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Tax proposals impacting companies under IBC

Taxsutra |
Milind Kothari, Managing Partner |

06 February 2018

The Insolvency & Bankruptcy Code, 2016 (‘IBC 2016’) was introduced with primary objective to consolidate and amend the laws relating to re-organisation and insolvency resolution of corporates, firms and individuals in a time bound manner to maximise the value of their assets in order to protect the interest of various stakeholders.

Since its introduction, the resolution process is ongoing in case of 12 very large Corporate Debtors, followed with several others which are in various stages of resolution. Importantly, the IBC 2016 lays down a statutory time line of 180 days, extendable by another 90 days for the process. If this process would fail, the IBC 2016 provides a mandatory liquidation. However, even before liquidation is contemplated, the key is to have a resolution plan that is acceptable to the lenders and approved by the National Company Law Tribunal (‘NCLT’).

The resolution plan to be presented by an interested bidder (‘Resolution Applicant’) would therefore need to be robust enough to factor in multiple challenges such as the impact of write back of loans, compliance with corporate law, incidence of tax, stamp duty and several other business specific regulations that the Corporate Debtor is subjected to.

In order to address the growing concern on the tax implications arising from the acceptance of a resolution plan, the Central Board of Direct Taxes (‘CBDT’) issued a circular dated January 6, 2018 relaxing Minimum Alternate Tax (‘MAT’) in case of companies subjected to IBC 2016. Various representations were made with regard to the need to relax the tax provisions to facilitate resolution and with the aim of insulating such plans from tax implications that would bleed the Corporate Debtor further. Needless to add, the expectation from the Hon’ble Finance Minister for relaxation of tax provisions in the Budget 2018 were high.

Apropos the need and expectations, the FM announced several tax proposals to address these concerns. The amendments proposed cover set off and carry forward losses (Section 79), relaxation of MAT provisions (Section 115JB) and signing of Return of Income (Section 140). The proposal for set off carry forward losses provides protection of such losses that would otherwise lapse in case of change of shareholding beyond the stipulated threshold. Further, for the purpose of computing MAT liability, such companies can reduce the book profit with an aggregate of brought forward book loss and unabsorbed depreciation, whereas the current provision would allow deduction of either of the two, whichever is lower. The proposed amendment follows CBDT circular of January 6, 2018 on the subject. Lastly, the Return of Income of such companies can be signed by the Resolution Professional appointed under IBC 2016 since the powers of the Board of Directors of the Corporate Debtor are suspended.

While the above proposals are welcome and would provide a much required relief to the such companies, it appears that the battle is only half won with the complexities far outpacing the challenges.

Section 80 provides that in the event a taxpayer fails to file return in accordance with the provisions of Section 139(3), the carry forward losses computed in accordance with the sections specified therein would lapse. In many cases, such companies may not be file their return of income within time for various practical challenges. The direct implication of such non-compliance would be to lose the benefit of carrying forward losses of the year.

Even routine compliances such as deduction of tax at source and depositing the same within the timeframes prescribed under sections 201 and 221 of the Income tax Act, 1961 (‘IT Act’) which would otherwise attract interest and penalty would escalate challenges of the resolution.

Another set of challenges which seeks to have escaped attention is the implication of now the mandatory Indian Accounting Standards that currently apply to listed companies and companies with net worth of more than Rs. 250.00 crores. Ind-AS 8 deals with Accounting Policies, Changes in Accounting Estimates and Errors. Para 42 of the said standard mandates that any material prior period errors is to be set right by restating the financial statements of that year. A tax complication may arise as to whether such error impacting the profit/loss of an earlier years would be allowed as an expenditure in the year of resolution or should be claimed for the year when such error is related to. Such claim could otherwise may only be possible of the revision of return is well within time. In a nutshell, the claim in respect of such error may not be available if one were to take the provision of law and jurisprudence on the subject. Further, Ind-AS 110 deals with Consolidated Financial Statements. Para B98 of the said Standard provides that when a parent loses control over a subsidiary, it shall derecognize the assets and liabilities of its subsidiary and in-turn record the investments in the subsidiary at fair value. If for instance the value of such investment in subsidiaries are lower than original investment, the difference would have an impact on the profit and loss. If the actual value of such investment is higher than the original cost, this would trigger an income and therefore, a tax liability.

Similar operating reliefs could also be contemplated under section 281 that requires prior approval of the tax department on transfer of assets. This could cause unnecessary compliance burden on the Corporate Debtor. The burden of anti-abuse provisions such as in section 56(2)(x) (taxability of acquisition assets for inadequate consideration) and Section 50CA (special provision for full value of consideration for transfer of shares, other than quoted shares) could also create additional burden on such companies. Most important would be the compliance of stringent conditions related to mergers (Section 72A) such as complying with the definition of an ‘undertaking’, that could pose practical difficulties.

There is still a long way to go in resolving all the challenges that the provisions of IT Act would fasten on such companies, and not put additional hurdles in resolution to bring to new life to such companies.

The article has been co-authored by Rajesh Thakkar (Partner, Transaction tax).