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NAVIGATING THE TAX LANDSCAPE OF SLUMP SALES

INTRODUCTION

The corporate environment has recently seen an increase in the number of business transfer transactions. One such transaction that has become popular is the “slump sale,” a mode of reorganizing a business by transferring the entire setup on a going concern basis for a lump sum consideration. The procedure may appear difficult due to the complexities of taxation, but it is crucial to comprehend the specifics of such transactions. As it is suggested, “how you acquire something can be just as important as what you acquire.” This is particularly true in the case of slump sales.

WHAT IS A SLUMP SALE?

A slump sale is a complex business transaction that has grown in favour of a smart and effective approach to purchasing a business’s whole setup. As defined under “Section 2 (42C) of the Income Tax Act[1]” “slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities in such sales.” The term “undertaking” is defined under “Explanation 1 to clause (19AA) of section 2 of the Act[2]”, “it shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

A slump sale is the sale of a whole company venture, including its assets, obligations, contracts, and intellectual property on a going concern basis. Going concern basis is a fundamental accounting theory that works with the assumption that a firm will go on with its activities and continue to operate for the foreseeable future.[3] This kind of transaction is an innovative approach for firms to transfer ownership while maintaining the organization’s integrity and continuity, and it may be a helpful tool for corporations wishing to simplify their operations, restructure their business, or broaden their reach.[4]

TAX IMPLICATIONS ON SLUMP SALE

GOODS AND SERVICES TAX (GST)

‘Transferring business assets’ is often viewed as a ‘supply of goods’ under the GST system. In contrast, it is regarded as a ‘supply of services’ if goods constituting a part of the assets are not provided during the transfer. The ‘transfer of a business as a going concern’, on the other hand, in which the complete business is transferred as a going concern, is regarded as a ‘supply of services’. According to “Notification No.12/2017”[5], the transfer of a business as a going concern is exempt from GST.[6] In 2018 in the case of Karnataka Authority for Advance Ruling in the case of M/s Rajshri Foods Private Limited,[7] it was stated that “the transaction of transfer of a business as a whole of one of the units of the Applicant in the nature of a going concern amounts to the supply of service and is covered under Sr. No.2 of the Notification No. 12/2017 subject to the condition that the unit is a going concern.”

It is not justifiable to impose GST on the sale of a business undertaking. Since the value of the transaction consists of the transfer of the complete undertaking as a going concern, the sale of only goods is not included in the slump sale. Since a business cannot be deemed a “good” under the GST rules, it might be argued that it should not be subject to GST.

CAPITAL GAIN

Any profit or gain from a slump sale is subject to tax under the heading “capital gains” according to “Section 50B of the Income tax act,1961”[8]. To calculate the difference between net sale consideration and net worth, a crucial component is to figure out the business undertaking’s net value. This calculation is based on the total value of all transferred assets, which is subtracted from the total value of all transferred liabilities.[9] The amount of tax owed depends on whether the gain is long- or short-term. If the business activity has been held for longer than 36 months, the capital gain is considered a long-term gain and is taxed at a rate of 20%. The capital gain, however, is treated as a short-term gain and is taxed at the taxpayer’s regular tax rates if the business has been owned for less than 36 months.[10] Additionally, the capital gain from the slump sale is added to the taxpayer’s income for the year of the transfer and is therefore subject to tax at the appropriate rates.

CHALLENGES IN SLUMP SALE TRANSACTION

  1. A slump sale is the transfer of a business undertaking in which the seller is not permitted to profit from asset indexation or revaluation to estimate the net value of the undertaking. This implies that any later growth in the value of the assets included in the venture is not taken into account; rather, the value of the assets is assessed based on their original cost of acquisition. The slump sale procedure is distinct from other kinds of business transfers because the seller is unable to use the prospective greater worth of the assets to obtain a higher sale price.[11]
  2. “Section 180 of the Companies Act, 2013”[12] places restrictions on the Board of Directors’ ability on certain activities such as to sell, lease, or otherwise dispose of the entire business. “Undertaking”[13] shall mean “an undertaking in which the investment of the company exceeds twenty percent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty percent. of the total income of the company during the previous financial year”. For any slump sale, the section gets triggered, and a special resolution of the members is required. While the section is intended to protect the interests of shareholders, it can also be viewed as a disadvantage for the Board of Directors and the business due to the added procedural complexity and potential delays it may cause.

ROOM FOR IMPROVEMENT SLUMP SALES TAXATION

  1. Simplification of Stamp Duty – The different stamp duty rates on slump sales in India can cause confusion and compliance concerns for enterprises that operate in numerous states. The government could think about establishing a unified stamp duty policy for all states to address this issue.[14] Compliance would be simplified, and the administrative burden on enterprises would be reduced. A common database for stamp duty rates on slump sales that is available to all businesses might also be created.
  2. Slump sale taxation charges- The addition of new “Section 50B of the IT Act”[15] has resulted in major modifications to how the sale consideration for slump sale transactions is calculated for income tax purposes. Regardless of what is agreed upon contractually, the sale consideration is now regarded to be the fair market value of the capital assets being transferred. This change[16] has a retrospective effect from April 1, 2020, and came effective on April 1, 2021, and it raise the transaction cost of slump sale transactions, particularly for undertakings with large immovable assets or securities.[17] Lower rates may help in preventing firms from undervaluing assets sold in a slump sale deal to avoid paying taxes. This would assist to guarantee that firms pay their fair share of taxes while still managing their inventories effectively.

CONCLUSION

Slump sales provide an innovative approach to transferring ownership while retaining the organization’s continuity. Always remains a popular option for companies looking to restructure their business. To succeed in a slump sale transaction, it is crucial to comprehend the specifics of such transactions, including tax implications such as GST and capital gains tax. By conducting exhaustive due diligence and understanding these complexities companies can make informed decisions and ensure a smooth transfer of ownership while minimizing risks and maximizing benefits.

Author(s) Name: Neha Gandhi (Guru Gobind Singh Indraprastha University)

References:

[1] Income Tax Act 1961, s 2 (42C)

[2] Income Tax Act 1961, s 2 (19AA) explanation 1

[3] Swapneshwar Goutam, ‘Concept of Slump Sale & Taxation Issues in India’ (2009) 242 (3) MLJ 74-80 < https://deliverypdf.ssrn.com/delivery.php?ID=506001013065021028093095087065000123025021068055070082025086095026070115090019009031057122111022009036109117002094002006091072017084012076061125000001070127093095005029073122012095074104071105022066091103070120078094097092005004007092099105090083004&EXT=pdf&INDEX=TRUE > accessed 22 April 2023

[4] Housing News Desk, ‘Slump sale: Understanding the tax implications of a slump sale’ (Housing.com, 7 November 2022) < https://housing.com/news/slump-sale-understanding-the-tax-implications-of-a-slump-sale/ > accessed 22 April 2023

[5] Notification No. 12/2017- Central Tax (Rate), 28 June 2017 < https://cbic-gst.gov.in/hindi/pdf/central-tax-rate/Notification12-CGST.pdf > accessed 23 April 2023

[6] Annapoorna, ‘Slump sale under GST’ (Cleartax, 2 June 2021) < https://cleartax.in/s/slump-sale-gst > accessed 23 April 2023

[7] M/s Rajshri Foods Private Limited [2018] Advance Ruling No. KAR ADRG 06 / 2018

[8] Income Tax Act 1961, s 50B

[9] Swapneshwar Goutam (n3)

[10] Housing News Desk (n4)

[11] Abhay Sharma et al, ’Tax on Corporate Transactions in India: Overview’ (Westlaw, 1 August 2021) < https://content.next.westlaw.com/practical-law/document/I449ae46db30011e498db8b09b4f043e0/Tax-on-Corporate-Transactions-in-India-Overview?contextData=(sc.Default)&transitionType=Default&viewType=FullText&firstPage=true > accessed 24 April 2023

[12] Companies Act 2013, s 180

[13] Ibid

[14] Abhay Sharma (n11)

[15] Income Tax Act 1961, s 50B

[16] Finance Act 2021, s 50B

[17] Akila Aggarwal et al, Taxing Times Ahead for Slump Sale Transactions (Cyril Amarchand Blogs, 16 June 2021) < https://tax.cyrilamarchandblogs.com/2021/06/taxing-times-ahead-for-slump-sale-transactions/ > accessed 25 April 2023