The Ministry of Finance (MoF) has rejected a key recommendation from the Ministry of Corporate Affairs (MCA) seeking tax exemption for loan waivers granted under resolution plans approved through the Insolvency and Bankruptcy Code (IBC).
This disagreement between two departments headed by Union Finance Minister Nirmala Sitharaman is laid bare in the Select Committee report on the Income Tax Bill, 2025, tabled in Parliament on July 21. The MCA had urged the Committee to consider exempting such waivers from being classified as taxable income, arguing that taxing them undermines the very objective of corporate revival under the IBC.
MCA's Case: Taxing Waivers Defeats IBC's Purpose
At the April 17 committee hearing, the Secretary of the MCA emphasized that treating loan waivers as income especially for financially stressed entities, runs counter to the IBC's objective of enabling distressed businesses to recover and function as going concerns. The MCA cited the Supreme Court's 2018 ruling in Mahindra & Mahindra, which earlier held that such waivers were not taxable, before later amendments reversed that position.
"The waiver of loan should not be considered as income subject to tax because it negatively impacts the purpose behind the IBC," the MCA stated.
The ministry highlighted that prior to 2023, waivers were not treated as taxable receipts, and warned that the inclusion of such provisions in the IT Bill, 2025 could deter resolution applicants.
Finance Ministry's Stand: No Exemption, Relief Already Provided
The MoF, however, declined to accommodate the suggestion, calling it a policy change beyond the scope of the current tax bill. It pointed out that relief already exists under Section 79 of the Income Tax Act, which allows carry forward of losses even when there is a change in shareholding, thus offering resolution applicants some benefit.
"Companies undergoing CIRP generally have large accumulated losses that can offset income from loan waivers," the MoF said.
The Ministry also referenced Ind AS 109, which requires waived loan amounts to be shown as profit in the Profit and Loss Account, and cited judicial precedents including:
- Solid Containers Ltd. v. Dy. CIT (2009, Bombay HC)
- Logitronics (P.) Ltd. v. CIT (2011, Delhi HC)
- Rollatainers Ltd. v. CIT (2011, Delhi HC)
These rulings held that loan waivers are taxable income, particularly when part of a one-time settlement.
Industry Disappointed by Missed Opportunity
The decision has disappointed tax experts and insolvency professionals, who note that the MCA's proposal was aligned with long-standing industry demands. Many believe the tax burden on waived loans could reduce the attractiveness of distressed asset deals and ultimately hurt both resolution applicants and banks expecting higher recoveries.
"If the funds from waivers are taxed, it means fewer resources for company revival and possibly reduced returns for creditors," a leading tax consultant stated.
The current law reinforced under the proposed IT Bill, requires gains from such waivers to be taxed under Sections 28(iv) and 41(1), unless offset by prior losses. This can inflate the cost of acquiring a distressed business, leading some applicants to walk away from viable revival opportunities.
Larger Implications for IBC's Future
The divergence is particularly significant because the IBC framework was co-developed by both the MoF and MCA as a flagship reform for tackling non-performing assets. While the MCA advocates for further refinements to enhance the IBC's effectiveness, the MoF appears more cautious, prioritizing revenue protection and preventing what it sees as "unjust enrichment."
Industry insiders warn that unless the final version of the Income Tax Bill, 2025 is amended during the legislative process, the continued tax treatment of IBC-related waivers may undermine the financial viability of resolution plans - the very cornerstone of India's insolvency regime.
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