Implications of Corporate Restructuring on Taxes for a Company in India –

MERGER
Specific provisions have been made in the Income Tax Act 1961 (the Act) in relation to corporate merger/ amalgamations. Corporate restructuring is tax neutral subject to the fulfilment of certain conditions.

DEMERGER
Under the Act, ‘demerger’ means any transfer by a demerged company of one or more undertakings to another company (resulting company) pursuant to a scheme of arrangement under sections 391 and 394 of the Companies Act. With effect from 1 April 2000, the transfer of shares in a scheme of demerger has been made tax
neutral subject to fulfilment of certain conditions.

SLUMP SALE
The Act defines ‘slump sale’ to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities. Profits or gains arising from slump sale are taxable as long-term capital gains if the undertaking is owned and held by the assessee for more than 36 months prior to date of transfer. Otherwise, they are taxable as short-term capital gains.Net Worth of the undertaking so transferred shall be deemed to be the cost of acquisition, No Indexation benefit is allowed
on case of a Slump Sale.

BUYBACK
Buyback refers to the purchase of own shares by a company from its shareholders in lieu of consideration. Consideration received by a shareholder from the company for purchase of its own shares is taxable as a long-term capital gain, if shares were held for more than 12 months prior to transfer to the company. Indexation benefit is available for long term capital gains. Otherwise, they are taxable as short-term capital gains in the year in which the shares are purchased by the company.

FOREIGN SOURCED INCOME
Profits derived by a foreign branch of an Indian enterprise are taxable in India. However, credit is allowed for foreign taxes paid by the branch in India either under the tax treaties or under the Act.

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