labels: confederation of indian industry
Fiscal incentives must for growth: CII news
Our Economy Bureau
30 January 2002
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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Fiscal incentives must for growth: CII