Driving M&As and capital markets – what to expect from the FM?

One of the big deterrents of a share swap is the trigger of capital gains taxes even with no liquidity. The budget is expected to address the tax neutrality of share swaps.

Written by Guest

July 8, 2024 16:56 IST

One of the most awaited amendments pertains to the rationalization of capital gains tax provisions across various asset classes.(Image: Freepik)

By Vaibhav Gupta

The Indian capital markets have been one of the best performing globally and Indian businesses continue to drive global inbound as well as outbound M&A activity. As the Union Budget for the upcoming fiscal year approaches, anticipation and speculation are rife regarding the significant changes that may be introduced to the Indian tax landscape. The Government, in its continued pursuit to streamline tax laws and enhance the business environment, is expected to unveil amendments aimed at rationalising various provisions, fostering economic growth, and promoting investor confidence.

Rationalisation of capital gains tax provisions

One of the most awaited amendments pertains to the rationalisation of capital gains tax provisions across various asset classes. The current structure is often criticized for its complexity and the disparity in tax rates and holding periods for different asset classes such as equity, real estate, and debt instruments. The Government is expected to simplify these provisions by possibly aligning tax rates and harmonizing holding periods. Particularly, the current tax regime has beneficial tax rates on the sale of listed equity. To encourage the culture of entrepreneurship and innovation, capital gains on the sale of unlisted equity should be brought at par with listed equity. Further, taxation provisions of debt mutual funds were amended last year and capital gains on sale of debt mutual funds are now taxed as short-term capital gains at normal tax rates. This has impacted retail investors who have been investing in the debt markets as an alternative to keeping fixed deposits with banks. One of the other fallouts has been mutual funds that invest in overseas equity markets which have been included within the meaning of specified mutual funds suffering the higher tax treatment. It will be useful to have the same treatment accorded to mutual funds investing in domestic equities and those investing in overseas equities.

Budget 24-25

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Re-introduction of Beneficial Tax Rate Regime for New Manufacturing

The re-introduction of a beneficial tax rate regime for new manufacturing units under Section 115BAB is another significant amendment expected in this budget. This section previously allowed a reduced tax rate of 15% for new manufacturing companies set up after October 1, 2019, and commencing operations before March 31, 2024. There is a strong possibility that this provision will be extended to new manufacturing units established after the cut-off date. The Government may consider removing the need to set up a new company to avail of this benefit going forward, which should help in simplifying tax administration and compliance. Such a measure would boost the ‘Make in India’ initiative, attract fresh investments, generate employment, and spur economic growth.

Buyback Taxes in the Hands of Shareholders

The current taxation policy mandates that companies undertaking share buybacks must pay a buyback tax, which in turn impacts their cash reserves. A shift in this policy is anticipated, where the tax liability could be transferred from the company to the shareholders receiving the buyback proceeds. This change would align with international practices and potentially provide companies with greater flexibility in managing their capital allocation strategies. Also, the shareholders will then be able to take the benefit of their purchase costs which tend to be higher than the price at which the shares were originally issued by the company.

Continuity of Tax Losses on Merger of Non-Manufacturing Companies

The non-availability of continuity of tax losses in the case of mergers involving non-manufacturing companies has posed challenges. The Government should address this issue by allowing the carry-forward and set-off of tax losses in such mergers, similar to the provisions available for manufacturing entities. This amendment would facilitate smoother corporate restructuring and ensure that tax benefits are not lost due to technicalities.

Clarity on Shareholder Level Taxation on Merger of Foreign Companies

Indian shareholders often face uncertainty regarding the tax implications when foreign companies merge or restructure. The upcoming budget should provide much-needed clarity on this front, outlining the tax treatment of gains or losses at the shareholder level in such scenarios. This would eliminate ambiguities and align India’s tax regime with global standards, making cross-border transactions more transparent and predictable. Further, this is required to bring the resident shareholders at par with non-resident shareholders who are not taxed when a foreign company merges into an Indian company or at the time of a merger of Indian companies.

Tax neutrality on re-organisation of Limited Liability Partnerships (LLPs)

Currently, the LLP laws permit the re-organisation of LLPs involving mergers or any other mode of arrangement, the tax laws do not recognise such a re-organisation. The Government should consider introducing provisions for tax-neutral re-organisation of LLPs along the same lines as currently provided for amalgamation or demerger of companies. In addition, provisions for permitting the merger of an LLP with a company should also be introduced in the corporate laws to facilitate ease of doing business and encourage businesses to be conducted through LLPs.

Tax Neutrality for Share Swaps

Share swaps have increasingly been used in M&A transactions in India. One of the big deterrents of a share swap is the trigger of capital gains taxes even with no liquidity. The budget is expected to address the tax neutrality of share swaps, ensuring that such transactions do not attract immediate tax liabilities. This would facilitate smoother M&A deals and encourage the use of equity as a currency for acquisitions.

GIFT CITY

The Government has been gradually introducing new provisions to facilitate the growth of investments in the GIFT City. Moves aimed at making the approval process a single window have been welcomed by global investors. As the GIFT City evolves into a globally recognized international financial centre, measures should be announced to facilitate a more open, transparent, and vibrant capital flow framework in the GIFT City. Policy bottlenecks need to be promptly addressed and clarified, particularly on aspects surrounding the fund management regulations, and single-family office set-ups in the GIFT City.

Promotion of Green Bonds and ESG Investments

With the global emphasis on sustainability, the Government is expected to introduce measures to promote green bonds and environmental, social, and governance (ESG) investments. This could include tax incentives for issuers and investors in green bonds, as well as regulatory support for ESG-compliant funds. Such initiatives would align India’s capital markets with international sustainability standards and attract a new class of responsible investors.

As we wait for July 23 hoping to see some of these changes which will go a long way in promoting economic growth, encouraging foreign investment flows, and boosting investor confidence, ultimately contributing to India’s economic resilience and competitiveness on the global stage.

(Disclaimer: Vaibhav Gupta is Partner at Dhruva Advisors. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)

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First published on: 08-07-2024 at 16:56 IST