A mid the financial crisis still looming in some parts of the world and other issues like increase in oil prices and inflation, not much was expected this year from the finance minister.
A mid the financial crisis still looming in some parts of the world and other issues like increase in oil prices and inflation, not much was expected this year from the finance minister.
Also, several tax reforms in the form of Direct Taxes Code, Goods and Services Tax are in the pipeline, which aim for moderation of rates, simplification of laws and better compliance.
Some of the key provisions announced in budget 2011 which would affect acquisitions and corporate restructuring include:
LLPs
Since LLPs enjoyed the benefits of a partnership firm, it had tax advantages in the form of non-applicability of surcharge, Minimum Alternate Tax (MAT) and Dividend Distribution Tax. The Finance Bill, 2011 has announced a partial rollback in the form of introducing Alternate Minimum Taxes (AMT) i.e. tax on certain incomes of an LLP at 18.5%. The income for AMT would include incomes on which deduction is claimed under Chapter VI-A Part C and Section 10AA. Clearly, the intention seems to be plugging conversion of companies claiming such tax benefits to mitigate MAT.
Overseas investments
In order to attract repatriation of dividends into the country, the budget proposes a lower tax rate of 15% on dividends from overseas subsidiaries, as compared to normal rate of 30%. This will be a positive move for several Indian companies, before Controlled Foreign Corporation regime sets in under the Direct Tax Code.
However, the fine print offers some surprises while laying down mechanism for taxing such dividends. As per proposed Section 115BBD, such dividends are to be taxed on “gross” basis and no expenditure in respect of such dividends shall be allowed.
A question could thus arise on deductibility of interest expenses on borrowings made for overseas investments.
Section 72A of the Income Tax Act, 1961 enables transferee companies to avail tax benefits in form of availability of losses of transferor companies. Amendments in these provisions in line with Direct Taxes Code would have given significant boost to corporate restructuring, acquisitions and consolidation. Further, an amendment or a clarification on tax neutrality in hands of Indian investors on global mergers/amalgamations would have been welcome.
Overall, the finance minister appears to have adopted a balanced approach while framing the budget proposals but seems to have restrained to get into major shift — considering perhaps the roll-out of a few new statutes soon.
Hemal Uchat is executive director, PwC India
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