Recognizing the need and significance of corporate restructuring, the government has over the years introduced measures to accord tax neutrality to such exercises.
One of the measures taken is reflected in section 72A of the Income-tax Act, 1961. This section lays down certain conditions, which are required to be fulfilled in case of amalgamations, demergers and certain other prescribed business reorganizations to entitle the amalgamated and resulting company to set off and carry forward the accumulated loss and unabsorbed depreciation of the amalgamating and demerged company.
It has been felt that these conditions have lost their relevance in the fast changing Indian business scenario and hence merit a fresh look.
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As far as demergers are concerned, the Act provides that to claim tax benefits in such cases, the following condition laid out in section 2(19AA) has to be satisfied, namely, all the property and liabilities relating to the undertaking that are being transferred by the demerged company immediately before the demerger should become the property and liabilities of the resulting company.
At present, the law provides that the consideration should be paid only to the shareholders of the demerged company and not to the demerged firm.
It is desirable that the requirement to transfer all assets and liabilities should be deleted, as in several cases there may be legal and contractual restrictions prohibiting transfer of certain assets and liabilities.
Instead, it should be provided that only the mutually agreed assets and liabilities need be transferred and the conditions for tax neutrality should be considered satisfied if the going concerned business is transferred.
Further, amendments should be made to the effect that the demerged company also qualifies to receive consideration.
Due to the way section 72A is worded, it does not cover all undertakings and sectors. It also does not support further amalgamation of the amalgamated company within the specified period of five years.
It is imperative that this section be recast to adjust to all sectors and undertakings.
The author is executive director, Tax & Regulatory Practice, PricewaterhouseCoopers. Respond to this column at firstname.lastname@example.org