The Finance Bill presented by the government has provided several changes which will impact dealmaking. Here are a few of these changes.
Financial investors, including private equity and venture capital investors, are often faced with a situation where the company where they propose to invest has a non-core business and the issue which arises is on the tax cost of implementing the carve-out of the non-core business.
Typically, this carve-out is undertaken with a slump sale. Gains on the slump sale are taxable at a base rate of 20%. The Finance Bill proposes to reduce the rate from 20% to 12.5%. This is a welcome change and will encourage faster and beneficial closure of deals.
Financial investors normally use the IPO route for securing a gainful exit. Promoters use the offer for sale (OFS) route for securing their share of this gain. Taxation on the gains under the OFS route lacked clarity, which has been given under the budget proposals. This will help the selling shareholders plan their tax more efficiently.
The shift of tax on buyback from the company to the shareholders was, in some manner, imminent. Whilst there is a window available up to 1 Oct 2024, it is important to recognize and recalibrate the benefits of undertaking buyback during this window. The shareholders can claim the cost on a secondary purchase in the proposed regime.
The abolition of the angel tax certainly creates an increased level of confidence reposed by the government on the taxpayers. This was a much needed announcement and will give an impetus to foreign investment in India.
Other measures announced in the nature of simplification of the withholding tax regime, simplification of the compliance provisions, steps to reduce litigation, and rationalization of assessment and audit are clear indications of the government's intention to get to a taxpayer-friendly regime.
The above measures have the ingredients of leading to an increased deal activity and M&A in the country. It is the government's contribution towards getting India to be an easy place to do business and making it attractive for investments, leveraging on the high consumption markets and its potential.
The next six to eight months would be a very close watch to see the reaction of the investor community to these proposals. When the next budget is to be presented, the government will be in a better position to assess the impact and make corrective steps as may be needed.
*Anil Talreja is partner, Deloitte India. Views are personal.
