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IBBI boosts real estate sector resolutions amid tax challenges

IBBI boosts real estate sector resolutions amid tax challenges

by Vishal Lohia, Associate Partner and Meet Mehta, Principal, Dhruva Advisors

The Insolvency and Bankruptcy Board of India (IBBI) has been consistently making efforts for the swifter and faster resolutions of Insolvency and Bankruptcy cases under the Insolvency and Bankruptcy Code, 2016 (IBC).

In line with its objectives and with a view to boost the real estate sector, the IBBI has recently introduced a host of amendments to its Corporate Insolvency Resolution Process (CIRP) for real estate sector – this inter-alia includes permitting the Committee of Creditors (CoC) to invite separate resolution plans for each real estate project.

Prior to the amendment, the IBBI regulations provided for a single resolution plan for all the real estate projects of the corporate debtor, ie, the CIRP is initiated against the entire company. This was counter-productive as other solvent projects also got stalled. Additionally, the CIRP against the entire company resulted in lesser interest from the resolution applicants as it entails huge capitaloutflow, and the applicants were not interested in all projects but only specific projects.

The amendment should not only encourage more participation from various resolution applicants who will get to choose the projects based on risk appetite but will also yield better value than a single bidder for the entire company.

In addition to the above, the recent amendments have also mandated that the resolution professional should operate separate bank accounts for each real estate project. This will prove to be beneficial to ensure financial transparency, accountability and for streamlining the CIRP during project wise insolvency.

These changes are in line with the guidelines issued by Real Estate Regulatory Authority (RERA). Even under RERA guidelines, each real estate is registered and monitored as a separate unit.

In the event where separate resolution plan for each project are invited, it may necessitate segregation of projects through restructuring modes such as demerger, business transfer, itemized sale. Also, the resolution plan to be submitted to the National Company Law Tribunal may include provisions for restructuring the debt (involving actions such as write-back of loans/ interest).

Re-organisations as well as restructuring of liabilities would entail tax implications. Some of the key implications and their nuances have been discussed in the ensuing paragraphs.

For instance, demerger under the income-tax provisions may be tax neutral subject to conditions which inter-alia include that the demerger of the undertaking should be on a going concern basis. One would have to evaluate whether demerger of a single project which is already in a stressed stage can be said to be transfer of an undertaking on a going concern basis.

Alternatively, one may consider slump sale or itemized sale which may entail certain tax implications in the hands of the corporate debtor. One should also be mindful of the fair market value norms under the income-tax provisions – as per the said provisions, where undertaking/ land/ building is transferred for a value less than the fair market value (to be determined in a prescribed manner), the difference between the fair market value and the actual consideration may be taxedin the hands of the transferor as well as the recipient. Also, in case of itemized sale, the same would be subject to certain GST implications.

As mentioned above, the resolution plan typically would involve waiver of loans and liabilities of the corporate debtor as a part of the resolution plan. While waiver of interest and trading liabilities which was claimed as a deduction in the past would be taxed in the hands of the corporate debtor on waiver, the taxability of waiver of principal amount of loan not claimed as a deduction in the past is a vexed issue. Additionally, with recent amendments in the income-tax provisions – the waiver of loan and interest may also be subject to withholding tax provisions requiring the creditor to deduct necessary taxes. The debtors which continue to be governed by the old tax regime shall take into consideration the impact of the aforesaid corporate actions under the Minimum Alternate Tax (MAT). While waiver of interest and trading liabilities would be subject to MAT, the taxability under MAT on waiver of principal amount of loan is a vexed issue.

Further, as part of resolution plan, the resulting entity (ie, post demerger) housing the insolvent project may be sold to prospective buyers. In such situations, certain deeming provisions relating to the transfer/acquisition price, continuation of business losses would also be relevant, the same has been discussed below:

The income-tax provisions provide for fair value taxation in case of transfer/ acquisition of shares of a company at less than the FMV of such shares computed in prescribed manner. In case of distressed assets and companies, the share sale/acquisition is likely to be below FMV. This could lead to tax implications both for the transferor and transferee. While the Government has an enabling power to exempt certain classes of persons; to date no notification has been issued.

In case of a closely held company, carry-forward/ set-off of losses is allowed only if beneficial owner of shares carrying at least 51% voting power continue. In case of a company seeking insolvency resolution, the ownership is likely to change, thus leading to a lapse of the existing losses. Towards this end, an exemption from this provision has been provided to a company where the resolution plan is approved under the IBC after affording opportunity to specified tax authorities.

Also, where the entity housing the insolvent project is being transferred to the prospective buyer, the income-tax provisions provide power to the tax authorities to disregard the transfer and treat such transfer as void unless a no-objection certificate is obtained from the tax department to proceed with the transfer.

While IBBI has definitely given a much-needed boost to the real estate sector and can lead to faster resolution of stalled projects and also reducing uncertainties for homebuyers, the corporate actions to achieve the said objective may entail various tax implications that the corporate debtor, creditor and the investor should be aware of and take into account prior to implementation -   Vishal Lohia, Associate Partner and Meet Mehta, Principal, Dhruva Advisors


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