Budget 2021: Harmonize these tax law to boost investor confidence, aid Ease of Doing Business

By Ravi Mehta

Indian Union Budget 2021-22: With India enduring the COVID-19 pandemic disruption, the Finance Minister has assured that the 2021 Union Budget will be like no other in the past and will help India emerge as the engine for global growth. Harmonization of the tax laws with the other domestic laws helps bring consistency, reduce litigation and boost investor/stakeholder’s confidence in the economy while fostering the ever-green government agenda of ‘ease of doing businesses. Against this backdrop, we have listed below some of the key tax expectations from the forthcoming Union Budget:

Capital Gains Regime for Indian shares directly listed abroad: The Government has mooted for a new regime to allow Indian Companies directly list their shares/securities overseas. At present, this is being done through Depository Receipts (ADR/GDR) mechanism, for which there is a specific capital gains exemption under S. 47(viia) of Income-tax Act 1961 (“ITA”) on transactions between non-residents. Technically, shares of Indian Companies directly listed outside India would qualify as ‘Assets situated in India’ and could give rise to Indian capital gain taxation, even if traded only between non-residents. Hence, introducing a specific exemption on similar lines like the ADR/GDR Regime for non-residents trading in Indian Company shares on the overseas bourses would make this new Regime attractive to foreign shareholders.

Exemption under Gifting Provision to transactions under Insolvency and Bankruptcy Code, 2016 (‘IBC’): Section 56(2)(x) and Section 50CA of ITA often poses difficulties in IBC transactions where neither the person transferring the shares (i.e., sellers/promoters) nor the person receiving the shares has control over the determination of consideration for the transfer of shares and where the consideration for such transfer gets approved by competent authorities like NCLT.

CBDT has presently relaxed the applicability of Section 56(2)(x)/Section 50CA on NCLT-approved Resolution Plans to entail the transfer of unlisted shares of a Company (including its subsidiaries) where the NCLT has suspended the Board of Directors of such Company on charges of oppression/mismanagement, and whose control has been transferred to a Government-appointed Board. (CBDT Notifications dated 29 June 2020 and 30 June 2020). 

A similar exemption to share transfers under IBC-related Resolution Plans has been the need of the hour since its inception. 

Taxation of Outbound Mergers:  The Companies Act 2013 allowed Outbound Mergers for the first time in the Indian history effective 2017. However, unlike the tax exemptions specifically available under S. 47(vi) (for the Companies) and 47(vii) (for the shareholders) of the ITA for Inbound mergers, the law remains silent on the taxation of outbound mergers. Bringing the much-needed tax clarity on outbound mergers has been imperative since its introduction to make it a viable/useful tool for the global restructuring of operations. 

Tax Regime for Shareholders of a Company delisted through the NCLT Regime: Market Regulator SEBI made amendments to its Delisting Regulations, 2009 by simplifying the delisting procedure for a listed subsidiary to become a wholly-owned subsidiary of its Listed Parent by resorting through to an NCLT Scheme and averting the lengthy reverse book building procedures. Such NCLT Scheme entails swapping of shares by the public Shareholders of the delisted Indian subsidiary to the Listed Parent against correspondingly receiving such Listed Parent’s equity. While SEBI’s amendment would facilitate easing compliance, amendments in the tax law to introduce specific tax exemption on the NCLT-approved ‘swap’ transaction, as well as to allow the roll-over of the original holding period and the tax basis in the hands of the shareholders, would greatly help in the success of such initiative. 

Extending the Manufacturing-related concessionalised Tax Regime (S.115BAB of the ITA) to Contract Manufacturers: An Indian company setting-up and commencing manufacturing operations between 1 October 2019 and 31 March 2023 is eligible to concessionalised corporate tax rate of 15% (plus Surcharge/Cess), subject to prescribed conditions (S.115BAB of the ITA). This Regime is presently not available to contract to manufacture. The Government has allowed 100% FDI under automatic route in contract manufacturing and to ensure that intent behind FDI in contract manufacturing achieves its full potential; it is noteworthy to extend the S. 115BAB coverage even to domestic companies who sub-contract the manufacturing activities to third parties. 

(The author is Managing Director & Head – Transaction Tax, RBSA Advisors. The views expressed in the article are his personal views)