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Corporate Tax Planning

Notes This gives the benefit of reducing foreign exchange risk and localised recessions. We have to look

carefully at diversification as a motive for merger and acquisition and make sure that it really
does maximise the wealth of the shareholder as there is evidence to the contrary. Imagine the
problems in production, for example, a company might face by entering a completely new line
of business.

Improved financing is another motive for merger. If a company is in trouble financially, it may

look for another company to acquire it. The alternative may be to go out of business or take
bankruptcy.

Larger business firms may have better access to sources of financing in the capital markets than
smaller firms. The expansion that results because of merger may enable the recently enlarged

firm to access debt and equity financing that had formerly been beyond its reach.

There are tax advantages associated with mergers; specifically, a tax loss carry forward. If one of
the firms involved in the merger has previously sustained net losses, those losses can be offset

against the profits of the firm that it has merged with, a signifi cant benefit to the newly merged
entity. This is only valuable if the financial forecasting for the acquiring firm indicates that there

will be operating gains in the future that will make this tax shield worthwhile.
If two companies merge that are in the same general line of business and industry, then operating

economies may result due to the merger. Duplication of functions within each firm may be
eliminated to the benefit of the combined firm. Functions such as accounting, purchasing, and

marketing efforts immediately come to mind. This is particularly true if two relatively small

firms merge. Business functions are expensive for small business firms. The combined fi rm will

be better able to afford the necessary activities of a going concern.
An important fi nancial reason often given for merger is economies of scale. Economies of scale
simply mean that the cost of doing business, whether in manufacturing or the aforementioned
operating economies, will be lower in the combined business firm. The thinking, in one camp, is

that if the cost of doing business is lower, that cost will be passed on to the consumer, resulting in
a win-win situation. Not every financier and economist believes this theory but many do. Some

believe that merger results in the monopolisation of an industry and that will cause the exact
opposite effect.
13.2.3 Tax Implication of Mergers and Amalgamations
This section of the unit will help you to gain information about the exemptions, carry forward

and set-off of accumulated loss and unabsorbed depreciation, and tax benefits resulting from

merger of firms or companies.
Exemptions Available under the Income-tax Act, 1961
1. Exemption from capital gains in the hands of the amalgamating companies: Under section
47(vi), capital gains arising from the transfer of assets by the amalgamating companies to
the Indian amalgamated company are exempt from tax.
2. Exemption from capital gains for the shareholders of the amalgamating companies: Under
section 47(vii), capital gains arising from the transfer of shares by a shareholder of the
amalgamating companies are exempt from tax, if:
(a) the transfer is made in consideration of the allotment to him of shares in the
amalgamated company except where the shareholder itself is an amalgamated
company; and
(b) the amalgamated company is an Indian company.

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