The Union Budget for 2018-19 has proposed to tax all mergers and amalgamations in which a company with higher accumulated profit merges with a company with lower profits, or with a company that made losses, and reduced capital to avoid paying dividend distribution tax (DDT).
The move assumes significance as companies, mainly multinationals and the unlisted ones, announced mergers in the past few years to escape the liability of paying tax on distributed profits in India.
According to tax experts, this will impact all mergers — for listed as well as unlisted companies — that were announced in the past few years, and reduction of capital that took place in the last one year.
“For the purpose of calculation of dividend under Section 2(22) of the Income Tax Act, accumulated profits shall also include accumulated profits of the amalgamating company on the date of amalgamation. This has plugged the loophole, wherein companies, by following the purchase method of accounting in amalgamations, have not recorded reserves of the amalgamating company and avoided payment of the DDT while upstreaming cash to its shareholders,” said Jinesh Shah, partner (tax, deal advisory), KPMG in India.
One such expert said with the loophole being plugged by the government, multinationals, which resorted to this route to avoid or reduce the incidence of the DDT, would now end up paying the tax at the rate of 20 per cent.
“The government realised that it was losing a lot of revenue as many companies were announcing amalgamations, and reduced capital, just to avoid paying the 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, would not affect the merger between Idea Cellular and Vodafone India as both companies were making losses, the expert clarified. This method was also prevalent among many holding and unlisted companies in which promoters were merging profit-making entities with loss-making ones just to avoid paying the DDT.