The Budget has proposed to tax all mergers and amalgamations in which a company with higher accumulated profits merged with a company with lower profits or made losses and reduced capital to avoid paying dividend distribution tax. This step was necessitated as companies – mainly multinationals – announced mergers in the last few years to escape liability of paying tax on distributed profits in India.
This step will impact all mergers that were announced in the last few years and reduction of capital took place in the last one year, tax experts said.
“For the purpose of calculation of dividend under section 2(22) of the IT Act, accumulated profits shall also include the accumulated profits of the amalgamating company on the date of amalgamation. This has plugged the loophole wherein companies by following purchase method of accounting in amalgamations has not recorded reserves of the amalgamating company and avoided payment of dividend distribution tax on upstreaming cash to its shareholders,” says Jinesh Shah, Partner, Tax, Deal Advisory, KPMG in India.
According to a tax expert, many MNCs were resorting to this route to avoid paying dividend distribution tax and with the loophole plugged by the government, these companies would now end up paying DDT at the rate of 20 percent. “The government realised that it was losing a lot of revenue as a lot of companies were announcing amalgamations, and reduced capital just to avoid paying DDT as the reserves came down. Now, the reserves will remain the same and tax has to be paid accordingly,” said a tax expert. This, however, will not impact the mega merger between Idea Cellular and Vodafone India Ltd as both companies are making losses, the tax expert clarified. This method was also prevalent among many holding companies and unlisted companies in which promoter was merging profit making entities with loss-making companies just to avoid paying DDT.
Source: Business-Standard 