Budget 2021: A Difficult Road Ahead for Mergers & Acquisition Transaction

Author: Samay Jain
College = Institute of Law, Nirma University, Ahmedabad
Year = IInd Year


Against the backdrop of the economic downturn caused by the Covid-19 pandemic, the Finance Minister (“FM”) presented her promised “never like before Budget,” with the goal of encouraging economic development through increased expenditure on healthcare and infrastructure. Under the Finance Bill, 2021 (“Bill”), the FM has also suggested a series of revisions to streamline the sections relating to the Income-tax Act, 1961 (“IT Act”). Certain clauses in the Bill might have a substantial influence on M&A agreements and alter the existing M&A transaction model in India. In the following paragraphs, we’ll look at a number of the Bill’s significant changes that may need stakeholders to think twice before engaging in a M&a deal, whether it’s an amalgamation, a share acquisition, or a corporation.

Even with the Vaccine available, the COVID-19 will have a long-term influence on many aspects of people’s lives. The mixture of a worldwide viral pandemics and a self-imposed closure in several sectors of the economy is unlike any other crisis or social upheaval in recent memory. For instance, the Financial Crisis of 2007-2009 had significant fiscal and operational consequences for people and enterprises, but its long-term impacts were largely bureaucratic.

Despite the fact that the pandemic has thrown the economy into disarray, the large proportion of firms are not altering their M&A approach as a response. Although transaction volume has slowed in 2020, several businesses are still in a strong situation to build purchases throughout the slump. Another major factor is the extraordinary sum of funds ready for mergers and acquisitions as well as other expenditures prior to the disease outbreak: Money on liabilities and assets and dry powder in private equity are both high, and lending interest rates are so low.  But if values fall from recent highs, the pool of prospective sellers might expand.

An attack on the ‘slump sale’

The IT Act defines a “slump sale” as “the transfer of a business undertaking as a consequence of a sale for a lump sum amount.” Any transaction that falls under the definition of a “slump sale” is subject to the provisions of Section 50B of the IT Act, which provides for a simpler method of computing profits deriving from slump sales, which may result in a lesser tax burden for the transferor in some instances. For years, the term “slump sale” has been a contentious issue, particularly in cases where the consideration for the transfer of an undertaking was discharged through the exchange of another asset (typically by the issuance of shares of the acquirer entity), which would fall under the purview of the term “slump sale.” The Bombay High Court held in CIT v. Bharat Bijlee[1], that a slump exchange could not be considered a “slump sale” under the IT Act.

After reviewing both parties’ representations, the Hon’ble High Court concurred with the Mumbai Income Tax Appellate Tribunal’s findings and concluded that the transferor would still not be held accountable to capital gains tax since slump exchange could not be taxed. This ruling has now been upheld by a number of additional courts. The Bill aims to clarify this problem by proposing to modify the definition of slump sale to include any transfer (including exchange, relinquishment, and so on) of a business enterprise. The word “slump sale” has been expanded to include the term “slump exchange.” Slump Exchange refers to the transfer and vesting of Transferor Company’s Transferred Undertaking to Transferee Company on a going concern and “as-is-where-is” basis for a lump sum consideration, to be exchanged by the issuance of Transferee Company’s equity shares, with no values assigned to the individual assets and liabilities, and to be carried out in accordance with Part V of the Scheme. Several taxpayers utilised slump exchange as an efficient technique to maximize their tax preparation in the wake of judicial pronouncements such as CIT v Bharat Bijlee. With the proposed change the taxpayers will no longer be able to structure divestment transactions as slump trades.

It’s also worth noting that this provision goes into effect on April 1, 2020, thus taxpayers who engage in slump exchanges in FY 2020-21 may be subject to capital gains tax on earnings resulting from such transactions. While this explanation will put to an end to the debate over the tax efficiency of slump exchanges, vagueness remains on a number of other issues surrounding slump sales, such as the methodology to be used to evaluate the profitability of non-monetary consideration, whether milestone-based payments qualify as lump sum consideration, and so on.

Spiralling up of the rate of goodwill depreciation

In any M&A deal, it is typical for an acquirer to pay more than the fair market value of the assets, which is recorded as “goodwill.” Since depreciation on goodwill was not expressly authorised nor prohibited, the availability of depreciation on such goodwill has been a point of contention. Furthermore, taxpayers used to claim a devaluation on acquired goodwill by considering it as an intangible asset, much like any other corporate or economic rights of the same sort. However, while claiming a fall in the value of acquired goodwill (for which the purchaser paid consideration) , there was always a great deal of uncertainty about goodwill, which arose from speculative changes.. In CIT v. Smifs Securities Ltd[2] , the Supreme Court made a landmark judgement permitting depreciation on acquired goodwill.

The Bill seeks to overturn the Supreme Court’s decision and amends the IT Act to make it clear that “goodwill” is not a depreciable resource. According to the Bill’s preamble, goodwill may experience gain or no degradation in worth, based on how the purchaser runs the firm, thus there is no reason to profess depreciation on goodwill. In addition, the Bill proposes a number of other changes to the IT Act, including clarifying that goodwill is not a real property. It is also suggested that the IT Act be amended to allow depreciation initially claimed on acquired goodwill to be subtracted from the cost of acquisition, with the remainder staying in the acquirer’s books as an analytical model. When the acquirer sells the firm, the stated amount will be available as an adjustment against the final cost.

This would be expected to have a major influence on M&A deals, particularly those that are built around the accessibility of goodwill amortization. Furthermore, deals related to the purchase of a large number of intangible assets may be harmed as a result of the proposed changes, since the seller’s ability to negotiate a higher price based on brand and goodwill may be harmed. It should be highlighted, nevertheless, that the new proposal solely prohibits amortization on what is classified as goodwill in the accounting records. Firms should be permitted to claim depreciation on intangible assets acquired via the transaction if they are classed as any other business or commercial rights of comparable type. Furthermore, since the acquisition will remain to be obliged to establish and then depreciate its intangible assets recorded as goodwill, difference in depreciation may result in a permanent mismatch between the acquirer’s statutory and tax books of account.

As a result, with the mooted change reversing eons of existing judicial law, taxpayers would need to consider the non-availability of depreciation on acquired goodwill, as well as the other problems outlined above, while discussing transactions.[3]

Reviewing the timetable for restarting inquiry

The timeframe for providing a notice of reassessment to a taxpayer has been lowered from six to three years under the Bill. [4]A notification for review could be filed up to 10 years after the appropriate analysis year if there is proof with the tax officer of income evading assessment of INR 5 million or more. Furthermore, the new regulations stipulate that before issuing a re-assessment notice, tax officials must now fulfil certain defined requirements. Its also worth noting that the extended assessment period will only apply if the financial regulators have accounting records or proof indicating that revenue payable to taxation, mentioned in the manner of an asset, has avoided evaluation in the value of INR 50 lakhs (five million) or even more. Its possible that establishing this feature will be exceedingly difficult.

These measures were enacted to make doing business easier and to decrease total lawsuits in the nation primarily as a result of reassessment. These terms may be relevant when negotiating the amount and time limit for tax-related indemnification in M&A transactions.[5]

Conclusion and Recommendations

Mergers and acquisitions may grow more expensive in the foreseeable future as a result of the legislative body reversing different decisions and adopting additional rules and regulations, and the anxious citizen might just have to traverse these rocky paths ahead. The bright spot in these recommended modifications is that long-running debates regarding asset devaluation, downturn sales taxes, and other concerns have been resolved. It is becoming critical for entities involved to thoroughly review these clauses before organizing their deals, since any improper structuring might expose them to considerable risk. M&A deals can have long-term consequences for acquiring firms. A rush of M&A agreements, especially when they include record transactions like the AOL-Time Warner merger in 2000 or the ABN Amro-RBS deal in 2007, might suggest an imminent market peak. Other M&A incentives are also being accelerated by the coronavirus. Hospitals under financial strain, particularly smaller, independent hospitals that may have been looking for a lifeline prior to the epidemic, may be even more motivated to look for partners. Despite the obstacles, top executives believe that, when done well, consolidation may bring significant advantages to patients, payers, and providers. According to the HealthLeaders poll, the majority of respondents feel that “lower provider costs” is a key advantage, followed by “better value for patients” (41%), and “better treatment for patients” (39%). (38 percent).

[1] (2014) 365 ITR 258

[2] (2012) 348 ITR 302 (SC),

[3] Dev Chatterjee, ‘M&A costs to go up after Budget 2021 axes tax depreciation on goodwill’ https://www.business-standard.com/budget/article/m-a-costs-to-go-up-after-budget-2021-axes-tax-depreciation-on-goodwill-121020300252_1.html(February 03, 2021) <https://www.business-standard.com/budget/article/m-a-costs-to-go-up-after-budget-2021-axes-tax-depreciation-on-goodwill-121020300252_1.html&gt; accessed July 16, 2021

[4]  Section 148 of Income Tax Act

[5] Hiten Kotak & Bhavin Shah, ‘Budget 2021: Significant impact on past and future M&A transactions’ ( February 03, 2021) < https://www.business-standard.com/budget/article/budget-2021-significant-impact-on-past-and-future-m-a-transactions-121020300875_1.html>

  accessed July 16, 2021

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