The carry forward and set-off of accumulated business losses and unabsorbed depreciation under Sections 72A and 72AA of the Income Tax Act, 1961, have historically played a critical role in corporate restructuring and tax planning. However, the 2025 Union Budget introduces legislative amendments aimed at preventing indefinite loss carry-forward through successive amalgamations. These amendments introduce a structured framework for restricting the period over which such losses can be utilized, aligning them with the principles of Section 72 of the Act.

Legislative Framework of Sections 72A and 72AA

Section 72A governs the carry forward and set-off of accumulated losses and unabsorbed depreciation in cases of amalgamation, demerger, or restructuring of businesses. It enables the successor entity (amalgamated company) to inherit and utilize the tax benefits of the predecessor entity (amalgamating company), subject to stringent conditions on business continuity, operational integration, and ownership.

Section 72AA extends similar tax relief mechanisms to business reorganizations involving specific categories of entities, including those in the financial sector. It ensures the seamless transfer of tax attributes in business consolidations.

Prior to the proposed amendments, these provisions allowed companies undergoing successive amalgamations to perpetuate tax losses beyond the initially allowable period, contradicting the intent of limiting tax benefits to bona fide business reorganizations. 

Proposed Amendments in the 2025 Union Budget

1. Introduction of a Defined Temporal Limit on Loss Carry-Forward
   • Business losses and unabsorbed depreciation will be available for set-off only up to a maximum period of eight assessment years following the year in which they were first incurred by the “original predecessor entity.”
   • Any further business reorganization, merger, or acquisition will not reset the carry-forward clock for these tax attributes.
2. Definition and Identification of the ‘Original Predecessor Entity’
   • The amendments introduce the concept of the “original predecessor entity,” referring to the first entity in which the loss originated and was recognized under the Act.
   • The eight-year limitation will be computed from the initial assessment year in which the loss was first allowed to be carried forward, irrespective of subsequent business transfers or amalgamations.
3. Alignment with the Existing Provisions of Section 72
   • Section 72 already restricts the carry forward of business losses (excluding speculative losses) to eight years.
   • The amendments ensure uniformity by preventing companies from circumventing this limitation via successive restructuring events.
4. Effective Date and Transitional Provisions
   • The amendments will be applicable to amalgamations, demergers, and business reorganizations taking effect on or after April 1, 2025.
   • The legislative changes will be enforced from Assessment Year 2026-27, which necessitates companies to reassess their corporate restructuring strategies.
     

Tax and Financial Implications

Impact on Corporate Restructuring Transactions

Entities contemplating M&A transactions will need to revisit valuation models, as the restriction on loss carry-forward may alter post-merger tax synergies. The inability to roll forward tax attributes indefinitely may diminish the financial attractiveness of certain transactions.

Curtailment of ‘Evergreening’ of Tax Losses

The amendments prevent the strategic extension of tax benefits through consecutive mergers and restructurings, ensuring tax neutrality and alignment with the principles of reasonable tax deferral rather than indefinite postponement.

Compliance and Tax Administration Considerations

• The introduction of the ‘original predecessor entity’ requires companies to maintain extensive historical records of losses and depreciation schedules.
• Tax authorities may intensify scrutiny over M&A transactions to prevent potential tax arbitrage and enforce compliance with the new limitations.

Industry-Specific Impact

Industries that rely heavily on business restructuring, such as manufacturing, infrastructure, and financial services, will need to recalibrate their tax planning frameworks. Loss-making startups and capital-intensive businesses will be particularly affected, as they often depend on tax-efficient M&A transactions to optimize cash flows. 

Strategic Considerations for Corporations and Tax Advisors

Reevaluating M&A Valuation Models

Given the revised limitations, due diligence and financial modelling for mergers and acquisitions must integrate the time constraints on loss utilization. Companies should conduct scenario analyses to assess the real value of tax attributes post-merger.

Strengthening Documentation and Record-Keeping

Firms must enhance compliance frameworks to ensure seamless tracking of tax attributes across various business restructurings. Maintaining granular-level financial records will be essential to demonstrate the eligibility of loss set-offs under the revised framework.

Engaging with Tax Authorities for Interpretative Clarifications

Given the complex nature of these amendments, companies should proactively engage with tax advisors and authorities to clarify ambiguities, particularly in cases of multi-tiered corporate structures where loss attribution may be unclear. 

Conclusion

The proposed amendments to Sections 72A and 72AA mark a significant shift in India’s tax regime, reinforcing principles of tax fairness and ensuring that corporate tax benefits remain aligned with genuine business continuity rather than indefinite deferral strategies. By capping the carry-forward period for business losses at eight years from the original computation date, these changes aim to curb tax arbitrage through sequential M&A transactions.

For businesses, the new framework necessitates a strategic reassessment of restructuring transactions, enhanced tax compliance mechanisms, and a recalibration of financial projections. While these amendments may introduce near-term challenges, they ultimately contribute to a more transparent and predictable tax landscape, fostering greater fiscal discipline in corporate consolidations. Proactive engagement with tax professionals and regulatory bodies will be essential for businesses to navigate these evolving tax provisions effectively.