Union Budget 2025: Key Tax Reforms Expected to Ease M&A Deals
With Finance Minister Nirmala Sitharaman set to present the Union Budget 2025 on February 1, industry experts, including Deloitte, anticipate significant measures to streamline tax structures, fostering smoother mergers and acquisitions (M&A). The first nine months of 2024 saw an impressive 66% surge in the total value of M&A deals in India compared to the same period in 2023, driven primarily by high-value transactions.
“Indian businesses across various sectors are leveraging cross-border M&A to expand internationally, acquire new technologies, and consolidate resources. Streamlined tax structures will play a crucial role in facilitating these goals,” said Vivek Gupta, Partner at Deloitte.
Stakeholders and tax experts alike are optimistic that the government will introduce amendments to rationalize tax provisions, boost economic growth, and enhance investor confidence.
Deloitte’s Expectations for Budget 2025
Deloitte highlighted three specific areas for reform in the upcoming budget that could significantly impact M&A activities:
1. Clarity on Taxing Contingent Considerations
Investors often include performance-based contingent considerations in shareholder agreements to incentivize promoters for achieving certain milestones. However, there is ambiguity about whether such considerations should be taxed during the year of share transfer or upon realization of the performance milestones.
Deloitte suggests introducing a clarificatory provision to tax contingent considerations as capital gains only in the year they are realized. This change would provide tax certainty for all parties and encourage smoother deal execution.
2. Section 56(2)(x) and Unintended Tax Burdens
Section 56(2)(x) of the Income Tax Act was designed to prevent tax avoidance through undervalued asset transfers. However, in off-market transactions involving listed companies, a mismatch between the agreed transaction price and the traded price on the transaction’s closing date can lead to unintended tax liabilities for buyers.
Given the time gap often observed in such transactions, Deloitte recommends clarifying the provision to avoid unnecessary tax burdens. This would enhance clarity and predictability for investors in M&A deals.
3. Exemptions for Internal Group Restructuring
Section 79 of the Income Tax Act currently prohibits the carry-forward of business losses if there’s a significant change in shareholding in a closely held company. The provision lacks a clear definition of “beneficial ownership,” leading to varied interpretations and judgments.
Deloitte proposes introducing exemptions for internal group restructurings where beneficial ownership within the group remains unchanged. Such a move would ensure that tax losses can continue to be utilized post-reorganization in legitimate restructuring scenarios, offering much-needed relief to businesses.
A Promising Outlook for M&A Reforms
Budget 2025 could mark a turning point for India’s M&A landscape. With measures to clarify and streamline tax structures, the government has the opportunity to not only ease M&A processes but also position India as a more attractive destination for global investments.
By addressing these critical issues, the upcoming budget could foster economic growth, enhance investor confidence, and pave the way for a more dynamic and competitive business environment. All eyes are now on February 1, as stakeholders await the government’s vision for propelling India’s M&A potential to new heights.
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