Air India-Indian merger may cost Rs 300 crores

The proposed mega merger of Air India and Indian would turn into a costly affair — with an estimated bill of Rs 300 crore — if the government does not provide tax breaks for the big fat wedding in the air. The merged entity would face an additional tax liability of Rs 256 crore in terms of unabsorbed depreciation and losses not carried forward. The unabsorbed depreciation works out to Rs 740 crore in the case of Indian while Air-India’s balance sheet has unabsorbed depreciation to the extent of Rs 20 crore. In addition, stamp duty would add to the cost of merger since both AI and Indian have properties located across metros, according to highly-placed government sources. The merger will result in creation of Asia’s largest airline in terms of fleet size. The estimated cost of merging the airline is around Rs 300 crore and the final figure would vary on the basis of the route adopted for bringing the two government airlines together.

In the case of unabsorbed depreciation and losses not carried forward, the estimated additional tax burden has been calculated on the basis of the current rate of corporation tax which works out to 33.66%. The Committee of Secretaries (CoS) which vetted the merger proposal has recommended that waiver should be granted in the case stamp duty and the merged entity should be allowed to set off future profits against unabsorbed depreciation and losses carried forward. The civil aviation ministry had earlier sought amendment to Section 72 of the Income-Tax Act to carry forward tax losses and unabsorbed depreciation. The final decision on tax breaks is expected to be firmed up by the empowered group of ministers (eGOM) — headed by external affairs minister Pranab Mukherjee — which is looking into the merger. Finance minister P Chidambaram is a member of the committee. The current feeling within some segments of the government is that the tax breaks should be specific only to Air-India and Indian since both are government-owned companies.

In other words, these concessions would not be applicable to other mergers & acquisitions (M&A) among airline companies. The CoS, on the other hand, feels that the benefit should be available to other airlines too. Either way, the government has to amend Section 72 of the IT Act if the cost of merger between Air-India and Indian has to be kept down. The only other option available is to go for a holding company into which both airlines would be merged. The idea of a holding firm was also discussed by the CoS from the tax perspective but the plan was dropped since it has not found support from several sections within the government. This option would be taken up only if the finance ministry does not agree to amendment of Section 72 of the IT Act, the sources said. The holding company concept envisages A-I and Indian working as two individual companies under a common ownership without actually getting merged into one company.

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