Firms buying stressed assets may get tax relief

Firms buying stressed assets may get tax relief

The government is considering giving tax relief to companies that acquire stressed assets under the insolvency process.Some of such steps like carrying forward tax holidays may come up in the Budget, while the government may approach the goods and services tax (GST) Council for giving relief on the GST.

For tax relief on the stamp duty, states’ cooperation might be sought, sources said. Companies going through the insolvency procedure face tax-related road blocks, making the resolution process tedious. For example, they pay the GST on sales of assets as well as brands, royalty, etc. Earlier, under the Sick Industrial Companies (Special Provisions) Act, companies were given exemptions from the central sales tax (CST). With the advent of the GST, the CST is no longer there.

Exemption from the GST will help companies bid for assets at higher prices, resulting in more funds for lenders. “If GST exemption is granted for assets sold pursuant to the Insolvency and Bankruptcy Code (IBC) process, it would increase recoveries for lenders,” Amrish Shah of Deloitte India said.

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Similarly,sales of assets including land would attract the stamp duty, which varies from state to state in the range three to 10 per cent, but in most states it is around five per cent.The stamp duty isastate subject and as such is required to be amended by states.

Even though there isacentral law —the Indian Stamp Act, 1989 —the rates are decided by states, which have the Constitutional right to make any changes to the Act and have their own sets of rules in this regard.Even inaparticular state, these might vary from one locality to another.For example, Maharashtra has the Bombay Stamp Act, 1958.

Other states such as Gujarat, Karnataka, Kerala, Rajasthan, and Tamil Nadu also have their laws on this.There is also an issue of transferring losses or tax holidays of the company acquired to the one that has purchased it. According to current laws, the tax holiday enjoyed by the insolvent company cannot be carried forward.

“To make the IBC process more robust, the carried forward losses of the company under the IBC should be shifted to the acquiring company pursuant to the acquisition of business,” Shah said.Also, there are conditions on transferring losses and un absorbed depreciations in the case of merger or demerger.

For instance, the transferee company should continue to hold 75 per cent of the book value of the fixed assets for at least five years and the amalgamated company has to achieve at least 50 per cent of the installed capacity of the amalgamating company before the end of four years and maintain it till the fifth year in order to receive such transfers.

These conditions are likely to be relaxed for merger under the IBC.Neeru Ahuja of Deloitte said: “Tax issues faced by companies under the IBC could lead to a large number of taxation disputes.It is important for the government to resolve the matter.”A recently constituted committee set up by the government under the chairmanship of the secretary in the Ministry of Corporate Affairs is looking at these changes.

The Business Standard, New Delhi, 19th December 2017