Amalgamation The following changes have been proposed to rationalize the provisions relating to amalgamation of companies:

Currently, 'amalgamation' is defined as merger of one or more companies whereby, besides other stipulations, shareholders owning at least 90% of the value of shares in the amalgamating company become share holders of the amalgamating company. It is proposed that this requirement be relaxed to 75% of the value of shares in the amalgamating company. Currently, expenditure for acquisition of know-how is deductible over a period of three or six years as the case may be. There was no provision for its treatment in case of amalgamation. In the case of amalgamation of companies, the balance future entitlements of the amalgamating company would now be made available to the amalgamated company. It is proposed that any expenditure incurred by an Indian company for amalgamation would be deductible in equal installments over a period of five years. Currently, the amalgamated company is entitled to carry-forward and set off the accumulated business losses and absorbed depreciation of the amalgamating company only if the amalgamation is approved by the Central Government.

It is proposed to eliminate the requirement of such an approval, subject to satisfaction of the following conditions :

The amalgamated company must retain 75% of the value of the assets of the amalgamating company; The business of the amalgamating company must be carried on for at least five-years; and Other conditions as may be prescribed by the Central Government.

If any of the above mentioned conditions are not satisfied, then the accumulated business loss or unabsorbed depreciation allowance set off by the amalgamated company in any tax year shall be treated as its income, taxable in the year in which the said conditions are not satisfied. Demerger With a view to put together a legislative framework to determine the tax position of demerger, and to make demerger tax neutral, the following provisions have been proposed:

"Demerger" would mean transfer of one or more undertakings owned by a company to another company in accordance with a scheme approved by a competent High Court. For the transfer to be regarded as demerger, certain prescribed conditions must be satisfied. One such condition is that the assets and liabilities of the undertaking must be transferred at values appearing in the books of account of the transferor company immediately before the transfer. The transferee company is required to issue, as consideration for the transfer, its shares to be shareholders of the transferor company on a proportionate basis. In the context, the following issues arise for consideration : o Would the transfer of assets and liabilities of an undertaking at fair market value instead of the book value fall outside the definition of demerger, even though the same may have been approved by a High Court? o Does the requirement of issue of shares to be shareholders of the transferor company mean that a legitimate demerger would not be treated as such if the consideration for the transfer includes, besides issue of shares, consideration in the form of cash or debt instruments? Expenditure for acquisition of patent right or copyright is deductible over a period of 14 years. In the case of transfer of a patent right or copyright in a demerger, the Indian company acquiring such right would qualify for the balance future entitlements. Further, any gain or loss to the transferor company on sale or transfer of the patent right or copyright would be disregarded. Expenditure for acquisition of know-how is deductible over a period of three or six years as the case may be. In case of transfer of know-how in the course of demerger. The balance future entitlements shall be available to the company acquiring the know-how. Capital expenditure for the acquisition of license to operate telecommunication services is deductible over the life of the license in the course of a demerger. The transferee Indian company would be

eligible to claim the balance future entitlements. Future, no capital gains tax would be applicable on the transferor company on sale or transfer of the license in the course of a demerger. In the case of an Indian company, certain prescribed start-up costs are deductible over a period of five years. The balance future deductions for start-up costs relating to the undertaking going through a demerger would be available to the transferee company. Any expenditure incurred by an Indian company for the purposes of demerger would be deductible over a period of five years. In the case of an Indian company, expenditure incurred on prospecting or extraction or production of certain minerals is deductible over a period of 10 years. It is proposed that in case of transfer of an undertaking in the course of a demerger, the balance future deductions for such expenditure relating to the undertaking shall be available to the transferee Indian company. In the case of transfer of capital assets in the course of demerger, the book value of the transferred assets is required to be reduced from the depreciation value of the said assets in the immediately preceding tax year in the case of the transferor company. The book value of the transferred assets as they appear in the books of account of the transferor company would be regarded as the opening depreciated value in the hands of the transferee company. However, if the book value of the said assets exceeds the depreciated value in the hands of the transferor company, then such excess amount shall be reduced from the opening depreciated value of the assets in the hands of a transferee company. Gains from the transfer of capital assets in the course of demerger to a transferee Indian company would be tax-exempt. Gains from transfer of shares of an Indian company by a foreign company to another foreign company would be exempt from tax in India if the following conditions are satisfied :

Such transfer is in the course of a demerger; At least 75% of the shareholders of the transferor company to remain shareholders of the transferee company; and Such transfer is exempt from capital gains tax in the country in which the transferor company is corporate.

In the course of demerger, the receipt of shares by the shareholders of the transferor company from the transferee company would be tax-exempt. In the course of demerger, the cost of acquisition of the shares issued by the transferee company to the shareholders of the transferor company would be valued in the prescribed manner, as a proportion of net worth of the transferor company. It is also proposed that the value so computed would be reduced from the cost of acquisition of shares of the transferor company, for calculating gains from sale of such shares in future. In the case of transfer of an undertaking in the course of a demerger, the transferee company would be entitled to carry forward and set off accumulated loss and absorbed depreciation allowance is not so directly relatable, the same will be apportioned between the transferee company and the transferor company in the same proportion in which the value of the assets have been transferred. The point of consideration is whether the value of assets for the apportionment of accumulated loss and unabsorbed depreciation not directly relatable to the transferred undertaking, should be computed on the basis of their book value, market value or the depreciated value? In the year of demerger, the tax holiday for the eligible undertaking would not be available to the transferor company, but would be so available to the transferee company. This could result in the entire profits earned by the transferor company from the eligible undertaking during the year of demerger, prior to the actual date of demerger, being denied the tax-holiday benefit.

Slump sale of business undertaking The following legislative provisions have been proposed in relation to ascertainment of the Income tax position of a business undertaking slump sale:

Slump sale would mean the sale of one or more undertakings for a lump-sum consideration without assigning values to individual assets and liabilities. Gains from slump sale of an undertaking owned by the transferor for more than 36 months would be regarded as long -term capital gains taxable at 20%. If the undertaking was owned by the transferor for

less than 36 months, then the gains on such slump sale would be short-term capital gains taxable at normal rates of tax. For computing capital gains on such transfer, the net worth of the undertaking would be treated as the cost of acquisition and the cost of improvement of the undertaking in the hands of the transferor company.

The value of block of assets of the transferor company would be reduced by the depreciated value of the transferred assets. The issue of appropriate valuation of various transferred assets and liabilities in the books of the transferee company remains unaddressed.