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Budget likely to offer a sop that could fuel start-up M&As

Startups may be allowed to carry forward losses and accumulated depreciation during amalgamation.Premium
Startups may be allowed to carry forward losses and accumulated depreciation during amalgamation.

The govt is considering a proposal to allow carry forward of losses and accumulated depreciation during the amalgamation of companies in a bid to promote consolidation among startups dealing in services and in organized retailing sectors, said two people privy to the development

NEW DELHI : India is considering a proposal to allow carry forward of losses and accumulated depreciation during the amalgamation of companies in a bid to promote consolidation among startups dealing in services and in organized retailing sectors, said two people privy to the development.

The new proposal is being considered by the finance ministry, and it may be introduced as part of proposals for Union Budget 2022-23, the people cited above said, requesting anonymity.

Such a move would be similar to incentives currently being extended to industrial units and banking to facilitate consolidation. A spokesperson for the finance ministry did not respond to an email query till press time.

The services sector is emerging as a key contributor to the Indian economy and a major source of exports revenue. Consolidation is expected to help create the scale necessary for Indian companies to compete with their global rivals.

Currently, companies in sectors such as manufacturing and shipping get to carry forward business losses and unabsorbed depreciation post amalgamation of entities for up to 7-8 years. This allows flexibility in such transactions, and the amalgamated entity gets the opportunity to set off losses from income generated over a period of time, thereby getting tax relief.

This provision, however, is not extended to startups in services and retail segments, making the process of consolidation in these segments tax heavy, especially in the event of a merger of a loss-making entity with a profit-making one.

“The services sector is emerging as a force to reckon with in India’s growth story. Like many other sectors, this also needs to scale up, and incentives like carrying forward of losses and unabsorbed depreciation would facilitate consolidation," an industry expert from one of the four big global audit firms said, requesting anonymity.

India’s total export in services in April-December stood at $178.81 billion, and the target is to grow this to more than $230 billion. An easier tax regime is likely to drive the sector’s growth by encouraging consolidation. Startups that have mushroomed in India in recent years would also gain. As the startup ecosystem in India gains maturity, it is seen that such entities are looking to grow through organic and inorganic means. Inorganic growth through mergers, acquisitions and business reorganizations have advantages such as consolidation of the market, meaningful competition and greater employment opportunities.

However, a common impediment faced in this area pertains to denial of loss-transition benefits under Section 72A, which is available only to amalgamation in respect of certain specific types of companies. Incentives for consolidation will help startups flourish and achieve global scale.

Industry body CII has suggested that the benefit of carrying forward and setting off of accumulated losses and unabsorbed depreciation prescribed U/S 72A can be extended to startups approved by a CBDT constituted Expert Committee.

The people cited above said that the proposal on allowing carry forward of losses and unabsorbed depreciation for setting off against profits generated by the amalgamated entity may be allowed for an extended period of 10 years till the time rules permit an entity to be recognized as a startup.

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