Navigating Tax Liabilities and Regulatory Disclosures in Tech M&A

India’s Information Technology (IT) sector is a global leader, contributing 7.5% to GDP in 2024, with mergers and acquisitions (M&A) projected to surpass $10 billion annually by 2026. Software-as-a-Service (SaaS), cybersecurity, and Artificial Intelligence/Machine Learning (AI/ML) platforms drive this consolidation as firms seek scale, talent, and innovation. However, tax liabilities and regulatory disclosures are pivotal to IT M&A success, directly impacting deal value, legal risks, and compliance. Mishandling tax liabilities can erode financial outcomes, while incomplete regulatory disclosures may trigger penalties from authorities like the Securities and Exchange Board of India (SEBI) or the Competition Commission of India (CCI). This article equips CXOs, CFOs, Legal Counsels, and Strategy Heads with actionable strategies to navigate these complexities in India’s dynamic IT M&A landscape.

Key Tax Liabilities in IT M&A Transactions

Managing tax liabilities is critical to structuring IT M&A deals effectively. Key considerations include:

• Capital Gains Taxation: Share transfers trigger capital gains tax, with Indian residents facing 20% (with indexation for long-term gains) and non-residents navigating 10–40% rates, often mitigated by Double Taxation Avoidance Agreements (DTAAs). Indirect transfer provisions further complicate tax liabilities for foreign entities.
• Asset Purchases vs. Share Deals: Asset purchases incur Goods and Services Tax (GST) or Value Added Tax (VAT) and stamp duty, while share deals focus on capital gains but require scrutiny of underlying tax liabilities. Each structure impacts depreciation and loss carryforwards differently.
• GST/VAT on Business Assets: Transferring assets like software licenses or hardware attracts 18% GST. Structuring as a “going concern” can exempt certain tax liabilities, but missteps increase costs.
• Withholding Tax in Cross-Border Deals: Payments to non-residents (e.g., royalties or technical fees) require withholding tax under Section 195 of the Income Tax Act (10–20%). Non-compliance inflates tax liabilities and risks penalties.

Proactive planning ensures tax liabilities are identified and optimised early.

1. Regulatory Disclosures – What Tech Firms Must Report

Comprehensive regulatory disclosures ensure compliance and transparency in IT M&A, preventing legal risks:

• SEBIGuidelines: Listed tech firms must disclose material M&A events under SEBI’s Listing Obligations and Disclosure Requirements (LODR), including board approvals, deal terms, and shareholder memorandums, to protect investor interests.
• FEMA/FDI Compliance: Cross-border deals require adherence to the Foreign Exchange Management Act (FEMA), including reporting to the Reserve Bank of India (RBI) within 30 days for share allotments or transfers, ensuring compliance with FDI policies.
• CCI Thresholds: Deals exceeding CCI thresholds (e.g., ₹2,000 crore in assets or ₹6,000 crore in turnover) mandate pre-merger filings to assess anti-competitive impacts. Timely regulatory disclosures expedite approvals.
• Data Protection and IT Act: SaaS and cloud firms must disclose data handling practices under the Information Technology Act, 2000, and the Digital Personal Data Protection (DPDP) Act, 2023–25, to avoid fines up to ₹250 crore.

Robust regulatory disclosures build trust and mitigate legal risks.

2. Legal and Compliance Risks in Tech M&A

Mishandling tax liabilities and regulatory disclosures exposes firms to significant legal risks:

• Inadequate IP Documentation: Unclear IP ownership (e.g., software or patents) can trigger disputes and inflate tax liabilities during transfers. Thorough IP audits are essential.
• Undisclosed Liabilities: Failing to disclose pending litigation, tax dues, or contingent liabilities (e.g., warranty claims) risks post-acquisition financial shocks and legal recourse.
• Data Protection Misalignment: Non-compliance with the DPDP Act, particularly for data-centric firms, can lead to penalties and reputational damage, amplifying legal risks.
• Multi-Jurisdiction Challenges: Cross-border contracts, employee stock option plans (ESOPs), and Special Economic Zone (SEZ) tax holiday claims require careful structuring to avoid tax liabilities and legal risks.

Proactive compliance is critical to safeguard deals.

3. Strategic Approaches to Mitigating Tax Liabilities

Strategic planning minimises tax liabilities and enhances deal value:

• Early Tax Due Diligence: Scrutinise historical tax filings, indirect tax exposures (e.g., GST, service tax), and transfer pricing compliance. This uncovers hidden tax liabilities and informs valuation adjustments.
• Tax-Efficient Structures: Use slump sales, demergers, or reverse mergers to optimise capital gains and GST implications, reducing tax liabilities compared to asset sales.
• Post-Deal Tax Optimisation: Leverage loss carryforwards, Minimum Alternate Tax (MAT) credits, or depreciation resets to lower future tax liabilities, maximising financial benefits.

These strategies ensure tax liabilities are managed effectively.

4. Best Practices in Regulatory Disclosures

Effective regulatory disclosures streamline IT M&A and reduce legal risks:

• Robust Data Rooms: Prepare detailed data rooms with tax assessments, compliance reports (including ESG, if needed), board resolutions, and shareholder agreements. These documents support efficient due diligence.
• Engage External Advisors: Bring in legal, tax, and valuation experts early. Their input ensures accurate regulatory disclosures and helps meet SEBI, RBI, and CCI requirements.
• Watertight Filings: Complete director disclosures, shareholder approvals, and ROC filings on time. This avoids penalties and confirms the legal validity of transactions.

These practices enhance transparency and expedite deal closure.

Illustrative Case Example

An Indian SaaS company acquired a Singapore-based DevOps platform for $50 million. Advisors structured the deal through a step-down subsidiary, leveraging the India-Singapore DTAA to optimise tax liabilities. Comprehensive regulatory disclosures with the RBI and Singapore’s Accounting and Corporate Regulatory Authority (ACRA) ensured compliance, while due diligence resolved unreported GST issues pre-closing. This approach minimised legal risks, reduced tax liabilities, and accelerated FDI approvals by 30%.

Conclusion – Building Resilient M&A Strategies

Accurate handling of tax liabilities and regulatory disclosures is essential for successful IT M&A. Early due diligence helps identify potential risks. Tax-efficient deal structures reduce financial exposure. Clear and timely regulatory disclosures ensure compliance. Together, these actions help mitigate legal risks and increase deal value. Aligning legal, financial, and strategic efforts is key. With support from expert advisors like LawCrust, IT leaders can build resilient M&A strategies. This proactive approach drives growth and strengthens competitive advantage in India’s fast-evolving tech sector.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

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