M&A costs to go up after Budget 2021 axes tax depreciation on goodwill

 The amendments on goodwill are retrospective as depreciation on any past goodwill, partly claimed in the past, would not be available going forward

The merger and acquisitions (M&A) transactions are set to become costlier after the Budget announced on Monday proposed that goodwill (including existing goodwill) will not be eligible for tax depreciation.
The amendments on goodwill are retrospective as depreciation on any past goodwill, partly claimed in the past, would not be available going forward. Therefore, while the amendment is prospective, it would adversely impact any goodwill created before March 31, 2021, say tax experts. The amendment is retrospective from April 1, 1998 and will also impact internal corporate restructuring where goodwill was claimed. ‘’This may lead to more litigation,” said a top tax expert.
Several M&A transactions signed in the past, including Hindustan Unilever’s acquisition of Horlicks in December 2018 from GlaxoSmithKline PLC, had claimed high goodwill as depreciation and will now be impacted by this amendment as, tax experts said, goodwill claims are still pending of the previous years. Unilever had expected around 1.3 billion euros of the goodwill to be deductible for tax purposes from the Horlicks deal.
"Depreciation is allowable on intangible assets, and there are judicial precedents to the effect that depreciation is allowed on goodwill, arising as result of an acquisition and/ or merger. The amendment seeks to nullify this position, and will impact the economics of M&A, especially in relation to those transactions where intangibles are the predominant chunk of the acquisition price; the ability of the seller to negotiate with the buyer to share the benefit of the tax break will be impacted," said Ketan Dalal, managing partner of tax advisory firm, Katalyst.
The amendment is to be effective from FY 20-21 itself and also applies also to earlier acquisitions, and the consequent goodwill related to such earlier transactions. "'In that sense, the amendment is retroactive, and one wishes that this is reconsidered and existing positions are grandfathered," he said.

Budget 2021