The government has withdrawn the tax exemption enjoyed by corporates receiving non-compete payments from the acquirer of their business in a merger and acquisition (M&A) deal. Non-compete payments are sums received in cash or kind under an agreement for not carrying out any activity in relation to a business.
The Finance Bill 2002 has amended Section 28 of the Income-Tax Act and plugged the loophole which hitherto allowed corporates to treat amounts realised as non-compete payments as capital receipt and be exempted from paying tax.
Mukesh Butani, partner, Arthur Andersen, said non-compete payments received by companies were open to interpretation as a capital receipt or a fixed-revenue receipt. There are instances where companies have deemed such payments as capital receipts which, by their very nature, are non-taxable.
