Insolvency process has a tax problem PDF Print E-mail
Saturday, 18 November 2017 00:00
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If buyers are to be taxed on notional gains, this will deter bidders, so important to fix this at the earliest


Given the speed at which NPAs have accumulated to over Rs 8.5 lakh crore today, and how they have brought the banking system to a halt, the government has been trying its best to ensure the insolvency process—through the National Company Law Tribunal (NCLT)—runs smoothly after the various challenges to it were dismissed by the courts. And after the Synergies Dooray case raised the possibility of promoters getting back control of their companies with a huge haircut on the debt, and after various promoters started putting in bids for their companies, the government tried to fix this as well. Since this would cast a shadow over the resolution process, the government decided to amend the insolvency regulations to ensure that the “antecedents, credit-worthiness and credibility of a Resolution Applicant, including promoters, are taken into account by the Committee of Creditors”. In other words, if a promoter was accused of siphoning off of funds, or was a wilful defaulter, he would not be allowed to regain control of the company. Of course, as this newspaper has pointed out, bankers—who mostly control the Committee of Creditors—need to use this wisely since in many of the really big NPAs, the promoters were never accused of being wilful defaulters as the banks were always willing to evergreen loans to prevent defaults and the need to provision for these under RBI guidelines. In which case, it is up to the creditors’ committees to disqualify such bidders and up to the government to ensure there is no pressure on banks to allow such bidding. If even some of the big defaulters regain control of their companies, either directly or through front companies, it will give the process a bad name. The disqualification, though, will almost certainly be challenged in court.

While that problem has been taken care of, another problem that has now come up relates to taxing of such sales. Under existing income tax guidelines, a company has to pay tax on the haircut taken by lenders as this results in a notional profit on the books of the company being bought. So, if a company has a debt of Rs 15,000 crore and, in the process of the sale, this is reduced to Rs 8,000 crore, the Rs 7,000 crore is to be considered as profit on which a tax has to be paid. Since this raises the effective price of the purchase, it will hit the bidding process at NCLT. The provision was probably inserted into the Income Tax Act to prevent enterprising businessmen from gaming the system by entering into fake sales and purchases, but this cannot possibly apply to debt-ridden companies that are up for sale as part of the insolvency process. It is important that the government quickly examine the issue and give an exemption for such sales. In other cases too, such as the applicability of MAT on FPIs, when a problem arose and the FPIs threatened to walk out if this was not rolled back, the government was quick to step in with a resolution.



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