India

Corporate - Other issues

Last reviewed - 14 May 2020

Mergers and acquisitions

The expression ‘merger’ has not been defined in the Income-tax Act but has been covered as part of the definition of the term 'amalgamation'. Amalgamation is defined as a merger of one or more companies with another, or the merger of two or more companies to form a new company, in such a way that all the assets and liabilities of the amalgamating company or companies become the assets and liabilities of the amalgamated company, are held by the amalgamated company for a minimum period of five years, and shareholders holding not less than 75% in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. In case of demerger, the cost of acquisition and period of holding of the assets related to the demerged company shall be available to the resulting company.

Capital gains

No capital gains tax is levied on the transfer of capital assets by an amalgamating company to the amalgamated company, provided the amalgamated company is an Indian company. Similar is the position in case of a demerger by a demerged company to a resulting company.

In cases where shares of an Indian company are transferred by a foreign company or a demerged foreign company to another foreign company or resulting foreign company, there is no tax payable, provided it satisfies certain specified conditions. Furthermore, the shareholder of the amalgamating company or demerged company is not liable to pay capital gains tax on the exchange of shares with that of the amalgamating company or the resulting company under the scheme of amalgamation.

Conversion of a bond or debenture of a company into equity shares is specifically exempt from capital gains tax. Furthermore, conversion of preference shares to equity shares will now be exempt from capital gains tax. The cost of acquisition and period of holding of the preference shares will be considered while determining the cost of acquisition and period of holding of equity shares acquired on such conversion. This is effective from tax year 2018/19 onwards.

Carryforward of accumulated losses of amalgamating company

The losses and unabsorbed deprecation of the amalgamating company are deemed to be those of the amalgamated company in the year in which the amalgamation takes place, provided it satisfies certain specified conditions.

In the case of amalgamation of a company owning an industrial undertaking, the amalgamated company shall achieve the level of production of at least 50% of the installed capacity of the undertaking before the end of four years from the date of amalgamation and continue to maintain the minimum level of production till the end of five years from the date of amalgamation. If these conditions are violated, the benefit claimed will be taxed in the hands of the amalgamated company in the year of default.

In case of demerger of a company, the accumulated losses or unabsorbed depreciation of the demerged company directly relatable to the undertaking or the division transferred is allowed to be carried forward and offset in the hands of the resulting company.

Amalgamations and demergers normally attract stamp duty at varying rates. Such rates are derived from the laws of the state involved. High Court(s), stock exchange, and other regulatory clearances are required for amalgamations or demergers.

Inter-governmental agreements (IGAs)

The Indian government has signed an IGA with the United States (US) to implement the Foreign Account Tax Compliance Act (FATCA) in India. According to the IGA, foreign financial institutions (FFIs) in India are required to report tax information about US account holders to the Indian government, which will, in turn, relay the information about Indian account holders to the US Internal Revenue Service (IRS). Furthermore, the US IRS will provide similar information about Indian citizens having any accounts or assets in the United States. This automatic exchange of information began from 30 September 2015. Subsequent to the signing of the IGA, the Indian government enacted rules relating to FATCA reporting in India.