As per the Budget 2021 with the proposed announcement, there is an impact on Merger and acquisition transactions. With no more benefits on tax savings on depreciation on goodwill acquired.
The Budget proposal states that goodwill (and also existing goodwill) will not be eligible for tax depreciation.
In the financial statement, after acquisition goodwill the amount a company pays —either as stock or cash — over the net worth of the entity. After the acquisition or merger, the goodwill is an intangible asset’. The acquiring company obtains a tax benefit as goodwill could be depreciated over a period of time. Thus reducing the taxable income and tax liability.
Allowance of Depreciation on goodwill under the Income-tax Act is the subject matter of long-drawn litigation in India. Taxpayers claims, that goodwill is an intangible asset on which depreciation is allowable under the provision of the Indian Income-tax Act.
In many Judgements including in the case of Smiff Securities Limited [(2012) 348 ITR 302 (SC)], the Courts allow the claim of depreciation on goodwill. However, the tax department never appeared to appreciate the favorable rulings and regularly challenged the claim of depreciation on goodwill.
Union Budget 2021 proposes certain amendments to the provisions of the Act. The object was to address the conflict surrounding the claim of depreciation on goodwill. The Proposed amendments include:
- The Goodwill of a business or profession is not a depreciable asset. No depreciation allowed even in respect of purchased goodwill.
- Block of assets shall not include Goodwill for purchase of depreciation.
- If goodwill is forming part of the block of assets as on assessment year beginning on 1st April 2020 and depreciation has been claimed. Then the calculation in the prescribed manner of the written down value and short-term capital gain is done.
- The cost of acquisition for goodwill acquired under certain modes of acquisition shall be the purchase price of the previous owner.
When we purchase goodwill, the cost of acquisition is its purchase price. However, the deduction is allowed from the purchase price of the goodwill if depreciation claim prior to the assessment year 2021-22
These amendments are applicable from the assessment year 2021-21. But having a retrospective impact as depreciation on any goodwill, partly claimed previously, would not be available in the future. The amendment is retrospective from April 1, 1998. This may have a tax impact on business restructuring as well as merger and acquisition transactions.
Several big-ticket M&A transactions for example Hindustan Unilever’s acquisition of Horlicks in Dec 2018 from GlaxoSmithKline, had claimed high goodwill as depreciation and will now be impacted by this amendment as no further depreciation shall be allowed.
The proposed amendments in the recent Indian Budget closed on one of the most prominent issues. This remains as a matter of litigation for more than a decade. Although the Union Budget 2021 has completely addressed the policy requirements to drive economic growth, the proposals are among the few amendments to the Act which may increase the cost of M&A or business acquisition transactions in India from a tax perspective.