Budget 2024: What's On India Inc's M&A Wishlist?

In the backdrop of a global economic slowdown and continued geopolitical tensions, India witnessed a rather quiet year in the mergers and acquisitions space in 2023.

However, experts expect M&A activities to resurge in the country, creating huge growth opportunities. They also agree that although no significant changes are expected in this interim budget, it does offer an opportunity to begin the larger conversation around tax policy changes needed to facilitate the Indian M&A space.

Tax Neutrality In Outbound Mergers

Tax neutrality, as a concept, basically means that investors should not be subject to additional layers of taxation when the investments take place through an unconventional route or through some kind of alternative investment vehicle.

Under the Income Tax Act, an Indian company's merger with another Indian company is tax neutral. However, no such provision has been made with respect to an Indian company's merger with a foreign company.

Such transactions should be treated as tax neutral for the company and the shareholders, and a prescription of rules in this regard could provide impetus to such deals, according to Winnie Shekhar, partner at IndusLaw.

Transactions such as mergers are driven by commercial considerations such as raising capital and synergising operations. Hence, in line with similar exemptions provided for inbound mergers, there is a need to provide a tax exemption for outbound mergers as well, Pranav Sayta, partner at EY India, told NDTV Profit.

Eligibility To Carry Forward Tax Losses

Currently, there are stringent conditions around the eligibility of amalgamated companies to carry forward the tax losses of amalgamating companies in tax neutral mergers, and this is restricted to a few specified businesses.

It is hoped that the government will allow for tax losses to be carried forward to amalgamated companies across industries, said Gouri Puri, partner at Shardul Amarchand Mangaldas.

A major hardship faced by the startup community is the risk of non-allowability to carry forward the tax losses on account of change of shareholding. Generally, startups have a longer gestation period and are required to make high investments in their formative years.

The tax rules, which restrict carry forward of tax losses in companies due to change of substantial shareholding, often hounds these enterprises as they do not get the benefit of the initial investment in any manner, said Anil Talreja, partner at Deloitte India.

Talreja added that the ask from their side has been to provide an exemption from this hardship, given the peculiar nature of their operations.

A significant risk of tax losses lapsing on account of change in shareholding acts as a deterrent to enhancing the value of M&A deals and the government should look to issue clarifications allowing such losses, Puri said.

Other Key Expectations

Another significant industry expectation is to extend tax neutrality to businesses which are looking to re-domicile headquarters back into India

Since re-domiciliation brings value back into India, the government should consider extending tax neutrality to such structures, Puri said.

While GIFT City is becoming a consistently sought after relocation venue, the regime needs to be simplified and tax exemptions need to be extended to help companies, which had moved outside India and want to now access Indian markets, Shekhar said.

The industry also seeks a simplification of tax implications arising on the sale of shares in M&A deals.

Talreja explained that capital gains tax is different for shares sold on the floor of the stock exchange and in cases where these shares are sold off the exchange. These rates are different in case the seller is a non-resident and differ for resident shareholders.

Simplifying the tax implications arising on the sale of shares will bring in additional certainty and reduce tax litigation in the future, Talreja said.