I-T LENS ON BUYOUTS OF UNLISTED FOREIGN FIRMS

Acquisition of unlisted foreign companies by Indian corporate has come under the scanner of income tax authorities who plan to scrutinize the deals to ensure they are not being structured to evade tax. Deals involving equity swaps are particularly in focus, as these could be used to transfer part-ownership of Indian companies to overseas jurisdictions. Valuation of unlisted entities in many countries is an unregulated area as no public interest is involved. This allows acquisition of unlisted foreign companies at inflated valuations. As a result, a large amount of cash or ownership of Indian company moves to a foreign entity and essentially amounts to asset-stripping of the domestic firm, which could have tax implications. The fundamental objective behind the department's proposal is to prevent tax evasion by domestic entities, as they may not declare actual profit or gain through these transactions.