Tax Implications of M&A in India: Key Direct and Indirect Tax Considerations for Businesses

Introduction – Tax Implications of M&A

In recent years, mergers and acquisitions (M&A) have become one of the preferred tools for strategic growth, exit, or restructuring across Indian industries. Whether it is a private equity fund acquiring a controlling stake in a mid-market logistics company or a tech startup absorbing a smaller player to expand capabilities, the Indian M&A landscape has matured. However, what often appears as a business transaction at first glance is, in fact, deeply shaped by tax considerations, both for the buyer and the seller.

In almost every significant deal, tax structuring plays a central role not only in how the transaction is executed but in how value is preserved post-acquisition. The parties involved, investors, promoters, legal counsel, and auditors, spend considerable time navigating direct and indirect tax frameworks to ensure the structure chosen is optimal, legally defensible, and cost-effective. The structure of the deal, the residence status of the stakeholders, the mode of consideration, and the nature of the assets involved all contribute to the final tax outcome. Therefore, the tax implications of M&A are not just an afterthought; they often drive the deal itself.

Rise in Transaction Volume and Complexity

From start-up consolidations in fintech and SaaS to larger cross-border acquisitions in sectors such as pharmaceuticals and renewable energy, Indian M&A activity has gained significant momentum. While increased capital availability among institutional investors has contributed to this trend, a key driver has also been regulatory liberalisation, including the simplification of FEMA regulations and greater clarity on tax treatment for specific merger structures.

That said, even with increasing deal flow, tax due diligence in M&A remains uneven. Many small and mid-sized acquirers still underestimate tax exposures, especially about legacy liabilities, pending assessments, or how unabsorbed losses transfer post-transaction.

As the deal size increases, so does the legal complexity. And tax, both direct and indirect, features in almost every clause of the transaction documents, from the representations and warranties in the share purchase agreement (SPA) to indemnity triggers and conditions precedent.

Role of Tax in Structuring and Valuation

Whether the parties choose a share purchase, asset purchase, or slump sale, the choice will significantly alter the tax incidence. A share purchase may appear cleaner, but it doesn’t come with a depreciation benefit. An asset sale, while offering a step-up on depreciation, often attracts GST and stamp duty. A slump sale, on the other hand, offers a middle ground, but raises valuation and compliance questions.

Each structure brings different consequences in terms of:

Capital gains taxation on transfer of shares or undertakings.
Availability of set-off for past business losses.
GST on transfer of business as a going concern.
Stamp duty on movable and immovable property.
Goodwill recognition and amortisation.

This is where strategic planning comes into play. An experienced legal and tax advisory team can use combinations of SPVs, internal mergers, or treaty planning to reduce overall incidence and align the deal with long-term financial goals.

Structuring an M&A Transaction: Tax Drivers

The tax outcome of any M&A transaction depends significantly on how the deal is structured. While commercial intent and valuation remain important, the transaction model, whether it is a share sale, asset acquisition, slump sale, or a court-approved scheme, drives most of the tax exposure. Buyers and sellers often approach M&A deals with different goals: the seller typically wants to optimise post-tax returns, while the buyer is focused on long-term deductions and compliance stability. Bridging these interests requires careful legal and tax planning from the outset.

Asset Purchase vs. Share Purchase vs. Slump Sale

The choice between an asset purchase, a share acquisition, and a slump sale can materially impact the deal value once tax effects are accounted for.

In a typical asset purchase, individual assets (tangible and intangible) are transferred to the buyer. The buyer gets a higher base for depreciation and may choose which assets and liabilities to assume. However, the transaction often attracts GST, and stamp duty may apply depending on the nature of the assets.
A share purchase is the cleanest route from a legal transfer perspective. The ownership of the company changes hands, but the business continues in the same legal entity. This structure avoids indirect taxes and typically requires less operational change. However, the buyer assumes all historical liabilities and is exposed to legacy tax risks.
A slump sale involves the transfer of a business undertaking as a going concern for a lump sum consideration, without values assigned to individual assets. It is treated as a transfer for capital gains purposes under Section 50B of the Income Tax Act. GST is typically exempt under Notification No. 12/2017-Central Tax (Rate), subject to specific conditions.

The decision must factor in both direct tax (i.e., capital gains tax on mergers) and indirect tax (i.e., GST impact on business acquisitions), in addition to operational and commercial goals.

Tax Incidence for Buyer vs. Seller

The structure impacts each party differently.

For sellers:

A share sale of unlisted securities may trigger capital gains tax on mergers, at 20% for long-term holdings and as per slab rates for short-term gains. Indexation benefit may apply in some cases.
In a slump sale, gains are computed based on net worth (book value of assets less liabilities), and taxed as long-term capital gains if held for more than 36 months.
In asset sales, gains are computed separately for each asset type, resulting in a more complex tax computation.

For buyers:

Asset purchases may enable higher depreciation claims on the stepped-up asset base, but also attract indirect taxes and duties.
Share purchases do not offer depreciation on goodwill (post the 2021 amendment), and no change in the cost base of underlying assets.
Slump purchases provide certain GST exemptions, but are subject to detailed compliance.

Legal and tax advisors often run multiple simulations to determine which route delivers the most tax-efficient outcome, especially where significant intangible assets (IP, goodwill, customer contracts) are involved.

Income Tax Treatment and Capital Gains Provisions

The treatment of M&A transactions under the Income Tax Act, 1961,  is well developed, but has evolved over the years based on amendments and jurisprudence.

Key provisions relevant to M&A taxation in India include:

Section 2(42A): Defines the holding period for capital assets.
Section 47: Lists transfers that are exempt from capital gains tax (e.g., certain amalgamations, demergers).
Section 50B: Governs slump sale transactions.
Section 49: Covers the cost of acquisition in share transfers and exempt transfers.
Section 56(2)(x): Deals with deemed income in cases of undervalued acquisitions.

For instance, a court-approved amalgamation between two Indian companies may be exempt from capital gains tax on mergers, provided it meets the conditions under Section 47(vii). However, in case of consideration being paid in non-share form (like cash or debentures), the exemption may not apply.

The exact method of computing gain, the availability of indexation, and exemption eligibility can materially alter post-deal tax consequences. Hence, legal opinions and tax rulings often form part of closing documentation in high-value M&A deals.

Use of Holding Companies and Step-down Structures

Many dealmakers use intermediate holding structures or step-down subsidiaries to optimise taxation, especially in cross-border transactions. For instance:

A Singapore holding company may acquire an Indian target via an Indian SPV, enabling potential use of a tax treaty and limiting exposure to indirect transfer provisions.
Indian promoters sometimes restructure shareholding via family trusts or LLPs before exit, to manage M&A taxation in India more efficiently.
In buyouts funded through debt, step-down acquisition structures may be used to push interest costs down the chain, subject to limitations under Section 94B.

Such structures, while often tax-efficient, must be designed with full regard to GAAR (General Anti-Avoidance Rules), substance requirements, and reporting obligations under FEMA.

When structured correctly, they can help reduce liability on both stamp duty on share transfers and withholding tax in case of offshore investors. However, these structures are often subject to intense scrutiny during tax due diligence in M&A.

Key Circulars and Case Laws to Consider

Over time, several CBDT circulars and judicial precedents have clarified the tax treatment of M&A transactions:

CBDT Circular No. 779/1999: Clarifies that slump sale proceeds are taxed as long-term capital gains if the undertaking is held for more than 36 months.
Mumbai ITAT in DCIT v. Summit Securities Ltd: Held that share transfers under schemes of arrangement approved by the NCLT are not taxable under Section 47.
Supreme Court in Vodafone International Holdings BV v. UOI: Brought indirect transfers of Indian assets into the tax net, triggering later amendments (Section 9).

Practitioners rely heavily on such case laws to support positions during structuring and to build protections into transaction documents.

Capital Gains Tax on Mergers & Acquisitions

In any M&A transaction, it’s capital gains tax that typically forms the first line of conversation between parties, especially when one side is exiting or cashing out. While the commercial intent may be aligned, the actual tax outcomes for buyer and seller can be very different. And unlike many other parts of the deal, these outcomes are determined by structure, holding period, and the nature of consideration involved, not by intent.

A minor shift in shareholding route, for example, or whether consideration is in cash or equity, can alter the entire tax liability. And yet, quite a few deal teams enter the documentation stage without having mapped the applicable capital gains positions clearly.

Taxability of Share Transfers: Listed vs. Unlisted Shares

When shares are transferred in the course of an acquisition, whether between individuals, promoter groups, institutional investors, or strategic players, what matters most is whether the shares are listed or not, and how long they’ve been held.

For listed shares:

Holding them for over 12 months brings them under long-term capital gains. These are taxed at 10%, but only on gains exceeding ₹1 lakh, under Section 112A.
Short-term gains (less than 12 months) are taxed at 15% under Section 111A.

For unlisted shares:

If held for over 24 months, they qualify as long-term and are taxed at 20%, with indexation.
If held for less, the gain is short-term and taxed at the slab rate.

These distinctions are crucial in evaluating the net proceeds from a share deal. Sellers of unlisted equity often attempt to pre-structure their holdings, either by holding through a resident company or via treaty jurisdictions, to optimise capital gains tax on mergers.

Exemption for Amalgamations Under Section 47

Some M&A transactions, particularly those done through NCLT-sanctioned amalgamation schemes, can claim exemption from capital gains tax, but only if the conditions under Section 47 are carefully followed.

A few relevant clauses:

Section 47(vi): Transfer of assets by an amalgamating company to an Indian amalgamated company is not treated as a “transfer” and hence not taxed.
Section 47(vii): If shareholders of the amalgamating company receive shares of the amalgamated company, and the latter is an Indian entity, no capital gains tax is triggered.

However, this exemption fails if consideration is paid in cash or if the recipient company is foreign. It has to be a share swap with an Indian company to qualify.

In terms of M&A taxation, this is a heavily relied-upon route that requires precision in documentation and structuring. Many taxpayers have faced scrutiny for cash-equity hybrid arrangements or for failing to meet the conditions in cross-border deals.

Sections 2(42A), 48 & 49 – How Gains are Calculated

These three provisions are often overlooked in early-stage structuring discussions, but they govern exactly how the capital gain is calculated.

Section 2(42A): Defines whether the asset is short- or long-term based on holding period.
Section 48: Outlines the method for calculating gain, selling price minus cost of acquisition (and sometimes indexed cost).
Section 49: If the shares or assets were acquired through inheritance, gift, merger, etc., then the cost to the previous owner is treated as the buyer’s cost.

This matters in cases where the shares were received under a prior tax-exempt transfer. Say, a company merges, and the shareholder now holds new equity. If that person sells these shares two years later, the holding period will include the time they held the original shares.

This becomes a key part of tax due diligence, especially when a buyer wants to understand whether they’ll face short-term or long-term exposure on a future exit.

Impact on Cost Base for the Acquiring Company

While most tax focus sits with the seller, the buyer’s cost base is equally relevant, especially when they’re acquiring a business via slump sale or through an asset deal.

Here’s what typically happens:

In a slump sale, the total consideration is allocated across all assets acquired. The buyer uses this apportioned value as the base for depreciation and capital gains when selling later.
In a share purchase, the cost base is the share price paid. But post the Finance Act, 2021, goodwill is no longer eligible for depreciation. So, if a large part of the consideration went toward brand value or intangibles, that value sits idle on the books with no tax benefit.

This disconnect often leads to a mismatch between accounting and tax outcomes. In several high-value transactions, the acquirer assumes they’ll get amortisation on goodwill but later finds it’s been disallowed. This makes proper valuation and advice crucial in M&A taxation

Tax Implications for Residents vs. Non-Residents

The final tax liability can change significantly depending on whether the selling party is a resident in India or based overseas.

For residents:

Gains are taxed as per the usual Income Tax Act provisions.
Indexation benefits apply to long-term gains on unlisted securities.

For non-residents:

Gains on Indian shares may still be taxed in India, unless protected by a DTAA.
The Mauritius and Singapore treaties previously provided relief for share sales, but that’s now limited to grandfathered investments.
In many cases, a non-resident still needs to withhold tax on exit consideration, unless the buyer ensures compliance.

In addition:

The Vodafone ruling (and its aftermath) introduced indirect transfer rules. If a non-resident entity holds another entity that in turn holds Indian assets, and that upstream entity is sold, India may still try to tax the transaction.

These are complex cases, and treaty relief isn’t automatic. Documentation like TRC (Tax Residency Certificate) and Form 10F becomes essential, especially in cross-border deals involving stamp duty on share transfers or GST impact on business acquisitions.

Indirect Tax Implications: GST & Stamp Duty

In most M&A transactions, attention tends to lean heavily towards direct tax exposures, capital gains, withholding, and loss transfers. That said, one area that tends to slip through or gets postponed till the closing stage is indirect taxation. But in reality, both GST’s impact on business acquisitions and stamp duty on share transfers can significantly affect how the deal lands on the books, especially when real assets, licenses, or regional offices are involved. It is not unusual for parties to finalise valuation and commercial terms only to realise during documentation that GST or stamp duty implications were either overlooked or misunderstood.

Even though these charges may seem procedural, the financial impact isn’t. Some indirect tax exposures are non-negotiable and payable upfront, no deferral, no adjustment against future profits, and in most cases, not even recoverable. That’s why early planning around them is key.

GST Impact on Transfer of Business as a Going Concern

When the deal involves buying or selling an entire business operation, including assets, liabilities, licenses, contracts, and employees, it is often referred to as a “going concern transfer”. Now, the term itself is not defined under the GST Act, but there is a specific exemption under Notification No. 12/2017, which says GST won’t apply to such transfers, provided certain things are in place.

Here’s what has to line up:

The business being transferred must be functional, not a dormant or empty shell.
There should be continuity of operations (even if the name or brand changes).
Transfer should include both assets and liabilities. Partial transfers often don’t qualify.

Now, the issue is not with the rule; it’s with interpretation. For example, if liabilities are excluded, or if the buyer plans to break up and liquidate part of the business immediately post-closing, GST officers may challenge the exemption. This is particularly important in slump sales, which are assumed to be exempt but can attract GST if not documented properly.

One of the common errors during early-stage structuring is that parties assume all business transfers are exempt. That’s not correct. The exemption under Notification No. 12/2017 applies only if it’s a going concern, and this should be clear from the agreement, board resolutions, and asset schedules.

Notification No. 12/2017 – Exemption of GST on Slump Sale

The slump sale route is popular because it allows for a cleaner transfer, one line item in the books, and no item-wise pricing. But GST rules view it with some conditions. If the transfer meets the criteria of a going concern, no GST applies. But if it doesn’t, say, because it excludes liabilities or does not maintain business continuity, GST will be levied.

In practice:

If only assets are sold, with no people or liabilities, the exemption may not apply.
If part of the business is retained by the seller, it may not qualify as a full going concern.
GST officers tend to go by substance over form; just calling it a slump sale in the agreement isn’t enough.

Deal teams often don’t factor this in while drafting. It’s best to involve tax advisors early, not at the time of execution, but ideally before the LOI stage, so that the intended GST position is clear and defensible later.

Stamp Duty on Share Transfers and Business Transfers

For share transfers:

If in demat form, post the 2019 amendment, the duty is collected through depositories and is typically 0.015% of the market value.
For physical shares (less common now), the rate may vary but is similar in range.

For asset or business transfers:

Stamp duty depends on the nature and location of assets; if there’s property, factories, or land involved, states like Maharashtra or Tamil Nadu will charge duty based on property value.
Even the transfer of plant and machinery can attract duty if it’s documented as part of an agreement and mentioned individually.
If the transfer includes trademarks or IP, in some states, the valuation basis becomes a point of dispute.

Variation Across States –

Stamp duty is governed by state-level amendments to the Indian Stamp Act. So while there is a central framework, the rates, triggers, and exemptions vary wildly between states.

Example:

In Maharashtra, Article 5(g-a) of the Bombay Stamp Act applies to business transfers, and if the value exceeds ₹1 crore, stamp duty of 5% is applicable.
In Delhi, the treatment may be more lenient, especially for slump sales without specific asset-wise pricing, but authorities still may require adjudication.

Also worth noting:

Online stamp duty payment is mandatory in many states now, and coordination with local sub-registrars can delay closings if not planned.
Some states insist on adjudication of instruments, even if they’re executed outside the state but affect local assets.

Any company with offices or property across states must factor in at least two or three jurisdictions when planning closing mechanics. A core part of tax due diligence is simply mapping stamp duty triggers and assigning responsibility in the transaction documents.

How Stamp Duty Can Materially Impact Deal Cost

In high-value M&A deals, stamp duty often comes in as a line item during negotiations. Sellers prefer buyers to pay it, but buyers want it adjusted in price. Unless specifically addressed in the agreement, it can become a post-closing friction point.

For example:

A ₹150 crore asset-heavy deal with ₹90 crore worth of immovable property can attract 5% stamp duty in Maharashtra, that’s ₹4.5 crore in cash.
That amount is not tax-deductible, nor refundable, and has to be paid before registration.
If the parties fail to specify responsibility, both can be held liable under state stamp laws.

This is why it is always advisable not to treat stamp duty on share transfers or slump sales as a formality. It affects cash flow and must be planned for alongside the M&A taxation and its obligations

Cross-Border M&A: Tax and FEMA Considerations

Cross-border transactions in India bring their own set of issues, beyond just pricing and valuation. Unlike domestic M&A, these deals need a dual-lens approach: one that accounts for Indian tax and exchange control frameworks, and another that accounts for the jurisdictional law where the buyer or seller sits. The mistake many companies make is assuming that if the commercial terms are locked, compliance will fall into place. Unfortunately, that’s rarely the case.

Most of the pushback in cross-border M&A comes not from negotiation breakdowns, but from tax authorities, FEMA regulators, or valuation challenges, especially in inbound deals. While the Indian legal system allows such deals under both automatic and approval routes, the burden of proof and compliance falls on the transacting parties. Getting this wrong doesn’t just delay closings; it can cause penalties, withholding issues, and, in extreme cases, reversal or clawbacks of parts of the transaction.

Understanding the Nature of Capital Flows: Inbound vs. Outbound

There is no single playbook for cross-border M&A. The structuring depends on whether funds are entering India (inbound) or leaving India (outbound). Each has separate consequences under the Income Tax Act and FEMA.

For inbound M&A, where a foreign entity acquires an Indian company:

The transfer may trigger capital gains tax on mergers, depending on how the shares are held and what the acquisition price looks like.
If the foreign entity buys shares of an Indian company from another foreign shareholder (offshore transfer), Indian tax authorities may still invoke Explanation 5 to Section 9, especially if the underlying value lies in Indian assets.
Share purchase agreements involving foreign buyers must also comply with FEMA pricing guidelines. The floor price rule, based on the return on net worth or DCF method, cannot be ignored.

For outbound M&A, where an Indian company acquires a foreign business:

There are outbound investment limits under the Liberalised Remittance Scheme (LRS) and Overseas Direct Investment (ODI) guidelines.
RBI approval may be required depending on the nature of the foreign entity and whether the acquisition is through a step-down subsidiary.
Debt used to fund the acquisition may not be eligible for a full tax deduction in India under Section 94B.

The distinction between inbound and outbound flows isn’t just academic. It affects the legal structure, documentation sequence, and even how post-deal cash flows are accounted for.

Transfer Pricing and Inter-Company Dealings Post-Closing

Many people think transfer pricing issues arise only after the deal closes. But in reality, the exposure starts the moment the structure is chosen. For example, if a holding company in Singapore acquires a 100% stake in an Indian subsidiary and then begins charging management fees, royalty, or IP licensing, the Indian subsidiary must demonstrate arm’s length pricing.

In some cases, the Indian tax department disputes even the need for the service, especially if the documentation isn’t aligned.
One of the more common triggers in tax due diligence in M&A is the absence of proper inter-company agreements post-closing.
Indian authorities also examine whether intangible assets (like brand names or software) have been transferred to offshore entities without consideration.

It’s critical to get inter-company contracts reviewed by transfer pricing advisors. If not, the acquirer may end up with exposure that wasn’t priced into the deal at all.

Withholding Tax and Escrow Mechanics in Cross-Border Exits

In inbound M&A deals, particularly when Indian founders are exiting and a foreign entity is buying them out, the Indian buyer is typically required to withhold tax under Section 195 on any payment made to the foreign seller. This includes cash, deferred consideration, earn-outs, and even escrow releases.

Even when a Double Tax Avoidance Agreement (DTAA) is being claimed, a Tax Residency Certificate (TRC) must be produced, and Form 15CA/CB filings must be made.
If a buyer pays in full without TDS, assuming DTAA applies, they may still be considered an assessee-in-default and be liable to pay the tax (with interest and penalty).
In multi-tranche deals, buyers often forget that TDS needs to be calculated separately for each installment, especially when payment is linked to future milestones.

Withholding tax issues are a recurring red flag in legal and financial due diligence. If not structured right, it can cause friction between buyer and seller, especially in deals with multiple closings or variable consideration.

DTAA Structuring and Risks of Misuse

It’s common to see M&A deals that are structured through Mauritius, Singapore, or the Netherlands entities because of the treaty benefits, specifically on capital gains. But in recent years, authorities have grown more aggressive in challenging these structures, especially if there’s no real presence (office, employees, economic activity) in the intermediate jurisdiction.

The Limitation of Benefits (LOB) clause in many treaties now requires minimum spend, staff count, or ownership criteria to be met.
Courts have held that round-tripping and treaty abuse may render the entire structure invalid.
One practical risk is if the Indian authorities invoke GAAR provisions, General Anti-Avoidance Rule, under which they can ignore the legal form and look at the substance of the deal.

Simply relying on a foreign entity’s certificate of incorporation is not enough. Acquirers and sellers must build economic substance and prove beneficial ownership. This is critical in managing M&A taxation in India.

FEMA Reporting and Regulatory Approvals

All cross-border M&A transactions, whether by Indian residents acquiring overseas entities or vice versa, must be in compliance with FEMA. This goes beyond the structure; it includes pricing, method of payment, timelines, and reporting.

Typical challenges:

Share swap deals often get stuck because the RBI mandates valuation reports under internationally accepted methods, and the pricing mismatch on either side causes regulatory hold-up.
Even where the transaction falls under the automatic route, forms like FC-GPR (for issue of shares), FC-TRS (for transfer of shares), and FLA return must be filed.
Delays in reporting can attract compounding penalties, which are costly and create a regulatory record for the company.

Tax Due Diligence in M&A Transactions

For any M&A transaction, regardless of whether structured as a share purchase or asset sale, the outcome will almost always depend on how well the buyer understands the target’s tax history. A well-executed tax due diligence in M&A serves two core functions:

(a) identifying legacy liabilities that might carry forward post-closing, and

(b) determining how those exposures must be dealt with in the transaction documents, whether through indemnities, price adjustments, or holdbacks. The mistake that often gets made is assuming that a clean compliance certificate or recent tax audit absolves the company of legacy risks. It doesn’t.

In several transactions reviewed recently, deal timelines were derailed at the eleventh hour not because of regulatory approvals, but due to previously unknown notices, unclaimed credits, or outdated filings that came to light during diligence. Therefore, tax diligence needs to be both broad and deep, covering income tax, GST, TDS, customs, and any litigation history.

Why Tax Due Diligence is Crucial: Buyer’s Perspective

From the buyer’s standpoint, diligence is not just a checkbox exercise. It directly influences commercial negotiations.

If the target has significant capital gains tax on mergers unpaid or disputed, the buyer must factor that into either the valuation or ask for specific indemnity.
Pending tax assessments or appeals increase the deal’s risk profile, particularly if they are large enough to threaten cash flow or asset security.
In some cases, buyers may prefer to structure the deal as a slump sale or asset acquisition just to isolate tax risks.

Buyers often treat tax exposures as an actual cost in their IRR model. This directly affects pricing discussions.

Common Red Flags: TDS Defaults, MAT Credits & Pending Litigation

While every target has some level of tax exposure, certain types consistently emerge as red flags:

TDS non-deduction or short deduction, usually in employee payouts, rent, or contractor invoices.
MAT credit carry-forwards that are not supported by proper assessment orders.
Demand orders received but not disclosed.
GST mismatches between GSTR-3B and GSTR-1 filings.
Intra-group transactions lack transfer pricing documentation.

Such risks are hard to quantify at first glance, which is why buyers prefer a clean confirmation and disclosure schedule in the agreement.

Review of Past Assessments, Appeals & Show Cause Notices

It is not enough to simply ask for the latest tax returns. A proper diligence requires looking into:

Income tax scrutiny assessments of the past 4-6 years.
Any pending appeals at CIT(A), ITAT, or High Court level.
Unacknowledged notices or email-based correspondence with tax officers.
Orders issued under GST Sections 73/74 or any customs proceedings.
Pre-deposit orders where appeals have been filed but liabilities remain unpaid.

Often, due diligence reports are rejected by buyers when these details are either not properly summarised or not flagged for action.

Some buyers require a table like the one below to summarise the pending tax matters:

Tax Authority	Assessment Year	Issue Raised	Amount Involved (INR)	Appeal Pending	Remarks
Income Tax Dept	AY 2021-22	Disallowance of expenses	12,50,000	Yes (ITAT)	Stay granted till next hearing
GST (Delhi Zone)	FY 2020-21	GSTR-3B vs 1 mismatch	8,90,000	No	Payment due, no appeal filed
Income Tax Dept	AY 2018-19	MAT Credit claim disallowed	6,20,000	Yes (CIT-A)	Filed in April 2023

Impact on Valuation and Indemnity Clauses

The tax findings from diligence are not for internal reference only; they must translate into binding clauses in the SPA or SSA. Depending on the risks found:

The buyer may reduce the offer price or ask for a holdback.
Indemnities may be structured as capped or uncapped, depending on the quantum of possible exposure.
Where litigation is ongoing, parties may agree to split liability based on the outcome.

Most serious issues must be captured in the Disclosure Letter, Schedule of Indemnities, or even the Price Adjustment clause. If not, the buyer has little legal remedy post-closing.

Role of Tax Representations & Warranties in Transaction Documents

Typical representations in a share purchase agreement relating to tax include:

All returns have been duly filed and assessed.
No notice of reassessment has been received.
All taxes have been paid or adequately provided for in books.
There is no undisclosed liability or unclaimed credit.
There is no pending audit or inspection by tax authorities.

These are not boilerplate; they must be tailored to the diligence findings. For example, if there is an ongoing GST audit, it must be disclosed and specifically carved out.

Tax Benefits, Amortisation & Set-Offs Post-Merger

There’s a tendency in many M&A deals to wrap up documentation and assume the job is done once the funds move and shares transfer. But post-closing, several tax considerations come into play that have a real financial impact, most of which aren’t visible during diligence or SPA negotiation. The reality is that if the structure hasn’t been handled right, a buyer may miss out on significant tax carry forwards, amortisation allowances, or even basic set-offs under Indian tax law.

Some of these are procedural, like missing a transition filing. Others are structural; if, say, the business wasn’t carried on in the manner required under the Act, the eligibility to carry forward losses can lapse. Many buyers assume these benefits flow automatically with the business. That’s not true. Most of them are conditional. And if even one of those conditions is broken, the entire benefit can be denied in the assessment.

Let’s take a look at a few key heads where this comes up.

Set-Off of Business Losses and Depreciation Under Section 72A

In a merger, particularly where one entity is loss-making, the most obvious question is: can the buyer use those losses to reduce future tax liability?

Under Section 72A of the Income Tax Act, the answer is yes, but only if some very specific conditions are met. The tax authorities are quite strict about this.

Key points include:

The amalgamating company (i.e., the one getting merged) must have been actively carrying on business for at least 3 years. Shell companies or asset-holding companies won’t qualify.
At least 75% of the book value of fixed assets should have been held for 2 years before the merger. So recent asset transfers can disqualify the claim.
After the merger, the amalgamated company (i.e., the acquirer) must continue to run the target’s business for 5 years. Even partial hiving off can be seen as a breach.
If any of the above conditions are violated, the entire benefit can be withdrawn with retrospective effect. There’s no partial relief.

If this clause is triggered properly, the acquirer can carry forward and absorb unabsorbed depreciation and business losses, a major tax shield in post-merger years.

If not, the tax implications of M&A could include reversal of those set-offs with interest and penalty.

Amortisation of Goodwill: Changed Rules and Impact on Deal Value

Until FY 2020-21, acquirers would usually factor in amortisation of goodwill as a long-term tax benefit. If a buyer paid INR 25 crores for a business, and the net asset value was INR 15 crores, the extra 10 crores was goodwill, eligible for depreciation under Section 32. That used to be a legitimate deduction.

But the Finance Act, 2021, changed this. Goodwill is no longer considered a depreciable asset.

Here’s what changed:

Goodwill is now explicitly excluded from the definition of “intangible assets”.
Even if you paid consideration and booked it as goodwill in your accounts, you cannot claim depreciation on it anymore.
This change is prospective, but assessments for past years are being questioned too. The department is challenging claims even from FY 2019-20.

For buyers, this has meant a serious hit to post-closing tax planning. It’s become a point of re-negotiation in some ongoing deals.

If valuation was justified partly on the capital gains tax on mergers and partly on amortisation, the absence of the latter makes the numbers less appealing.

GST Input Credit: Transition, Forms, and Breakage Risk

Another area where things fall through the cracks is GST input credit. In cases of slump sale or asset purchase (as opposed to share purchase), the acquirer often assumes it will get the GST credit that the target had accumulated. This doesn’t happen by default.

For credit to move:

The transferor (seller) must file FORM ITC-02 with a declaration of transfer of business.
Supporting documentation and ledger closing must be clean; any mismatch in invoice dates or amounts causes the transition to fail.
The transferee must accept the transfer in its own GST portal and match the credits.
If any of this is missed, even by a few weeks, the authorities may reject the credit claim altogether.

Several clients have reported that their GST credit worth lakhs was denied simply because the old registration wasn’t properly closed or documentation was incomplete.

This is why the GST impact on business acquisitions is more a procedural risk than a substantive one.

Optimising Depreciation Post-Merger

The tax treatment of depreciation after a merger is a surprisingly under-reviewed area. Companies just continue using their old fixed asset schedules. But the reality is that once a merger or acquisition happens, asset blocks must be revalued, grouped afresh, and reported properly.

Some key points:

Section 43(6) and Rule 5 of the Income Tax Rules prescribe how written down value (WDV) must be carried over.
Where assets are revalued post-merger, the higher value is not considered for depreciation unless taxed accordingly.
Useful life has to be considered afresh, especially for IT assets, plant, and machinery.
There’s a window for restructuring asset blocks post-acquisition to optimise depreciation in the first few years.

Carry Forward of MAT Credit and Other Deferred Tax Assets

This is perhaps the trickiest. Companies often carry large amounts of MAT credit or deferred tax assets (DTAs) on their books, which they assume will pass on to the acquirer. But these are recognised under accounting principles; not all of them are accepted under tax law.

A few caveats:

MAT credit cannot be carried forward unless the acquiring company meets specific continuity conditions.
Deferred tax assets need to be re-evaluated post-merger. If the business model changes, auditors may ask for a reversal.
Many targets inflate valuation by presenting a high DTA on books. But if that’s not realisable within 3–5 years, it has no practical value.

Strategic Tax Planning: How Deals Can Be Optimised

For companies and investors looking at India as an M&A destination, the tax impact of the deal can materially change its attractiveness. There’s a broad spectrum of approaches available to optimise the tax implications, ranging from pre-deal corporate restructuring to jurisdictional planning.

A key learning is that unless strategic planning is done well in advance, sometimes 6–12 months before the proposed acquisition, even the most carefully negotiated deal can lose major tax efficiencies. In practice, most well-advised deals use a mix of legal and tax structuring to extract optimal value.

Use of Intermediate Jurisdictions to Access Treaty Benefits

India has tax treaties with several jurisdictions (e.g., Singapore, Mauritius, Netherlands), which can significantly reduce capital gains tax on mergers or exits. Historically, Mauritius and Singapore were preferred due to favourable capital gains exemptions. While the 2016 amendments removed the blanket exemption, partial benefits continue under certain conditions.

Key aspects include:

Substance requirements: Holding entities must demonstrate real commercial activity (office, employees, board control).
Limitation of Benefits (LOB) clauses: If the intermediate entity fails to meet minimum asset or expenditure thresholds, the treaty benefit is denied.
Substance over form: Under GAAR, authorities can recharacterise the transaction if the structure lacks economic justification.

Investors must be able to show business purpose and a documentation trail beyond mere incorporation. Treaties now offer benefits only when genuine control and management are present.

Pre-deal Internal Restructuring for Tax Efficiency

In many M&A deals, the real planning begins long before the deal hits the term sheet stage. Internal restructuring helps clean up books, realign business verticals, and unlock tax benefits.

Popular approaches include:

Hive-off of non-core business into a separate entity before sale.
Reclassification of equity and preference shares for long-term capital gain advantage.
Conversion of unsecured loans into equity or CCDs for better treatment.
Adjustment of intercompany pricing or contracts to minimise tax audit risks.

This is where a buyer’s team must review not just the SPA, but also resolutions, board documents, and ROC filings from 6–12 months earlier. That’s where the structuring usually begins.

Use of LLPs, Step-down SPVs, and Hybrid Cross-Holdings

Hybrid structures often allow acquirers to split tax exposure, optimise dividend flows, and even reduce indirect tax burden.

Examples include:

Acquisition through an LLP to benefit from pass-through taxation and avoid dividend distribution tax (DDT).
Use of step-down SPVs to route acquisitions in sectors where FDI norms require layered investment.
Establishing cross-holdings to enable internal dividend set-offs and minimise MAT.

While these are legally allowed, they must be justified in terms of business rationale. Without that, the entire structure may be vulnerable under GAAR provisions.

Advance Rulings & APAs: De-risking Transfer Pricing Issues

For cross-border M&A involving intra-group service arrangements, transfer pricing is often the Achilles’ heel. Many companies now use Advance Pricing Agreements (APA) or seek rulings under Authority for Advance Rulings (AAR) to ring-fence this risk.

Benefits include:

Upfront clarity on pricing method, margins, and tax exposure.
Binding treatment for 5 years (APA) or more.
Helps eliminate double taxation where group entities are involved.

For high-value acquisitions, particularly in technology and pharma sectors, this is increasingly becoming a must-have tool in the tax strategy playbook.

General Anti-Avoidance Rule (GAAR) – Strategic Threat or Compliance Trigger?

General Anti-Avoidance Rules (GAAR) give Indian tax authorities sweeping powers to disregard legal form and look into substance, especially where there’s any perceived attempt to create artificial tax benefits.

Some triggers that have drawn GAAR scrutiny:

Use of offshore vehicles to hold IP while maintaining control in India.
Circular funds transfers via group companies to show equity injection.
Unexplained step-up in valuation without corresponding commercial activity.

GAAR doesn’t automatically apply; it must be approved by a designated panel. But once it’s invoked, the burden shifts to the taxpayer to prove commercial rationale.

Table: Strategic Tools vs Tax Optimisation Objective

Strategic Tool	Primary Tax Objective	Risk Profile
Use of jurisdictions such as Singapore/Mauritius	Reduce capital gains tax on mergers	Medium–High (GAAR risk)
Step-down SPV	Sectoral FDI compliance, MAT efficiency	Low
LLP Structure	Avoid DDT, pass-through income	Medium
Internal Restructuring	Optimise M&A taxation in India and reporting	Low–Medium
APA / AAR	Transfer pricing certainty	Low
Cross-holdings	Tax shield via intercompany set-off	High (GAAR red flag)

Practical Challenges & Compliance Risks – Tax Implications of M&A

Timeline Mismatch Between Legal and Tax Closing

In many deals, especially those with multiple closing tranches, the legal closing (signing of documents and transfer of ownership) and tax closing (recording of entries, filings, disclosures) do not always align.

Risks that arise:

Tax liability arising before legal transfer of control.
Incorrect recognition of gain or loss due to accounting cutoff.
Buyer is inheriting tax liabilities due to delayed ROC filing or delayed FC-TRS reporting.

This mismatch is rarely accounted for in deal models, yet it often causes the most regulatory pain.

GST Valuation of Intangibles: Grey Zones and Disputes

Where a business transfer involves IP, brand, software, or data, there’s often little consensus on how to value these for GST purposes.

Common issues:

GST department challenges the value of invoices that do not match the valuation report.
Transfer of ‘business as a going concern’ is exempt, but only if documented.
In cases where IP and goodwill are transferred separately, GST is often levied on the entire consideration.

The GST impact on business acquisitions is particularly hard to standardise, making it a common source of post-deal disputes.

Importance of Post-Closing Tax Compliance Tracking

In large deals, especially where integration is phased, compliance tracking often slips through the cracks.

Best practices include:

Maintain a calendar of all post-closing filings – FC-GPR, ITC-02, 15CA/CB, PAN/TAN updates.
Appoint an internal SPOC to coordinate between tax, legal, and finance.
Quarterly review of tax schedules and disclosures during the integration period.
Validate application of set-offs and credits as per the plan.

In short, the tax due diligence in M&A is not the one done before signing; it’s the one that continues for 6–12 months post-closing.

Conclusion – Tax Implications of M&A

India’s M&A landscape offers exceptional opportunities, but tax can be a decisive factor in whether a deal adds or erodes value. Across all stages, from diligence to integration, legal and tax teams must work in close coordination.

There is no single “tax-safe” route. What works for one acquisition may not work for another. But certain truths are universal:

Start early. Tax structuring often begins months before due diligence.
Document everything. Claims without paperwork don’t hold up in an audit.
Post-deal tracking matters. The real tax risk starts after closing.
Don’t rely on templates. Each clause, be it on indemnity, escrow, or warranties, must reflect actual risk.

Today, tax authorities are more aggressive, better digitised, and often one step ahead. Hence, the intersection between tax implications of M&A and legal enforceability must not be treated as an afterthought; it should form the core of deal planning.

About Us

Corrida Legal is a boutique corporate & employment law firm serving as a strategic partner to businesses by helping them navigate transactions, fundraising-investor readiness, operational contracts, workforce management, data privacy, and disputes. The firm provides specialized and end-to-end corporate & employment law solutions, thereby eliminating the need for multiple law firm engagements. We are actively working on transactional drafting & advisory, operational & employment-related contracts, POSH, HR & data privacy-related compliances and audits, India-entry strategy & incorporation, statutory and labour law-related licenses, and registrations, and we defend our clients before all Indian courts to ensure seamless operations.

We keep our client’s future-ready by ensuring compliance with the upcoming Indian Labour codes on Wages, Industrial Relations, Social Security, Occupational Safety, Health, and Working Conditions – and the Digital Personal Data Protection Act, 2023. With offices across India including Gurgaon, Mumbai and Delhi coupled with global partnerships with international law firms in Dubai, Singapore, the United Kingdom, and the USA, we are the preferred law firm for India entry and international business setups. Reach out to us on LinkedIn or contact us at contact@corridalegal.com/+91-9211410147 in case you require any legal assistance. Visit our publications page for detailed articles on contemporary legal issues and updates.