Asset Deals: The New Tax Challenge

12 August, 2011

Asset deals are very common in the M&A world. Asset deals are typically executed when a potential acquirer wishes to invest in a particular business or undertaking of a company, and not in the entire business of the company. One of the key drivers of these types of deals is that the acquirer would want the business to be hosted in a fresh entity or another existing entity in India.

In such type of transaction, the seller is obliged to obtain a tax clearance certificate from the income tax authorities before parting with any asset. Based on the applicability of obtaining such certificates, many of these deals are generally executed by inserting the requirement of clearance certificate as a ‘condition precedent’ in the transaction documents, viz. the Business Transfer Agreement.

In practical terms, there have been several challenges in obtaining such clearances. These were compounded by procedural matters, including the absence of any prescribed guideline for the tax officers before granting such clearances, thus resulting into severe delays. Some of these have always been a matter of high concern, given the fact that deals generally cannot wait for a long period of time.

The tax authorities have recently issued a clarification in this regard. The new circular on the subject has now laid down detailed guidelines, resulting in standardising the process of applying and granting of the tax clearance certificates. Now, the tax payer is obliged to apply in the prescribed form to the tax officer, 30 days prior to the proposed date of transaction.

Key Highlights Of The Circular

The circular lays down certain parameters, based on which clearance would be granted by a tax officer. A noteworthy aspect is that timelines are being established, within which tax officers need to respond.

The circular envisages four situations:

The approval granted as above by the tax officer would be valid for a period of 180 days from the date of issue of approval.

Implications

With these new guidelines, tax payers (sellers of assets) would have to ensure compliance with all the requirements stated in the circular before applying for the approval. The stringent timelines, prescribed for grant/rejection of the approval, are a welcome change, since prior to this circular, severe delays were being experienced in obtaining such approvals. Further, the application is now required to be made in a structured manner.

Furthermore, deal-makers can continue to examine the pre-requisiteness of such clearances depending upon several factors of the transaction, including, timing, discussions among parties, tax history of the assets and the selling entity.

Anil Talreja, Tax Partner, and Urmi Rambhia, Deputy Manager, are from Deloitte Haskins & Sells.

 


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2 Comments
Devendra Agrawal . 5 years ago

Thanks Anil and Urmi, very helpful. Can a Company get a certificate from tax authorities that it has met all its tax compliance and there would not be any liability for past years.

Komal . 5 years ago

Your article is very simple and clear. Could you explain more on the ramifications of the ‘180 days’ validity of the clearance given by the tax authorities.

Asset Deals: The New Tax Challenge

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