GSK minority shareholders must read fine print of merger with HUL: Experts

The all-equity merger of Hindustan Unilever Ltd with GSK Consumer Healthcare India appears tax neutral, say experts.

On the face of it, the all-equity merger of Hindustan Unilever Ltd (HUL) with the publicly-listed GSK Consumer Healthcare India is tax neutral, with no incidence of tax in India.

However, tax experts noted that the merger in all likelihood would lead to a difference in value of tangible assets of the merging company and the value of shares issued by HUL. This difference will be treated as value of goodwill and other intangible assets.

Tax experts said HUL could claim depreciation on goodwill for tax purpose. This follows a Supreme Court order in 2012 that held that companies are allowed to claim depreciation on ‘acquired’ and ‘paid’ goodwill for tax purposes. In the Smifs Securities case the apex court said that goodwill is an intangible asset as per Section 31(1) (b) of the Income Tax Act, 1961.

“There is a Supreme Court decision which says that goodwill arising in a merger is depreciable for tax purposes. As far as brands are concerned the case is litigative,” said Girish Vanvari, founder, Transaction Square, a tax advisory firm.

However, there could be some concerns for the minority shareholders of GSK in this deal, experts said.

“From the perspective of shareholders of GSK Consumers, including the GSK group, logically the grandfathering of fair market value as on January 31, 2018 should be available,” said Ketan Dalal, managing partner at Katalyst Advisors.

However, this will be applicable provided the date and cost of acquisition of shares acquired on merger relate back to the original acquisition, he said.

Experts said Indian tax department could ask the parties involved in the transaction to explain the rationale for the payment to GSK UK for the commercial arrangement. Further, it remains to be seen whether the GSK shareholders will be able to grandfather the market value of their share, they said.