[Opinion] Interim Budget 2024 | A Glimpse into Anticipated Tax Reforms from a Business Restructuring Perspective

CA Harsh Biyani, CA Shubham Kumar & CA Mehak Ahuja – [2024] 158 taxmann.com 703 (Article)

As we approach the Lok Sabha elections in early 2024, the Central Government is gearing up to announce an interim budget instead of the usual full year Budget. This interim budget will act as a temporary financial plan for the remaining months until the current government is in power. The hon’ble Finance Minister Nirmala Sitharaman is scheduled to present this interim budget on 1 February 2024 in the lower house of India’s bicameral Parliament. It is essentially a preview of the comprehensive budget which will come later once the newly elected government assumes office in June 2024. In simpler terms, this interim budget is a way to manage finances during this transition period. As businesses keenly watch for any potential tax reliefs and insights that will shape the future financial landscape, here are a few tax reforms that the industry expects for business reorganisations from the upcoming interim budget.

I. Enlarging the scope of reduced taxation for newly setup domestic manufacturers under section 115BAB

Section 115BAB of the Income-tax Act, 1961 (the Act), provides an opportunity for recently established domestic manufacturing entities to access a lower effective tax rate of 17.16%. Applicable to corporations setup 1 October 2019 and engaged in the manufacturing, production and associated research sectors, this option is contingent on the condition that production must commence by 31 March 2024. It is expected that in the interim budget, the deadline for commencing production will be extended to March 31, 2025. This extension holds significance as India rises as a global manufacturing hub, attracting substantial investments in manufacturing sector.

II. Applicability of withholding tax under section 194R on writeback of loan

Current provisions of the section 194R of the Act provides that TDS at the rate of 10% should be deducted by a person responsible for providing to a resident any benefit or perquisite, whether convertible into money or not, arising from a business or the exercise of a profession. Ambiguity arises on whether the writeback of loan or deposits should be considered as a benefit or perquisite for withholding purposes. Subsequently, CBDT issued a circular clarifying that waiver of a loan by the specified categories of banks and financial institutions is not subject to TDS. Commercially, loan waiver is provided in cases where the borrower does not have the capacity to repay i.e., is debt-ridden, and thus, if TDS is imposed on such waivers, then it would only result in extra burden on the borrowers. Thus, clarifications should be introduced to exclude any waiver or writeback of loan from above provisions.

III. Carry forward of losses on acquisition under liquidation proceedings

Past business losses of companies under the insolvency resolution process of The Insolvency and Bankruptcy Code, 2016 (IBC) are permitted to be carried forward despite the change in shareholding by more than 49%. However, it is not clear if the said beneficial provisions will apply where the target company is acquired under the liquidation proceedings of IBC. Clarity is required on this.

IV. Ambiguity in provisions for revision of the tax return pursuant to the Tribunal or Court order

The Finance Act, 2022, introduced section 170A of the Act, which provides an opportunity to the successor entity to furnish a modified return in case of a business reorganisation. The term ‘business reorganisation’ has been defined to mean the reorganisation of a business involving the amalgamation or demerger or merger of the business of one or more persons. In commercial parlance and from the corporate law perspective, business reorganisation is a broad term which may include other corporate restructurings such as slump sale, capital reduction or buyback. Accordingly, the definition of business reorganisation under the tax provisions should also be expanded to include other possible corporate restructurings.
Further, the above section allows a successor entity to modify the return. The term ‘successor’ has been defined in the section to mean all resulting companies in a business reorganisation, whether or not the company was in existence prior to such business reorganisation. It is pertinent to note that business reorganisation such as demerger and slump sale would also warrant modification of return of the predecessor entity. Further, restructuring like capital reduction would require revision of return of the shareholder as well. Accordingly, the provisions should be broadened to include all entities impacted by the order of the Tribunal or court and not only successor entities.

V. Carry forward of historical tax losses on acquisition under the IBC

Section 156A of the Finance Act, 2022, was introduced to address the modification of tax demands for target companies under IBC proceedings, ensuring that any reduced demand resulting from an order under section 5(1) of the IBC is duly reflected. This section prevents the imposition of new demands and reduces existing ones to zero.
While introduction of this section is a commendable step towards taxpayer relief, its efficacy hinges on ensuring the preservation of tax attributes of such target companies for future use. Most of the target companies under IBC have considerable tax attributes and unfortunately, current practices by tax authorities involve offsetting previous demands against such tax attributes, defeating the intended purpose. The forfeiture of tax attributes of such companies will result in higher future taxable profits.

Thus, it is imperative to amend this section to explicitly safeguard tax attributes for future tax profits, thereby fortifying its impact and truly providing comprehensive relief to the taxpayers.

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