March sees rush to close deals as new tax rules kicks in from April 1

MUMBAI: On Wednesday, an investment banker and a corporate tax practitioner along with their teams shut themselves up in the suite of a 5-star hotel in Delhi. They spent hours to dot the i's and cross the t's of a business agreement so that a $100-million deal — where one private equity house was selling stake to another PE firm — can be wrapped up by Friday.

Rarely in an acquisition do shares change hands within 48 hours of signing the agreement. But the men in suits were racing against a deadline to escape tax in future. And they weren't the only ones. Scores of lawyers and dealmakers across the country were busy closing acquisition transactions before April 1, 2017, when new tax rules kick in.

Indeed, close to 150 such deals were signed in March. "In terms of private equity, almost $3.6 billion — or two-thirds of the total value of investments during the January-March quarter — came in during March alone," said Arun Natarajan, CEO of Venture Intelligence.

A revision in the tax treaty between India and Mauritius is one such change that has sparked a flurry of deals. As per the revised treaty, Mauritius-based entities buying shares of Indian companies before April 1 will not have to pay capital gains tax when they choose to exit in future. But such capital gains (as and when shares are sold later) will attract tax if the acquisition is closed after March 31, 2017.

The General Anti-Avoidance Rule (GAAR) — which the taxman will use to check if shares are being housed in paper companies or post office entities to evade tax — is also fuelling the deal frenzy.

"Considering that GAAR will come into force from April 1, 2017, and particularly the benefit of grandfathering will not be available to investments made post March 31, 2017, many PE firms intend to complete deals prior to March 31 to avail the benefit of grandfathering and also the tax treaty shelter," said Amit Singhania, partner, Shardul Amarchand Mangaldas. GAAR, which was deferred earlier, is now being pushed through to discourage tax avoidance strategies.

From April, the tax office will scrutinise every transaction where investment is made through an entity registered in Mauritius or other offshore tax havens. As per the rule, foreign investors will have to convince Indian tax officers that the investment vehicle is a full-fledged company with employees, a genuine address, etc — features that constitute 'substance' in tax parlance. An investor failing to meet the GAAR test can be asked to cough up extra tax.

"In many cases the buyers have been smart and managed to reduce the asking price by about 10%," said the investment banker involved in the $100-million deal. His peers — like one sewing up an investment by an Asian wealth fund into a local healthcare company, or another advising an Indian insurer which recently roped in an investor — have been putting in long hours to meet the Friday deadline.

Another change in the tax rule that has caused a flurry of share transfers relates to imposition of capital gains tax in cases where securities transaction tax (STT) was not paid.

"If shares of a listed company are sold on the stock market before April 1, capital gains tax exemption will be available unconditionally. However, if the shares are sold after April 1, tax exemption would be available only if STT was paid at the time of purchase. Selling listed shares before April 2017 also helps achieve lower tax in future because of increased cost of acquisition in the hands of the buyer," said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.