The reliefs will provide an impetus to the effective mechanism for insolvency resolution, but are not sufficient, argue the authors.
The Economic Survey 2017-18 showed that India jumped 30 places to break into the top 100 for the first time in the World Bank’s Ease of Doing Business (EODB) Report, 2018. The rankings reflect the government’s reform measures on a wide range of indicators. India leaped 53 and 33 spots in the taxation and insolvency indices respectively, on the back of administrative reforms in taxation and passage of the Insolvency and Bankruptcy Code (IBC), 2016.
Over 525 cases of corporate insolvency have been admitted across all the National Company Law Tribunal (NCLT) benches. In addition, 108 voluntary liquidation proceedings and one Fast-Track Corporate Insolvency Resolution have also been initiated. Of which, resolution plans have been approved for 10 applicants, 30 have been ordered for liquidation, 36 have been closed by appeal or review and 442 are under progress.
Total underlying default is Rs 128,810 crore. Of the 9 companies (details of 1 company are not available), whose resolution plan has been approved, total claims of financial creditors (FC) is Rs 5,530.30 crore; liquidation value estimated is Rs 1,430.70 crore; resolution amount is Rs 1,853 for FCs, percentage of recovery by FC is approximately 44 per cent on an average; and realisation value by FC to the liquidation value is 161 per cent on an average.
So, there is huge write-off for the FC on the resolution plan and there is huge waiver of interest and loan for the companies under liquidation. Further, the resolution plan could involve change of shareholding of the company under resolution.
As a step towards effective resolution mechanism, the Union Budget 2018 proposed to introduce certain tax reliefs as under:
• Section 115JB provides for levy of the minimum alternate tax (MAT) on the book profits of a company. As per section 115JB, in computing book profits, a deduction in respect of amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account, should be provided. Consequently where loss brought forward or unabsorbed depreciation is Nil, no deduction is allowed.
In case of companies whose application for corporate insolvency resolution process under the IBC has been admitted by the Adjudicating Authority the following relief is proposed:
• Section 115JB is proposed to be amended to provide that the aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from the book profits in case of the above companies
• Section 79 of the Act provides that carry forward and set-off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial ownership of shares carrying not less than 51% of the voting power, on the last day of the year or years in which the loss was incurred.
With a view to mitigating the hurdles in restructuring and rehabilitation of such companies, it is proposed to relax the rigours of section 79, whose resolution plan has been approved under the IBC, after affording a reasonable opportunity of being heard by jurisdictional Principal Commissioner or Commissioner.
As a step to further the insolvency resolution mechanism, it is the need of the hour that the below tax reliefs be considered by the government for debt-ridden companies, which are sought to be revived under the IBC:
• Section 41(1) of the Act seeks to bring to tax, the allowance or deduction claimed in earlier years, in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year if there is any cessation or remission of such loss, expenditure or trading liability. Section 41 (1) should be amended to provide that in cases, where any outstanding liability, inclusive of any accrued interest is waived in accordance with the approved Resolution Plan, such waiver / write-back should not be subject to tax under both normal and Minimum Alternate Tax (MAT) provisions of the Act.
• Section 50CA of the Act provides that if the assessee transfers shares of a company other than a quoted share, for a value less than the fair market value determined in the prescribed manner, then for computing capital gains, the fair market value shall be deemed to be the full value of consideration received or accruing as a result of such transfer. The promoters of the companies as sellers of shares of the unquoted companies under the insolvency resolution under the IBC, should be exempted from the applicability of provisions of sections 43CA, 50C, and 50CA of the Act.
• Section 56(2)(x) was inserted vide Finance Act, 2017 with effect from 1 April 2017.
The provisions of section 56(2)(x) seeks to bring to tax any receipt as income as ‘Income from other sources’ and widen the tax scope. The acquirer of the shares or property from the promoters / shareholder of the companies which are under the Insolvency Resolution Mechanism as per the IBC, should be exempted from the applicability of provisions of section 56(2)(x) of the Act. The exclusion should be provided by amending the proviso to section 56(2)(x) to the effect that provisions of clause (x) shall not apply to any sum of money or any property (whether movable or immoveable) received by the acquiring companies or the companies which are under the Insolvency Resolution Mechanism under the IBC.
The intent of the legislature in introducing the new IBC was clearly to provide an effective mechanism for time bound resolution of indebtedness issues for financially distressed companies. The above tax reliefs will provide an impetus to the effective mechanism for insolvency resolution.
About the authors:
Bahroze Kamdin is Partner, Deloitte India and Vidya Shenoy is Manager with Deloitte Haskins and Sells LLP