Roll back fair value based tax demands or give a leeway, companies tell govt
MUMBAI: Even as the government gave power to the income tax department to question valuations in merger and acquisition deals, companies, consultants and industry bodies have approached the government to roll back or at least give some leeway to the rule.
The fear is that the income tax department would now be in a position to question whether a fair value was paid in each and every transaction. In cases where it is found that a fair value is not paid, the tax department would be within its rights to levy a tax.
According to a representation made by the industry, the provision (50CA) is against the concept of taxing real income. Although the attempt is to address outlier situations it targets all the genuine deals as well. Transactions at lower than fair market value will be taxed already in the hands of the transferee and taxing it again under another provision of the tax act, would lead to a double taxation, the representation said.
Industry trackers say that if the income tax department anyway goes ahead and start making tax adjustments, it could lead to litigation as well.
The industry bodies have sought that the government sets a guideline where the income tax officer is required to state his reasons, in writing, before making any tax demands from the company. This is aimed towards transparency, say industry experts.
The industry has also demanded that the government clarify how the tax officer would arrive at determining fair value. This is something the government may oblige, say industry trackers.
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
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.
The fear is that the income tax department would now be in a position to question whether a fair value was paid in each and every transaction. In cases where it is found that a fair value is not paid, the tax department would be within its rights to levy a tax.
According to a representation made by the industry, the provision (50CA) is against the concept of taxing real income. Although the attempt is to address outlier situations it targets all the genuine deals as well. Transactions at lower than fair market value will be taxed already in the hands of the transferee and taxing it again under another provision of the tax act, would lead to a double taxation, the representation said.
Industry trackers say that if the income tax department anyway goes ahead and start making tax adjustments, it could lead to litigation as well.
The industry bodies have sought that the government sets a guideline where the income tax officer is required to state his reasons, in writing, before making any tax demands from the company. This is aimed towards transparency, say industry experts.
The industry has also demanded that the government clarify how the tax officer would arrive at determining fair value. This is something the government may oblige, say industry trackers.
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
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.
