Centre may bring in new method to value M&A deals
MUMBAI: There may be some good news for corporate houses, private equity and venture capital funds concerned over the government's announcement in the Union Budget 2017 to allow the income-tax department to reassess the valuations of any merger and acquisition (M&A) deals and tax them accordingly.
The government may be looking to prescribe a method whereby it can learn whether the deal was done at lower or higher valuations and then levy tax.
The government is looking to prescribe the net-asset-value (NAV) method as against the discounted-cash-flow (DCF) method to arrive at the fair value of M&A deals, people in the know said.
The move could soothe some nerves, as there were fears of a huge tax burden on all concluded transactions since the tax man had been given a free hand to challenge the valuations of various merger and acquisition deals including those between relatives or secondary private-equity firms.
“If the government prescribes the NAV method as against the DCF method to arrive at a fair market value under section 50CA, this would only target certain section of mergers and acquisitions.
After the budget announcement, there was a worry that many M&As done at valuations lower than the perceived fair-market value could see taxation. This could also have led to double taxation in the hands of the buyer and the seller," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
As per the new section (50CA), sale transactions of unlisted shares of an Indian company in cases where the fair-market value is more than the sales consideration would be taxed in the hands of the seller.
Tax experts are of the view that under the new section, the income-tax officer can demand tax after any M&A deal, if it is felt that the sale was undervalued.
“In the context of the fact that we should logically move to a system of taxing real income, this provision is unwarranted and should be rolled back. There are other provisions in the tax law to deal with outlier situations, such as where understatement of consideration is suspected,” said Ketan Dalal, senior tax partner, PwC India.
Most of the industry experts want the government to roll back the section entirely. Industry experts point out that not only will it impact M&A deals but also family restructuring.
“This provision (50CA) has the unfortunate consequence of badly impacting genuine deals and, in any case, should not apply to family restructuring and also where either of the counter parties of the transactions are institutional investors, including private equity and venture capital,” said Dalal.
The main difference between NAV and DCF is that the latter arrives at a valuation based on future viability of the business. In most cases, say experts, DFC is based on the hypothesis that there is a perpetual growth in the business.
This would mean that the valuation or fair value of a deal arrived at through DCF is likely to be higher as against NAV.
Using the NAV could mean that only companies with huge real estate on their books and shell companies that are selling the whole business to escape stamp duty will come under the tax scrutiny.
The government may be looking to prescribe a method whereby it can learn whether the deal was done at lower or higher valuations and then levy tax.
The government is looking to prescribe the net-asset-value (NAV) method as against the discounted-cash-flow (DCF) method to arrive at the fair value of M&A deals, people in the know said.
The move could soothe some nerves, as there were fears of a huge tax burden on all concluded transactions since the tax man had been given a free hand to challenge the valuations of various merger and acquisition deals including those between relatives or secondary private-equity firms.
“If the government prescribes the NAV method as against the DCF method to arrive at a fair market value under section 50CA, this would only target certain section of mergers and acquisitions.
After the budget announcement, there was a worry that many M&As done at valuations lower than the perceived fair-market value could see taxation. This could also have led to double taxation in the hands of the buyer and the seller," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
As per the new section (50CA), sale transactions of unlisted shares of an Indian company in cases where the fair-market value is more than the sales consideration would be taxed in the hands of the seller.
Tax experts are of the view that under the new section, the income-tax officer can demand tax after any M&A deal, if it is felt that the sale was undervalued.
“In the context of the fact that we should logically move to a system of taxing real income, this provision is unwarranted and should be rolled back. There are other provisions in the tax law to deal with outlier situations, such as where understatement of consideration is suspected,” said Ketan Dalal, senior tax partner, PwC India.
Most of the industry experts want the government to roll back the section entirely. Industry experts point out that not only will it impact M&A deals but also family restructuring.
“This provision (50CA) has the unfortunate consequence of badly impacting genuine deals and, in any case, should not apply to family restructuring and also where either of the counter parties of the transactions are institutional investors, including private equity and venture capital,” said Dalal.
The main difference between NAV and DCF is that the latter arrives at a valuation based on future viability of the business. In most cases, say experts, DFC is based on the hypothesis that there is a perpetual growth in the business.
This would mean that the valuation or fair value of a deal arrived at through DCF is likely to be higher as against NAV.
Using the NAV could mean that only companies with huge real estate on their books and shell companies that are selling the whole business to escape stamp duty will come under the tax scrutiny.
