Provisions impacting cross border M&A

Consideration paid to target or its promoters or shareholders for non-compete or intangibles will now be taxed

• Consideration paid in M&A for acquisition of intangibles was not considered taxable since the law did not provide the mechanism to compute capital gains and there was no provision to determine cost of acquisition. There have been significant litigation in this regard.

• It is now proposed that from FY 2023-24 (AY 2024-25), Section 55(1)(b) would be amended to include a new form of assets of ‘any other intangible asset’or ‘a payment for non-compete to give up any other right’.

• The cost of acquisition of such intangible asset will be considered nil.

• Thus, the entire amount paid will become capital gain.

• Similarly, cost of improvement for such assets is also prescribed to be nil. Where the intangible asset is an acquired one, the cost of acquisition will be the price paid on its acquisition.

Long term or short-term capital gain?

The law is silent on whether such gain will be long term or short term. Where the intangible as defined above is an acquired property under M&A, it should be possible to ascertain whether the gain is long term or short term based on when it was acquired. Where it is self generated, there is no guidance. A clarification in this regard would avoid any litigation.