Government collecting tax exemption on share transactions after mergers and acquisitions

For that, the 'Medium Level Taxpayer's Office' under the Internal Revenue Department has written to Nepal Stock Exchange, CDS and Clearing and asked for the share transaction details of the companies involved in the merger and acquisition process.

'The purpose of direct tax collection is not stated in the letter, but in the discussion with the revenue office staff, they said that they asked for the details of the merger and acquisition of the company designated for the purpose of tax collection. It is not possible to distinguish which is the new and which is the old company because of the name. But the revenue officers argue that they are not the interpretation body of the Act but only the enforcement body.'

Section 47 'A' of the Income Tax Act 058 has a special provision related to deductions due to business mergers. In sub-section 4 of the same section, it is said, 'If the shareholders remaining in the demerged entity dispose of their shares within two years of the demerger, the profit received from the demerged shares will not be subject to capital gains tax.'' Also, the stock broker companies have been giving tax exemption to all the shareholders of the organizations formed after the merger and acquisition for two years after the merger.

But now only the shareholders of the company that will be merged in the merger and acquisition process by the tax office will get tax exemption. The tax office is on the verge of collecting tax from those shareholders saying that the shareholders of the organization that will be maintained after the merger and acquisition will not get tax exemption. Suppose 'A' and 'B' organizations merged with each other and started operating under the same name as 'A'. In such a case 'B' is a company merged with 'A'. Therefore, the shareholders of 'B' company get capital gains tax exemption for two years. However, the argument of the tax office is that the shareholders of 'A' company should not get tax exemption.

Tax system experts say that initially when the law was made in the financial year 076/77, they did not make a clear law, but now the shareholders cannot be told about the tax. They said that after the technical problems regarding the implementation of Section 47 'A' of the Income Tax Act at that time, it was further explained through the Income Tax Guidelines, and since it was arranged that the shareholders of both organizations will not be taxed for two years in mergers and acquisitions, they say that now they cannot say about the tax again.

When this arrangement came, there was a technical problem. To solve it, it was stated in the income tax guidelines that the shareholders of both the merging and acquiring organizations will not be taxed. But the provisions of the Act (law) were not enforced. After that, according to the guidelines, the shareholders of both organizations were not taxed," says Chartered Accountant Bhavnath Dahal, "In the guidelines, it has been made clear that no tax will be charged for two years after the merger with the examples of Kavre Bank and Kaski Bank. According to Dahal, since it is an international practice to remove obstacles or complications in the

act through guidelines, now the state should not cheat the tax payers by collecting taxes contrary to the provisions of the guidelines. 'Taxpayers are hens that lay golden eggs, they should not be killed and eaten,' he adds, 'We cannot deceive the tax authorities by saying that there is no tax in the directory.'

Section 47 'A' of the Income Tax Act states, If the remaining shareholders sell their shares within two years of the merger, the capital gains tax will not be charged on the profit on the shares sold.'' However, the same shareholder can be in both entities. Dahal said that if such shareholders sold shares after the merger, it was difficult to distinguish which one was sold, and it was explained through the directory.

'This is like if you first mix water with milk and then separate milk and water, which cannot be separated,' he added, 'In such a situation, the problem of how to tax came, to solve this problem, the department decided not to tax both organizations. Through the directive, it was said that the shareholders of both organizations would be exempted. This problem was more for the shareholders who had shares in both companies before the merger.'

Umeshraj Pandey, a chartered accountant, says that due to the lack of clear laws in the past, millions of investors are trapped now. "In the beginning, it was decided that 'A' and 'B' would become 'C' organization, and section 47 'A' of the Act was drafted. Later, the National Bank saw a technical problem when canceling the two institutions that went into the merger and creating a third one, then it started to merge 'A' with 'B'. But the language of 47A was not amended," he says, "Banks and financial institutions were also exempted according to 47A. The bank also did mergers and acquisitions by believing what the National Bank said without carefully studying the law.'

In the beginning the law was right. But Pandey said that because the sub-sections of the law were not amended according to the manner in which the merger was done, now the problem is starting to appear. Investors are getting trapped due to the weakness of the law. If the National Bank had changed the language of the sub-section at that time, nothing could have been done," he says.

Last February, Babarmahal, a medium-level taxpayer office, wrote to the Nepal Stock Exchange (NEPSE) and CDSC, asking for details regarding the sale of shares and capital gains tax within two years of the merger by the shareholders who remained on the date of merger in fiscal year 076/77 or earlier. "In 076/77 or earlier, among the existing shareholders on the date of the merger of the various entities, the existing shareholders of the merging entity are requested to provide the details related to the sale of shares and capital gains tax within two years from the date of the merger," the letter said.

The letter states that after the date of the merger of those entities and the start of integrated business, the shareholders of the said bank and financial institution must provide the details of the shares sold within two years from the date of the merger, in the prescribed format. Tax Office Global IME & Janata Bank, NRN Ramarosan & Creative Microfinance, Prime & Kankai, NMB & Om Development Bank, Sign, Resunga, Poornima & Bhargava, Tanahun Mission & Nepal Community Development Bank, Wami & Nagarik Microfinance Financial Institution, Sarathi & Satyavati Business details of microfinance financial institutions and others are requested.

Purna Prasad Acharya, the chief executive officer of CDSC, accepted the letter from the tax office demanding tax transactions after mergers and acquisitions. In the letter, the details of how much tax exemption was received by the shareholders of Global IME and Janata Bank were requested. After the merger, the shareholders of Janata Bank cease to exist. We replied that it will not be separated as all the transactions are done under Global's name,' said Acharya, 'Then we were asked to send whatever details are available. After that, we have sent the details (transaction amount and number) of the transactions made under the new name after the merger. There is all a mix-up. Therefore, the tax office should not understand that the details we sent are all people who do not pay tax.'

The Accountant General's Office wrote to Beruju saying that the tax exemption given in mergers and acquisitions should be recovered. In the annual report of the General Accountant, looking at the details of only one financial year and only one company, Rs. Section 47A of the Income Tax Act 058 has a special provision regarding exemptions due to business mergers. Because of the word "merger" in its sub-section, it seems that the tax is exempted only to the one who is merged, but not to the merger. The office claims that Beruju was fired based on the same explanation. As soon as the annual report was wrongly mentioned, the Accounts General sent a letter to the concerned agency asking them to recover it. Then the tax office process is asking for such details.