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How the Test Works

Impairment testing follows three steps.

First, goodwill is allocated to a Cash Generating Unit (CGU), which is the smallest group of assets that generates independent cash inflows, typically a business segment or an acquired entity. Getting this allocation right matters, because the test is only as meaningful as the unit it is applied to.

Second, the recoverable amount of the CGU is determined. This is the higher of what the business would fetch in an open market sale after disposal costs, or its Value in Use, being the present value of future cash flows the business is expected to generate. For unlisted companies, where market-based evidence is limited, Value in Use computed through a discounted cash flow model is the more commonly used measure.

Third, if the carrying amount of the CGU, including allocated goodwill, exceeds its recoverable amount, an impairment loss is recognised. The write-down is absorbed first by goodwill, and only after goodwill is exhausted, spread across the other assets.

Triggers for Testing

Goodwill must be tested at least annually. But Ind AS 36 also requires testing whenever indicators suggest that value may have eroded. Waiting for the annual cycle in such situations is not acceptable.

Some of common triggers include consistent underperformance against the original acquisition business case, loss of key customers or talent, and decisions to restructure or exit parts of the acquired business.

Accounting and Financial Impact

An impairment charge reduces the carrying value of goodwill permanently and is recognised in the income statement in the period it arises. Under Indian tax law, this charge is generally not tax-deductible, which gives rise to a difference between accounting profit and taxable income. This difference is required to be recognised and disclosed in the financial statements.

The reduction in goodwill also correspondingly reduces total assets and net worth as reported in the balance sheet. Financial statement notes are required to disclose the circumstances that led to the impairment, the CGU to which goodwill was allocated, the amount of the impairment charge, and the key assumptions underlying the recoverable amount calculation, including the discount rate and the long-term growth rate applied.

Where Companies Go Wrong

Over-optimistic cash flow projections are the most common shortcoming. Management teams naturally believe in the acquisitions they championed, and that belief tends to colour the projections used in the impairment model. Projections that show a sharp recovery without grounding in historical trends or industry benchmarks are difficult to substantiate under auditor review.

Discount rate errors are also common. The standard requires a pre-tax rate, but many companies use a post-tax cost of capital without the required adjustment, or apply the group-wide rate to a CGU that carries a very different risk profile.

CGU aggregation is another area of concern. Grouping a weaker business with a stronger one into a single CGU can make the combined unit appear healthy, delaying recognition of impairment in the underperformer.

A related issue is the mechanical roll-forward of prior year assumptions: same discount rate, same growth rate, no fresh review. Economic conditions, industry dynamics, and company-specific factors evolve, and the assumptions in the impairment model must reflect that.

Conclusion

Goodwill impairment testing is a question of whether the carrying value on the balance sheet continues to reflect what the acquisition is genuinely worth. For unlisted companies, where this assessment rests almost entirely on internal estimates, the rigour applied to projections, discount rates, and CGU identification determines the credibility of the outcome.

In response, the Finance Act, 2012 introduced Explanations 4 and 5 to Section 9(1)(i) with retrospective effect from 1 April 1962, clarifying that shares of a foreign company would be deemed situated in India if they derived their value substantially from Indian assets. The Finance Act, 2015 then supplied much-needed thresholds: under Explanations 6 and 7, value is "substantial" only if Indian assets exceed INR 10 crore and represent at least 50% of the company's global asset value, while a small-shareholder exemption protects transferors holding less than 5% of capital or voting power with no management rights. Valuation and reporting mechanics were prescribed through Rules 11UB–11UC and Form 49D.

B. Impact on global M&A and group structures

These provisions reshaped cross-border deal structuring. Acquisitions of multinational groups with Indian subsidiaries, internal reorganisations, private-equity exits routed through holding companies in Mauritius, Singapore or the Netherlands, and even intra-group transfers now require an India tax assessment. Buyers insist on withholding-tax indemnities, valuation certificates and tax representations. Group restructurings that move Indian-derived value between offshore entities can trigger Indian capital gains even where neither party is Indian-resident, and the obligation to withhold tax under Section 195 falls on the non-resident payer. The compliance and documentation burden, particularly the apportionment of gains attributable to Indian assets, has materially raised transaction costs and lengthened diligence timelines.

C. Judicial and arbitral precedents

The retrospective amendment provoked sustained litigation. In the Vodafone investment arbitration (2020), the Permanent Court of Arbitration at The Hague held that India's retrospective levy breached the fair-and-equitable-treatment guarantee of the India–Netherlands bilateral investment treaty. Around the same time, in the Cairn Energy arbitration (2020), the tribunal ruled India's retrospective demand violated the India–UK investment treaty and awarded Cairn roughly USD 1.2 billion plus interest and costs — an award Cairn began enforcing against Indian state assets abroad.

On the domestic front, the Andhra Pradesh High Court in Sanofi Pasteur Holding SA v. Department of Revenue (2013) addressed the transfer of shares of a French company (ShanH) that indirectly held Shantha Biotechnics in India. The Court held that, under the India–France treaty, the resulting capital gains were taxable only in France, allowing the treaty to prevail over the retrospective domestic amendment. However, it is important to note the Supreme Court ruling in the case of Tiger Global wherein it was held that The Court held that indirect transfers of Indian assets structured through intermediate jurisdictions to avoid taxes can be taxed under the General Anti-Avoidance Rules (GAAR).

The political resolution came through the Taxation Laws (Amendment) Act, 2021, which nullified the retrospective effect. It provided that no tax demand would survive for indirect transfers made before 28 May 2012. This effectively closed the Vodafone and Cairn disputes and restored a measure of investor confidence.

D. The DTAA dimension

Where a tax treaty applies, Section 90(2) allows the taxpayer to invoke the treaty if more beneficial than domestic law. Capital gains are governed by Article 13 of most treaties. Crucially, gains from the alienation of shares of a foreign company often fall within the residuary clause (commonly Article 13(5) or 13(6)), which assigns taxing rights exclusively to the state of residence of the alienator. In such cases, the indirect transfer provisions of domestic law can be neutralised by the treaty, as Sanofi case provides.

However, with the Apex Court ruling emphasizing on substance over form and application of anti-abuse rules such as GAAR / principal-purpose test, the scope of Treaty benefits appears to be narrow.

With respect to implementation, the notification does not provide a specific effective date. In such situations, it can be considered that as and when it is notified in the official gazette it is effective and enforceable. From a compliance standpoint, employers are expected to give effect to the revised minimum wage thresholds at the earliest, i.e., in the next payroll cycle following such publication.

B. Changes brought by the Notification:

The impugned notification introduced four changes, namely:

• Workers employed in cleaning toilets, bath houses, drainage systems, and those employed in power generation units, foundries (with or without the use of machines), manufacturing of insecticides, pesticides and chemical fertilizers are prescribed different schedules for minimum wages.
• New employment categories have been added into the Scheduled Employment (viz., those employments to whom the Minimum Wages Act, 1948 applies). To illustrate - Teachers at Private Schools and Colleges, E-commerce and Courier Services, Religious and Charitable Institutions, Public Amusement Parks, Water theme parks, Manufacturing of products related to coconuts and its husk and many more.
• A uniform minimum wage limit has been prescribed for all the scheduled employments (except those mentioned under point 1 above), and the thresholds have also been uniformly increased. The minimum wage limit for the scheduled employment stands as thus:

Skill Category	Zone-1 Region under Greater Bengaluru Authority		Zone-2 Regions under the limits of other Municipal corporations of the State		Zone-3 Regions not covered under Zone 1 or Zone 2
	Per Day	Monthly	Per Day	Monthly	Per Day	Monthly
Highly Skilled	1196.69	31114.02	1087.90	28285.47	989.00	25714.07
Skilled	1087.90	28285.47	989.00	25714.07	899.09	23376.43
Semi-Skilled	989.00	25714.07	899.09	23376.43	817.35	21251.30
Unskilled	899.09	23376.43	817.35	21251.30	743.05	19319.36

• The Variable Dearness Allowance shall be fixed for a period starting from 01st April to 31st March of the next year. The VDA for the FY 2025-26 is set at Rs. 1030.80 per month and at Rs. 39.64 per day.

C. Incorporation of this threshold into Payroll:

The term “wage” as defined under section 2(y) of the Code includes Basic, Dearness Allowance (“DA”) and Retaining Allowance (“RA”) (if any). Every other element of a payroll other than Basic, DA or RA, such as contribution to pension and insurance scheme, overtime wage, bonus, house rental allowance, commission, gratuity, retrenchment compensation etc. would not be wage but part of the gross salary. To represent it, gross salary = ‘Wage’ + other components.

Section 5 of the code reads that “No employer shall pay to any employee wage less than the minimum rate of wage notified by the appropriate government”. This definition, when read along with the definition of Wage and the impugned notification, makes it clear that that wage component of the gross salary should at the very least meet the thresholds prescribed under the notification.

Now while incorporating this, it is important to add the DA component to the basic component of the wage. To illustrate:

• Consider an employee who is highly skilled and working in Bangalore, then his/her minimum wage would be
  

  Basic          + DA             = Minimum Wage
  31104.02  + 1030.80    = 32,134.82
  

• Now consider an employee who is semi-skilled and working in Mysore (under the Mysore Municipal Authority), then his/her minimum wage would be:
  

  Basic          + DA             = Minimum Wage
  23376.43  + 1030.80    = 24,407.23
  

Conclusion:

The Karnataka Minimum Wage notification dated 22nd May 2026 by increasing the monetary thresholds, aims to ensure fair compensation and aligns it with the current economic conditions. For Employees, the revised thresholds provide for enhanced financial entitlement and increase the take home. However, for Employers, it is time to review and recalibrate the payroll structure to ensure that firstly, the wage component of the gross salary meets the minimum wage threshold prescribed based on their skill level and zone applicable to the employee in the said notification. Secondly, on recalibrating the wage component, the employees must ensure that the contribution to employee provident fund and pension schemes are also recalculated. Lastly, it should also ensure that in the total gross salary, the components other than wage must not be more than 50% of the gross salary.

Press Note 3 issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on 17th April 2020, introduced restrictions on FDI from entities located in, or whose beneficial owners are situated in, countries sharing a land border with India. Such investments which were earlier permitted under the Automatic route, if the sector was otherwise open to FDI, were now allowed only under the Government approval route.

The press note outlined three specific triggers requiring government approval:

• The investor was an entity incorporated in a land-border country; or
• The beneficial owner was situated in a land-border country; or
• The beneficial owner was a citizen of a land-border country.

Further, the press note clarified that these restrictions would also apply to any transfer of ownership of existing or future FDI that results in beneficial ownership falling within the scope of the above-mentioned countries

While the move was an apt way considering the prevailing geo-political scenario then, it gave rise to many challenges in practice.

A key issue was the absence of a clear threshold or test to determine “beneficial ownership” which led to varied interpretations. Some investors relied on definitions under other laws, while others adopted conservative approaches, treating even minimal Land Bordering Countries (LBC) linked ownership as sufficient to trigger approval. As a result, a significantly higher number of transactions were routed through the Government approval process. This created procedural bottlenecks and delays, slowing investment inflows from LBC jurisdictions.

The impact was particularly high for global private equity and venture capital funds operating through layered structures. Even a small, non-controlling participation by an LBC-linked partner could bring an entire investment under the approval route, regardless of the absence of any governance or control rights. Consequently, investors with merely financial exposure were also captured within the regime.

Similarly, multinational corporations with incidental or minority LBC ownership faced compliance burdens disproportionate to the actual risk. Routine transactions such as downstream investments, restructuring exercises and secondary transfers required detailed scrutiny for indirect LBC exposure, increasing transaction costs and timelines.

Another significant challenge arose from the use of the phrase “situated in”, which extended the trigger beyond citizenship to include residency. This had unintended consequences, particularly in the context of employee stock option plans (ESOPs). ESOP issuances to employees residing in LBC jurisdictions even if they were not citizens required Government approval. This created challenges for multinational companies and complicated cross-border workforce mobility and compensation structures.

These challenges highlighted the need for a more well-thought-out framework that balanced national security concerns with ease of doing business. Press Note 2 (2026), issued on 15 March 2026, was a landmark step taken in that direction. Subsequently, the notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 was released on 1 May 2026, providing the legal backing and operational clarity to the policy shift.

The term “beneficial owner” is now aligned with Section 2(1)(fa) of the Prevention of Money Laundering Act, 2002, which defines it as an individual who ultimately owns or controls a client of a reporting entity, or the person on whose behalf a transaction is conducted, including anyone exercising ultimate effective control over a juridical person.

Press Note 2 (2026) and the corresponding amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 specify that the term “beneficial owner” shall be determined as per the criteria laid down in sub-rule (3) of Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. Under this framework, the identification of beneficial owners follows a structured approach:

• Companies: Natural persons holding more than 10% ownership or exercising control (e.g., appointing majority directors, influencing policy decisions).
• Partnership firms: Natural persons entitled to more than 10% of capital or profits, or exercising control over management/policy.
• Unincorporated associations/bodies of individuals: Natural persons with more than 15% ownership or entitlement.
• Trusts: Identification of the author, trustee, beneficiaries with ≥10% interest, and any person exercising ultimate effective control.
• Fallback: Where no natural person is identifiable, the senior managing official is deemed the beneficial owner.
• Listed entities: For companies listed on Indian stock exchanges (or notified foreign exchanges) and their subsidiaries, beneficial owner identification is not required.

The revised framework clarifies that LBC-linked beneficial ownership will be triggered only where such persons or entities

• exceed prescribed 10% threshold limit (15% for associations), or
• have the ability to exercise control, or
• can exercise ultimate effective control

This three-limb test marks a shift from a broad, ownership-agnostic test to a more nuanced, control-based approach.

Further, Press Note 2 removes the phrase “situated in”, narrowing the scope of application to just a citizenship-based criteria. This change has a direct impact on ESOP structures since approval is now required only where the recipient is a citizen of an LBC. Employees merely residing in such jurisdictions without citizenship are no longer covered, significantly easing compliance for multinational employers.

The broader reform which also includes a SOP issued by DPIIT on 4th May 2026 introduces a fast-track approval mechanism for LBC investments in specified sectors, with an indicative 60-day decision timeline.

However, it is to be noted that these relaxations apply to LBCs except Pakistan. The regulations for Pakistan continue to remain the same where no citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy and such other sectors or activities prohibited for foreign investment;

On a comparative note, while Press Note 3 adopted a broad and restrictive approach, recent reforms reflect a more calibrated framework, introducing objective thresholds and a control-based test to distinguish between strategic and purely financial investments. By refining the scope of restrictions and introducing proportionate safeguards, the policy strikes a better balance while still reinforcing India’s attractiveness as a stable and predictable investment jurisdiction.