Changing Tax and Regulatory Landscape in the Indian Investment Ecosystem

Contributed by: Ajay Shukla, CFA

Bengaluru chapter of the IAIP organised a session on Changing Tax and Regulatory Landscape in the Indian Investment Ecosystem. Kalpesh Maroo from BMR Advisors was kind enough to spend his valuable time going over the tax and regulatory system in India, how it is changing and its impact on the investment ecosystem. With over 10 years of experience in corporate and transaction tax, Kalpesh seamlessly went over the changes in the tax & regulatory laws and their day to day impact on the businesses.

Tax and regulatory environment in India is undergoing a paradigm shift with the introduction of key changes to existing laws and legislations. General Anti Avoidance Regulations (GAAR) and Direct Tax Code (DTC) are expected to be implemented soon. Government is keen to introduce the Goods and Services Tax (GST) at the earliest. There is some clarity with respect to IFRS reporting and FDI/FEMA regulations are constantly changing. Finally we have a new Companies Act. These changes have huge implications in the Mergers & Acquisitions context.

Given the euphoria that the Modi Government has managed to garner in the international investment community and the challenges in the developed economies, slowdown in China, India is again looked as a serious destination for investment. Transactions are getting larger, more complex and innovative. Proper transaction planning and deal structuring is therefore needed to enhance economics of a deal which in turn requires an upfront clarity on the laws and regulations governing the deals. In order to be successful, there is a need for certainty at the planning stage. This is all the more important because recently the general approach of the revenue authorities has been extremely aggressive in several large and high profile transactions.

Kalpesh went over a few case studies to highlight the issues with some of the existing, new and modified laws. As an example, consider a situation where a multinational acquirer acquires a target in another country. The acquired company has an Indian subsidiary which is material in terms of its overall value. Does this deal have any tax and regulatory implications in India? Consider another situation where the transfer of shares happens between subsidiaries of the same parent holding company. Is this taxable in India? How do you deal with valuations of an acquired company given multiple valuation methods and assumptions? How do you deal with good-will and non-compete from a tax perspective? How do you depreciate/amortize these “assets” and what are the challenges from the perspective of the Indian tax laws. He went over the motivations for instituting the Super Premium Tax and how it has made life difficult especially for non-public listed companies.

His parting thought summed it up beautifully – change is not necessarily good as far as taxes and regulations are concerned however given the existing environment a lot of change in the laws are required. The challenge therefore is to manage the change.

– AS