Tax experts and industry voices have raised serious concerns over the Income Tax Bill, 2025, saying the proposed law excludes fast-track demergers from tax-neutral treatment, contradicting the government's aim of promoting ease of doing business and encouraging corporate restructuring.
While the draft Bill includes fast-track mergers under Section 233 of the Companies Act, 2013, within the scope of "amalgamation," it excludes fast-track demergers, thereby creating a disparity in tax treatment that could severely impact startups, MSMEs, and closely held companies.
Under the current Income Tax Act, 1961, many fast-track demergers have benefited from capital gains exemptions through broader interpretations. However, the draft IT Bill limits tax neutrality only to demergers approved under Sections 230 to 232 of the Companies Act, which require NCLT approval, effectively excluding those under Section 233, which are non-court-monitored and handled by regional directors.
"This exclusion introduces a significant tax burden on small companies using the fast-track route," said a tax expert, arguing that it undermines a mechanism meant to simplify restructurings and adds friction to India's business environment.
The Ministry of Finance, in its submission to the Finance Select Committee, defended the exclusion citing concerns over lack of judicial oversight and potential valuation manipulations in such transactions. However, experts counter that these concerns can be addressed through regulatory checks rather than an outright denial of capital gains exemption.
"Denying tax neutrality across the board will push companies back into the time-consuming tribunal process, creating unnecessary compliance and cost hurdles, especially for intra-group restructurings," another expert warned.
The issue is particularly worrying for startups and MSMEs, which depend on fast-track demergers for cost-effective and time-efficient restructuring, especially during growth phases or while pivoting business models.
"The exclusion ignores the spirit of the Companies Act reforms and contradicts India's commitment to ease of doing business," an industry analyst said.
The BJP MP Baijayant Panda-led finance select committee submitted its report on the draft Bill to the Lok Sabha on July 16, along with 285 recommendations. Experts hope that the government will revise the provisions to allow tax-neutral treatment for fast-track demergers, aligning tax law with company law and avoiding unnecessary tax burdens on genuine business restructurings.
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