Understanding Mergers and Acquisitions (M&A) Transaction in India: Key Types and their Tax Implications
Mergers and acquisitions (M&A) are critical strategies for corporate growth and restructuring in India. These transactions can be structured in several ways, each with unique implications under income tax.
Below is a brief overview of the primary forms of M&A transactions:
(a) Amalgamation or Merger: This involves the combination of two or more companies into a new entity or the absorption of one company by another. It requires approval from the National Company Law Tribunal (NCLT).
(b) Demerger: This process involves the transfer of one or more undertakings of a company into another company, often to streamline operations or separate business verticals. It also requires NCLT approval.
(c) Share Purchase: In this transaction, the acquirer buys shares of the target company, resulting in a change of ownership. This is a straightforward method without the need for court approval.
(d) Slump Sale: This involves transferring one or more undertakings as a going concern for a lump sum consideration without assigning values to individual assets and liabilities.
(e) Asset Sale: Specific assets of a company are sold individually rather than the entire undertaking. This method is often used for non-core asset disposal.
Comparative Table and their indicative Income Tax implications
| Parameter | Amalgamation / Merger | Demerger / Hive-off | Share Purchase | Slump Sale | Asset Sale |
| Meaning | Combination of two or more companies into one entity | Transfer of one or more undertakings into another company | Purchase of shares of a company, resulting in a change of ownership | Transfer of one or more undertakings as a going concern for a lump sum consideration | Sale of specific assets of a company |
| Capital Gains Tax | Not applicable if conditions of tax neutral merger are met | Not applicable if conditions of tax neutral demerger are met | STCG/LTCG based on the period of holding | STCG/LTCG based on the period of holding of undertaking COA would be ‘net-worth’ of the undertaking on the date of transfer |
STCG/LTCG based on the nature of the asset and period of holding |
| Carry forward of accumulated losses | Allowed, if conditions of Section 72A of IT Act are satisfied | Allowed, if conditions of Section 72A of IT Act are satisfied | Allowed where change in beneficial shareholding does not exceed 49% | Not allowed | Not allowed |
| Other Commercial Considerations | Integration of business operations, cultural fit, brand consolidation | Separation of distinct business verticals, operational focus | Simple and quick transaction, change in ownership | Efficient for transferring a whole business unit without individual asset valuation | Flexibility in choosing specific assets to sell |
Conclusion
Each form of M&A transaction has unique legal and tax implications under Indian law. Understanding these nuances, it is crucial for structuring deals efficiently and ensuring compliance. By carefully considering the type of transaction, companies can optimize their tax positions and achieve their strategic objectives.
DISCLAIMER: – This above summary note is based on Income Tax Act, 1961 as amended from time to time, including rules, regulation, circulars, instructions, judicial precedents and administrative interpretations in respect thereof as on the date of this note. For further details, please refer the Income Tax Act,1961 and related rules. While the information is believed to be accurate, we make no representations or warranties, express or implied, as to the accuracy or completeness of it. Readers should conduct and rely upon their own examination and analysis and are advised to seek their own professional advice. This note is not an offer, advice or solicitation. We accept no responsibility for any errors it may contain, whether caused by negligence or otherwise or for any loss, howsoever caused or sustained, by the person who relies upon it.
PDF version is attached: M & A Transactions and their legal & tax implications
