New
Delhi: Fiscal incentives are key to facilitate corporate
restructuring in a downturn, according to the Confederation of
Indian Industry (CII). In a press release, CII said compliance of
the various procedural norms to get fiscal benefits by corporate
houses dilutes incentives for restructuring.
 On
the issue of demerger, the IT Act states that fiscal incentives
for demerger will be available, provided it meets the requirements
of Section 391-394 of the Companies Act. CII is of the opinion
that limiting demergers within the scope of Section 391-394 of the
Companies Act is a disincentive to the corporate houses. In
addition, the requirement of approval by a high court in case of a
demerger also delays the process considerably.
In its pre-budget memorandum, CII has suggested an alternative to
this arrangement by permitting the shareholders and lenders to
approve the proposal for demerger and allow the corporate to avail
the fiscal benefit till the proposal is pending at an high court.
In case the proposal is turned down by the high court, CBDT can
recall those incentives availed by the corporates.
CII is of the view that it will considerably reduce the delays and
will encourage restructuring. Secondly, provision for demerger
under the IT Act states that assets and liabilities will be taken
over on the basis of book values. CII said this acts as a barrier
to successful demergers. CII is of the view that in case of a
demerger the valuation of assets taken over should be based on
business valuation and not on the historical book values of
assets. This, CII suggest, will make economic and business sense
and will boost the restructuring process.
On the issue of amalgamations, CII pointed out that the benefits
of carry-forward and setoff of unabsorbed business losses and
depreciation are available to industrial undertaking only. CII has
suggested that areas in services sector like telecom, tourism,
trading activities and NBFCs should also brought within its scope.
CII has also said the additional conditions of carrying 75 per
cent of the book value of the assets and carrying on the business
of the amalgamating company for five years also acts as a
disincentive for successful amalgamations. It has suggested that
to facilitate successful amalgamations the conditions of 75 per
cent and five years should be brought down to 50 per cent and
three years.
On the issue of carry-forward and setoff business losses in case
of closely-held companies, the norm for keeping the beneficial
ownership to the extent of 51 per cent within the same members
also restricts the scope for corporate restructuring in
closely-held companies. In such a dampened economic condition CII
is of the opinion that the condition to maintain 51 per cent
beneficial ownership should be relaxed.
CII said another stumbling block in corporate restructuring is the
sudden withdrawal of fiscal incentives for payments made towards
the voluntary retirement scheme (VRS). The present provision
states that all payments made under VRS are eligible for tax
deduction over a period of five years.
Prior
to 1 April 2001 it was treated as revenue expenditure and the
entire sum was allowed as tax deductible in one single year. The
sudden withdrawal of this incentive by treating it as capital
expenditure for the period prior to 1 April 2001 has an adverse
impact on corporates. CII has suggested that corporates should be
given the choice either to claim it in one year or spread over a
period of five years.
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