Clearing tax haze may help bad bank

Mumbai: Business houses interested in acquiring debt-saddled companies have reached out to the government seeking clarity on possible tax that a target company may be faced with.Once lending banks take a haircut and settle loans at a lower amount, tax officials take a view that the borrower has to pay tax on the reduction in loan liability.Senior tax practitioners believe that tax authorities should clear the fog on the issue at a time the government has proposed a bad bank to take over sticky loans.Consider a company with Rs 5,000 crore bank borrowings falling into difficult times. If lending banks, in the course of debt resolution, settle for an outstanding of Rs 3,000 crore, then the borrowing company is exposed to tax on Rs 2,000 crore. A corporate house looking to take over the company either from banks or an asset reconstruction company (or, bad bank) to which lending banks have sold the loans may rethink the deal if the element of tax arising from loan haircut is high.80741166“A bad bank is a critical component of a larger ecosystem of stressed asset resolution. The possible tax on the borrowing company is a grey area in the law that could put the whole process in jeopardy if not clarified. It could impact the efficiency of a bad bank and the pace of debt resolution,” said Ketan Dalal, managing partner, Katalyst Advisors.Bad banks taking over the loans may sell it down to other institutions and acquiring companies.“Transactions involving acquisition of troubled companies will not take off in the absence of clarity on the tax liability that the latter may be subjected to. It would affect deal valuation and put off the acquirer,” said Uday Ved, partner, KNAV, a tax advisory firm.A bank which sells Rs 5,000 crore loans to an ARC for Rs 3,000 crore has to provide for the Rs 2,000 crore haircut it takes. The bank’s taxable income dips once it writes off the loan. The tax incident on the borrower arises when banks finally settle the loan (say at Rs 3,000 crore) and issue ‘no due certificate’ to the borrower. While a debt-ridden company may not have to pay tax as it can offset the tax amount (on Rs 2,000 crore) against accumulated losses, such an adjustment would not be possible once the shareholding and control of the borrowing company changes. Under the circumstances, acquiring companies argue that there is little sense in using money infused to revive a loss-making company to pay tax.“Whenever the bad bank would acquire any debt from a bank it would do so on net book value, that will again be based on how much provision the banks have made on the loan. When the bad bank would sell this debt, it would do so at fair value, which again can be negotiated by a potential buyer and the difference, if any, would then be adjusted back to the banks,” said Abizer Diwanji, national leader, financial services, at EY India.Representations to change the tax law have been made by companies which want to take over entities facing bankruptcy proceedings. The government has so far not agreed to the proposal.“Probably, tax authorities believe that the acquiring company should factor in the tax element resulting from loan settlement while valuing the deal,” said a banker.

from Economic Times https://ift.tt/3cR0xBm