Fast-track demergers, introduced by the Ministry of Corporate Affairs (MCA) to make corporate restructuring quicker, cheaper and more business-friendly, are running into unexpected tax hurdles that threaten to blunt their impact, tax and legal experts said.
On September 4, 2025, the MCA allowed Indian companies to carry out demergers through the fast-track route — a process that bypasses the National Company Law Tribunal (NCLT) and instead requires approval only from the regional director of the MCA. The move was part of a broader push to unclog tribunals and make routine corporate reorganisations less time-consuming and litigation heavy.
Under the traditional NCLT route, even simple intra-group demergers often take 9–12 months, involve multiple hearings, creditor approvals and court filings, and impose significant legal and compliance costs. This has made restructuring slow and expensive, particularly for unlisted and closely held groups that regularly hive off businesses into separate vehicles for funding, regulatory compliance, or operational focus.
Fast-track demergers were therefore designed to allow companies to split businesses without going through the tribunal, provided there is no objection from shareholders or creditors. For family-owned and promoter-driven groups, this is critical for separating mature cash-generating businesses from high-growth units, attracting investors, or ring-fencing risks — all without changing the underlying ownership.
However, unlike traditional NCLT-approved demergers, fast-track demergers currently do not enjoy tax neutrality under the Income Tax Act, 2025, exposing companies and their shareholders to significant tax liabilities.
At the core of the problem is the definition of “demerger” under the tax law. While the Companies Act provides for both tribunal-approved demergers under Sections 230–232 and fast-track demergers under Section 233, the Income Tax Act grants tax neutrality only to demergers carried out under the NCLT route. Section 233 is not referenced, effectively making fast-track demergers taxable.
“Intra-group mergers and demergers are routine corporate restructuring exercises that do not change beneficial ownership. Yet fast-track demergers are currently treated as taxable transfers,” an tax expert said.
Under the existing framework, a company transferring assets or shares under a fast-track demerger could face capital gains tax in the range of 12.5% to 20%. The impact can be even harsher for shareholders, who may be taxed on shares received in the resulting company at rates going up to 36% if the transaction is treated as a deemed dividend rather than a capital gains transfer.
“There is a greater risk of tax incidence in the hands of shareholders, where it could be considered a deemed dividend taxed at 36% instead of capital gains taxed at 15%,” he said. “Unlike mergers, fast-track demergers currently do not enjoy tax neutrality, making otherwise genuine intra-group reorganisations commercially unviable.”
The issue is particularly acute for unlisted companies, which are the primary users of the fast-track route. Listed companies typically prefer the NCLT process, where tax neutrality continues to apply.
Legal experts say the disconnect appears to be a drafting gap between corporate law and tax law rather than a deliberate policy choice.
“The absence of reference to Section 233 of the Companies Act, 2013 within the definition of ‘demerger’ under the Income Tax Act, 2025 appears to be purely inadvertent,” another tax expert said. “It would be helpful if this is clarified in the tax proposals in Budget 2026.”
Beyond domestic restructurings, outbound demergers — where assets are transferred to a foreign company — face even steeper tax obstacles.
“In India, tax neutrality for demergers is largely restricted to cases where the resulting company is an Indian entity,” another tax expert said. “While inbound demergers may achieve tax neutrality if conditions under the law are met, outbound demergers continue to face significant tax hurdles.”
In such structures, the transfer of assets by an Indian company to a foreign entity typically triggers capital gains tax, shareholders may be taxed on receipt of foreign shares, and accumulated losses cannot usually be carried forward.
Tax experts say unless the anomaly around fast-track demergers is fixed, companies may be forced to continue using the slower tribunal route, undermining the MCA’s objective of making corporate restructuring faster, cheaper and more aligned with business needs.
