Section 233 of the Companies Act, 2013 ("the Act") provides an alternative to the NCLT scheme route for certain classes of companies. The fast-track route is approved by the Regional Director, and it is faster and less expensive than the NCLT process. But the fast-track route has a tax problem: the Income-tax Act's definition of demerger does not expressly recognise the Section 233 route, and the tax neutrality of a fast-track demerger is uncertain.
The Eligibility and Procedure
The fast-track route is available to small companies, start-up companies, and holding companies merging with their wholly owned subsidiaries. The 2025 amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 expanded the eligibility to include mergers between unlisted companies with aggregate outstanding loans, debentures, or deposits not exceeding two hundred crore rupees, and mergers between a foreign holding company and its Indian wholly owned subsidiary.
The procedure requires the companies to issue notices to the ROC and the Official Liquidator inviting objections, file a declaration of solvency, and obtain the consent of at least ninety per cent of shareholders and ninety per cent in value of creditors. If no objections are raised, the Regional Director may approve the scheme directly or refer it to the NCLT.
The Tax Neutrality Problem
Section 2(19AA) of the Income-tax Act defines a demerger by reference to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, and the corresponding provisions of the 2013 Act. The corresponding provisions are Sections 230 to 232, not Section 233. A fast-track demerger is a scheme under Section 233, and it is not a scheme under Sections 230 to 232. The Income-tax Act does not expressly extend tax neutrality to a fast-track demerger.
The consequence is that a fast-track demerger may be treated as a taxable transfer. The demerged company may be liable to capital gains tax on the transfer of the undertaking, and the resulting company may be liable to tax on the receipt of the assets. The tax cost can be significant, and it can outweigh the procedural savings of the fast-track route.
The Strategic Choice
A company that is considering a demerger must weigh the procedural savings of the fast-track route against the tax risk. Where the demerger is small and the tax cost is manageable, the fast-track route may be appropriate. Where the demerger involves a substantial undertaking and the tax cost is material, the NCLT route is the safer choice.
A tax-neutral demerger requires a scheme that satisfies every condition of Section 2(19AA), and the scheme must be under Sections 230 to 232. The fast-track route is not a substitute for the NCLT route where tax neutrality is the objective.
Call to Action
Anuj Desai & Associates advises companies on the choice between the fast-track demerger route and the NCLT route—from the eligibility analysis and the procedural design to the tax neutrality assessment and the structuring of the scheme. If you are planning a demerger, we can help you evaluate the tax risk before you commit to a route.
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