Expanding the Door, Narrowing the Gate: Fast-Track Mergers and the Tax Attribute Problem

The Income-tax Act, 1961, as amended by the Finance Act, 2025, restricted the carry-forward of accumulated losses under Sections 72-A and 72-AA to eight assessment years from when the losses were first computed by the original predecessor entity.

On 1 April 2026, two reforms took simultaneous effect that were designed to make intra-group restructuring faster and more accessible. The Ministry of Corporate Affairs (MCA) had, in September 2025, notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025 (Amendment Rules), substantially expanding the class of companies eligible to merge through the fast-track route under Section 233, Companies Act, 2013 (2013 Act).

For the first time, unlisted companies with borrowings below Rs 200 crores, listed holding companies merging with unlisted subsidiaries, and fellow subsidiaries of the same holding company could bypass the National Company Law Tribunal (NCLT) and seek approval directly from a Regional Director (RD). The policy ambition was clear, viz. to reduce the 9—12-month queue at the NCLT and make intra-group restructuring accessible, genuinely.

The door which the MCA expanded has not, however, been accommodated by the tax code. The Income-tax Act, 1961 (IT Act, 1961), as amended by the Finance Act, 2025, restricted the carry-forward of accumulated losses under Sections 72-A and 72-AA to eight assessment years from when the losses were first computed by the original predecessor entity. Those amendments have now taken effect from 1 April 2026 under the Income-tax Act, 2025 (IT Act, 2025), which replaces the IT Act, 1961 as the governing statute from that date. The Finance Act, 2026, passed by Parliament on 30 March 2026, does not disturb these provisions. The mismatch between the expanded Section 233 universe and the tightened carry-forward regime is therefore not a transitional problem but rather a structural one, which is now baked into the new Act.

When read in isolation, the carry-forward cap is a sensible anti-avoidance measure. But when it is read alongside the dramatically expanded Section 233 universe, it creates that structural problem. How? The very companies that the Amended Rules have newly invited into the fast-track route are often the ones whose tax attributes the amended framework now makes least valuable. This piece examines that mismatch, argues that it partially undermines the reform’s stated purpose, and finally proposes a targeted fix.

The fast-track route and its newly expanded traffic

Section 233 of the 2013 Act, read with Rule 25, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, creates an alternative to the court-supervised merger process under Sections 230—232. Instead of nudging the NCLT, eligible companies obtain Board approval, notify regulators, hold meetings of members and creditors, and file a declaration of solvency with the RD. If no objection is received within the prescribed period, the scheme is deemed approved. The attraction is speed, where an NCLT-supervised merger can take 9—12 months or more, the RD route has a statutory outer limit of 60 days.

Before the Amended Rules, eligibility was confined to small companies, holding companies merging with wholly-owned subsidiaries, start-ups, and, from September 2024, foreign holding companies merging with their Indian wholly-owned subsidiaries (the reverse-flip route). The Amended Rules¹ added three materially new categories:

1. unlisted companies below the Rs 200 crores borrowing threshold,

2. holding companies (including listed ones) merging with their unlisted subsidiaries,

3. fellow subsidiaries of the same holding company, provided the transferor is unlisted.

The filing deadline was extended from 7 to 15 days, and a new Form CAA-10A, requiring an auditor’s certificate of solvency, was introduced.

The practical significance is considerable. Most intra-group consolidations involve precisely these categories — an unlisted operating subsidiary merging upward into a holding company, or two unlisted group entities combining to rationalise structure. These were previously forced through the NCLT, often waiting over a year for a Bench date even when no creditor or shareholder opposition existed. The Amended Rules answer a long-standing industry demand.

The Finance Act, 2025 and the tax attribute problem

The same Union Budget 2025-2026 that signalled Section 233 expansion also introduced amendments to Sections 72-A and 72-AA, IT Act, 1961², which govern the carry-forward of accumulated business losses and unabsorbed depreciation in an amalgamation. Under the pre-amendment framework, a successor entity inherited those losses and obtained a fresh eight-year carry-forward window running from the year of amalgamation. This meant that successive mergers could perpetually reset the clock, allowing accumulated losses to be sheltered far beyond what Section 72, IT Act, 1961 would permit in the ordinary course.

The Finance Act, 2025 addressed this by inserting Section 72-A(6-B) into the IT Act, 1961. For any amalgamation effected on or after 1 April 2025, the successor entity can only carry-forward inherited losses for the period remaining within the original eight-year window calculated from when those losses were first computed for the original predecessor entity. No fresh clock is granted. A parallel amendment was made to Section 72-AA, which governs banking and government company reorganisations. Both amendments took effect from 1 April 2026 and are carried forward into the corresponding provisions of the IT Act, 2025 by virtue of the repeal and saving clause under Section 536, IT Act, 2025³, which preserves the character and conditions of losses computed under the old Act.

The anti-avoidance rationale is sound. Indefinite loss carry-forward through successive amalgamation had become, in practice, a form of tax planning that departed from the original legislative purpose of Section 72-A, which was to facilitate genuine business reorganisation without penalising economically distressed companies. The new framework brings parity with Section 72, IT Act, 1961 (and its IT Act, 2025 equivalent), which caps ordinary business loss carry-forward at eight years. The Finance Act, 2026, enacted on 27 March 2026, leaves these provisions entirely undisturbed, confirming that the tightened carry-forward regime is now settled law.

The point of collision

The problem emerges when both reforms are read together. The companies newly eligible under the Amended Rules are, structurally, the companies most likely to carry significant accumulated losses: Unlisted operating subsidiaries that have been loss making for several years, fellow subsidiaries in the same group maintained separately for commercial reasons, and holding companies that have historically incubated loss-making ventures before consolidating them.

For such companies, the value of a tax-neutral amalgamation under Section 47(vi), IT Act, 1961 (exempting capital gains on transfer of assets in a qualifying amalgamation) and the carry-forward benefit under Section 72-A is a primary driver of the merger decision. A profitable group entity considering absorbing a loss-making subsidiary often prices the inherited tax attributes as part of the deal economics. The broader Section 233 universe, the more such transactions are being actively planned.

Section 72-A(6-B) now tells the acquiring entity: The losses you are inheriting come with a shortened window, determined by when those losses were first incurred by the original predecessor, not by the date of your merger. For a company that has been loss making for, say, five years before the amalgamation, only three assessment years of carry-forward may remain. The practical consequence is that the tax shield that made the restructuring commercially attractive may be significantly eroded by the time the merger is complete, even under the faster RD route.

There is a further ambiguity that compounds the problem. The word “effected” in Section 72-A(6-B) is not defined, and this ambiguity is specifically unresolved in the IT Act, 2025. As noted by legal commentary on the IndiaCorpLaw blog⁴, there is no clarity in the amendment as to whether “effected” refers to the appointed date in the scheme or the final effective date following regulatory approvals. In the NCLT-supervised merger process, the Supreme Court’s ruling in Marshall Sons & Co (India) Ltd. v. CIT⁵ established that the appointed date specified in a court-approved scheme is the relevant date for tax purposes. But under Section 233 fast-track route, there is no court order and no appointed date in the traditional sense: The scheme takes effect upon the RD’s deemed approval under Section 233(6) of the 2013 Act.

It is not settled whether the RD approval date, the date of the scheme document, or some other reference point constitutes the date on which the amalgamation is effected for the purposes of Section 72-A(6-B). This ambiguity will generate litigation precisely for the class of companies the Amended Rules have newly admitted to the fast-track route.

A structural fix missed by the IT Act, 2025

The IT Act, 2025 was a once-in-a-generation opportunity to consolidate and modernise India’s direct tax framework. On the question of fast-track mergers, however, it has largely restated the existing position without addressing the interaction with the expanded Section 233 regime. The Select Committee that reviewed the Income-tax Bill, 2025 prior to its enactment identified a related but distinct problem: Fast-track demergers under Section 233 are excluded from the definition of demerger in the IT Act, 2025, meaning that a fast-track split does not qualify for tax-neutral treatment at all. The MCA’s representatives told the Select Committee that this exclusion existed because the absence of court supervision raised tax avoidance risks. Yet the same logic, if applied consistently, would suggest that fast-track mergers, too, deserve heightened scrutiny, not an unclarified appointed-date rule that invites litigation.

A coherent legislative fix would do three things. First, it would clarify that, for fast-track mergers under Section 233, the date on which the RD’s order takes effect under Section 233(6) of the 2013 Act constitutes the date on which the amalgamation is effected for the purposes of the carry-forward provisions, removing the appointed-date ambiguity in one clean amendment. Second, it would introduce a deemed original predecessor date rule under which the original predecessor entity’s loss computation date is treated as the date of first computation only where the successive amalgamation was structured primarily to extend the carry-forward window, as determined under the General Anti-Avoidance Rules (GAAR) in Chapter XI of the IT Act, 2025. This would preserve the anti-avoidance purpose of Section 72-A(6-B) while not penalising genuine first-time mergers through the fast-track route. Third, it would bring fast-track demergers within the definition of demerger, subject to enhanced RD oversight, as the Select Committee itself acknowledged was technically feasible.

Notably, the Finance Act, 2026, passed on 27 March 2026, addressed several procedural aspects of the IT Act, 2025 but did not touch any of these three issues. The appointed-date ambiguity, the GAAR-gated exception, and the demerger exclusion remain unaddressed. The Finance Act, 2026‘s silence on Section 72-A(6-B) appointed-date question is itself significant as it is the first budget cycle since the fast-track expansion and the first under the new Act, and Parliament has passed without resolving the mismatch this article identifies. Each subsequent cycle that leaves this gap open is another cycle of litigation risk for companies that have relied on the Amended Rules to restructure faster.

Conclusion

India’s corporate restructuring reform in 2025 reflects a genuine policy intent which is, faster mergers, less tribunal congestion, and broader access to the fast-track route. The MCA has delivered on the corporate law side. But legislation does not operate in silos. The Finance Act, 2025‘s Section 72-A(6-B) amendment, designed to prevent loss evergreening, interacts with the expanded Section 233 universe in ways that partially undercut the reform’s own purpose. The companies most likely to use the new fast-track categories are precisely those whose tax attributes are most sensitive to the loss of a fresh carry-forward window. The IT Act, 2025, which was an opportunity to align the two reform streams, omits to do so. The Finance Act, 2026, enacted on 27 March 2026, does not address Section 72-A(6-B) appointed-date ambiguity, a conspicuous legislative gap that only strengthens the reform critique advanced here. Until a clarificatory amendment addresses that ambiguity and introduces a GAAR-gated exception for genuine first-time reorganisations, the expanded door of Section 233 will, for many restructuring candidates, remain narrowed at the tax gate.