Tax Neutrality Of Corporate Restructuring

<div>With the BJP government firmly in the saddle, things are already beginning to look better, and indeed, even in the short time that the government has been in place, the feel clearly is that the government is decisive.<br /><br />With the Union Budget round the corner, there are a whole host of expectations and one aspect which has been relatively 'under the radar' is relating to corporate restructuring. In the context of corporate restructuring, often generated by the need for a subsequent transaction (e.g. hiving of a division from a company into another company, to facilitate a JV) or changing the form of a business entity (e.g. conversion from company to LLP) to avoid the over burdensome requirements under the Companies Act 2013, or indeed merging two companies in similar businesses, there is an urgent need to look at the overall framework to make corporate restructuring less painful, primarily from a tax standpoint.<br /><br />An example is the cumbersome provisions u/s 2 (19) (AA) of the Income Tax Act, which requires, as an example, demerger at a book value. One fails to understand the need for this, because depreciation is anyway permitted on the WDV of the block in the hands of the transferor company (in demergers, incidentally, the Companies Act also contains this provision which makes the situation even worse, in the sense that even if one is willing to pay the tax, one cannot do a demerger at other than book value). Similarly, there are several restrictive conditions on setting off of losses in the context of company amalgamation.&nbsp; <br /><br />A large number of companies want to convert into an LLP, not just, (as the tax department believes) for avoiding dividend distribution tax (the actual quantum of dividends distributed are often quite small, even if the profits are large), but often to avoid overly cumbersome compliance requirements under the Companies Act (even, under the earlier Companies act) as, the flexibility of funding by infusion and extraction of capital, which is not really a tax issue.&nbsp; However, the condition of a 60L limit for tax neutrality on conversion is a major deterrent.<br /><br />To sum up, very often, corporate restructuring does not involve any change of economic interest and it would be worthwhile for the government for considering making such conversions tax neutral without providing too many needless conditions and fetters.<br /><em><br />The author is senior tax partner of PwC India</em><br />&nbsp;</div>