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Corporate Tax Planning

Notes Capital Gain Tax not attracted: As per section 47 (vib) of the Income Tax Act, the transfer of any
capital asset by the demerged company to the resulting company will not be regarded as transfer
for the purpose of capital gain.
Dividend: Section 2(22) has been amended by inserting a new clause (v) to provide that no
dividend income shall arise in the hands of shareholders of demerged company on demerger.

Caselet Indian Corporate Restructuring Initiatives

orporate India is witnessing a restructuring revolution. The somewhat guarded,
tentative response of the early years of economic reforms is slowly giving place to
Cmore decisive initiatives in corporate restructuring. Consolidation at the group and
industry levels through mergers and acquisitions, strategic divestitures to permit sharper
focus, strategic alliances and to a lesser extent demergers and spin-offs etc; are transforming
the ownership profile and competitive structure of the Indian Industry.

Almost every company in India is struggling with this issue of how to face change
and to face change effectively what to restructure. As India moves away from a seller’s
market into a buyer’s one, corporate India is compelled to reassess the way they operate
and how to respond. Coping with uncertainty, which accelerated with the opening
up of the Indian economy to the winds of competition in the mid-1980s; is one of the
key drivers for corporate restructuring in India. The pace and extent of fi rm level or
enterprise level restructuring varied depending upon the competitive structure at the

industry/economy levels, the structural flexibility, capital market expectations and
the regulatory environment. For example, there is broad consensus that the signifi cant
improvement in the competitive position of the US and to an extent the UK industries
in the 90’s has come about on account of the wide spread restructuring carried out by
the companies in these countries. The problems of Indian industries in pre-liberalisation
flow, not inconsiderably, from the inability of the companies to carry out decisive and

comprehensive restructuring on account of structural rigidities, high tolerance level
of capital markets, and somewhat interwoven ownership structure of corporate share-
holding.

Demergers are carried out for a variety of reasons, and the number is steadily growing. In
India typically demerger is carried out as an arrangement under sections 391 to 394 of the
Companies Act, much in the same manner as an amalgamation or merger. Consequently the
process calls for the involvement of and approval by High Courts. As part of liberalisation
process Government carried out number of changes in tax policies to facilitate demergers.
The Income Tax Act has been amended to remove any ambiguity regarding the tax liability
arising from demerger. The Income Tax Act provides for the explicit exemption of capital
gains tax for companies and shareholders on demerger as also for the carry forward of the
unabsorbed business loss and depreciation by the resulting companies.
Demergers are not a new phenomenon and corporate India resorted to demergers for
variety of reasons. To illustrate the point few examples are mentioned here. DCM Ltd.
Demerger into DCM Ltd., DCM Shriram Industries Ltd., DCM Engineering Industries Ltd.,
and Rath Foods Ltd.; Hoechst India Ltd split into Hoechst India Ltd. and Hoechst Schering
AgrEvo Ltd.; Sandoz (India) Ltd.into Clariant (India) Ltd. and Sandoz India Ltd.; KCP Ltd
demerged into KCP Ltd. and KCP Sugar and Industries Corporation Ltd; Hindustan Ciba-
Geigy Ltd demergered into Hindustan Ciba-Geigy Ltd. and Ciba Speciality Chemicals
(India) Ltd. etc. In the case of some (e.g., DCM, HCL, KCP), demerger involved reduction
of capital in the “parent” company, while no capital reduction was involved in respect of

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