issued or allotted and in case of a Subsidiary Co, shares
merged (or cancelled) with Parent Co and consideration paid on merger/
demerger
Higher of A or B
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
State Specific Stamp Duty entries on High Court Order
Based on Market Value of Property
Rajasthan
(Merger)
Andhra
Pradesh
(Merger)
A. 4% of the MV of the property
(Market value of the property shall be deemed to be the total amount of value of
shares issued and amount of consideration)
A. 2% of the MV of the property
(Market value of the property shall be deemed to be the total amount of value of
shares issued and amount of consideration)
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
Issues:
1
Market value of shares as on Appointed Date or Effective Date
2
Merger/ de-merger of wholly owned subsidiary into Holding Co – no issue of shares
3
Property includes movable and immovable property
4
Extra territorial nexus in certain states
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with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23
Thank You
For any questions, please feel free to contact:
Prashant Kapoor, M&A - Tax Director
Direct: +91 124 334 5318
[email protected]
Glossary
Co
: Company
FY
: Financial Year
ISA
: Indian Stamp Act, 1899
Sec
: Section
MAT
: Minimum Alternate Tax
M&A
: Merger and Acquisitions
MV
: Market Value
The Act
: Income Tax Act, 1956
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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