Lens on Goodwill Tax: Last 5 years M&A Deals Likely to be Reviewed

A number of merger and acquisition transactions over the last five years may have to be re-examined following changes to tax treatment of goodwill.

The Central Board of Direct Taxes on Thursday notified a mechanism for computation of short-term capital gains and written down value where depreciation on goodwill has been taken. Companies where typically the goodwill has not been substantially depreciated by April 2020, will need to immediately quantify their tax impact, tax experts said.

“If goodwill carrying tax value is higher than carrying tax value of the intangible asset block (comprising goodwill), the same will result in short-term capital gains tax pursuant to goodwill-related adjustment required to such block as per the new rules,” said Amrish Shah, partner at Deloitte India.

Transactions done in the past five years in sectors such as pharma, life sciences, startups lining for IPO would have to closely evaluate the financial impact of this amendment, said Aravind Srivatsan, partner at Nangia Andersen LLP.

“The impact for such corporates is that now short-term capital gain taxes need to be computed and be paid before filing of return of income for FY2020-21. Further, corporates who have not elected for the lower tax rate regime should also closely evaluate the financial impact of this rule change,” Srivatsan said.

The Finance Act, 2021 had amended that goodwill will no more be regarded as an intangible asset and depreciation would be not be available from April 2020. Under income tax, goodwill will have to be removed from the block of asset and such value to be reduced will be cost of goodwill, net of depreciation claimed till date.

The Board introduced a new rule which provides for a computation mechanism to tax the impact of removal of cost of goodwill net depreciation when goodwill if removed from a block of assets, deeming it as a transfer.

In a notification issued on Thursday, the Board said where the value of net goodwill removed from the block is in excess of the opening written down value as on April 1, 2020. The excess will now be offered to tax as short-term capital gains. S-ET

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