Mergers and acquisitions (M&A) have increased over the past decade as companies look for ways to synergise in a dynamic economic environment.
There are several ways in which two or more companies can combine their efforts, but these actions are governed by the tax and regulatory environment in the jurisdiction concerned. Indirect taxes form a cardinal part of this. The multiplicity of indirect tax legislations in India adds to their complexity. The factors that determine the outcome of any transaction are indirect tax costs, compliance requirements, transferability of credits, historical tax liabilities and continuity of indirect tax benefits.
The mechanisms commonly adopted for M&As include: one company acquires another, taking over entire operations (slump sale); one company purchases select assets of another (asset sale); one or more companies come together to form a new company (amalgamation/ merger); existing division/s of a company becomes an independent company (de-merger); and conversion of an existing firm/ LLP/ proprietorship into a company (corporatisation).
Indirect taxes can result in considerable cost in any M&A transaction. Value Added Tax (VAT) applies where a transaction entails sale of goods which may arise in an asset sale. VAT does not apply where a transaction involves sale of business as a going concern. The characterisation of a slump sale is often a matter of litigation with sales tax authorities. Typically, any transaction involving the sale of a business that is capable of running independently is considered slump sale. Excise and Customs implications should be factored in for the purchase consideration in an M&A. The service tax law specifically exempts transfer of a going concern. Therefore, stakeholders should consider the various taxes that could impact them. Further, it is important to analyse the applicability of indirect taxes on transactions between the entities during the intervening period — that is, the appointed date and the effective date for a merger.
Another critical aspect is the transferability of indirect tax credit. The input VAT credit and CENVAT credit are transferable to the resulting entity in the case of slump sale, merger or amalgamation, subject to conditions.
As far as compliance is concerned, the emerging entity should fulfil the requirements in the respective indirect tax legislations. This generally involves intimating the jurisdictional authorities, obtaining fresh registrations or amendment in the existing registrations and so on. Though these are procedural requirements that arise after the M&A deal, their significance cannot be overlooked. Often, such procedural lapses arising out of non-reporting of events could result in loss of benefits, apart from penalties and other operational issues.
The historical liabilities of the target entity are a major concern. In a merger, slump sale or amalgamation the central levies (excise duty, customs duty and service tax) can be recovered from the transferee. The VAT liability could be passed on to the transferee in certain States, while in others the transferor and transferee are jointly liable.
Various tax holiday and other beneficial schemes are available under the indirect tax laws. It is vital to examine the continuity of such benefits, which are usually transferable in a slump sale, amalgamation or merger, but not in an asset sale transaction. Certain schemes have express provisions to transfer the benefits, subject to conditions.
Indirect tax laws related to M&As have evolved over the years, and there are several grey areas. In some cases, the affected parties can obtain advance ruling from authorities. Transaction costs, including indirect tax liabilities, can make or break a deal. Therefore, for an M&A deal to succeed, efficient planning is of paramount importance.
Saloni Roy is Senior Director and Bhavesh Ahuja is Deputy Manager, Deloitte Touche Tohmatsu India Pvt Ltd