Understanding GST Implications on Slump Sale Transactions

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Published Date:  09-02-2024   Author:   ahana-das
captainbiz understanding gst implications on slump sale transactions

Slump sales have emerged as a popular approach for the transfer of business undertakings in India. It enables transfer as a going concern for a lump-sum consideration without assigning specific values to individual assets and liabilities. Slump sales provide certain tax advantages over other modes of transfer.

Under the GST regime, taxation of slump sales has been an ambiguous area with limited clarity in law. There have been divergent views on whether GST is applicable to slump sales or exempt. This article aims to provide a comprehensive understanding of what constitutes a slump sale, the applicable GST provisions, treatment in different scenarios, challenges to be addressed, and the impact across business sectors.

Introduction to Slump Sale

Slump sale refers to the transfer of an undertaking as a whole, on a going concern basis, for a lump sum consideration without assigning values to individual assets and liabilities. It is also known as a business transfer on a lump-sum basis.

Key characteristics of slump sales:

  • Lump sum consideration paid by the transferee
  • No value is assigned to specific assets or liabilities.
  • Assets and liabilities transferred to the transferee
  • Transfer on a going concern basis
  • Business activity remains unchanged after the transfer.

Essentially, a slump sale is the sale of an entire business unit or division for a composite price without itemized valuation. It helps buyers take over a running business quickly. For sellers, it provides flexibility and tax efficiency.

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Exploring Goods and Services Tax

Goods and Services Tax (GST) is an indirect, comprehensive, multi-stage tax levied on the supply of goods and services right from manufacture to consumption. GST subsumes multiple indirect taxes into a unified tax structure.

Some key aspects of GST:

Tax Applicability

  • Taxes levied on intrastate and interstate supplies of goods and services
  • Certain products and services are tax-free.

Input Tax Credit

  • Seamless flow of input credit across the supply chain
  • ITC of GST paid on inputs available for offsetting output GST

Tax Rates

0%, 5%, 12%, 18%, and 28%

Returns and invoices

  • GSTR-1 and GSTR-3B monthly returns to be filed by taxpayers
  • E-invoicing is mandated for turnovers above the threshold.
  • An e-way bill is required for transportation.

Payment and Refunds

  • GST is to be paid by the 20th of next month.
  • The refund process is prescribed for excess balances.

Registration

  • Mandatory registration if turnover exceeds ₹40 lakhs
  • Voluntary registration is permitted with a lower turnover.

Thus, GST has brought in a comprehensive indirect tax structure with a focus on technology, digital payments, and transparency.

Also Read: What Is GST? Overview And Services

Basics of Slump Sale

A slump sale is defined under Section 2(42C) of the Income Tax Act as the transfer of an undertaking for a lump sum consideration without assigning values to individual assets and liabilities.

Key aspects of slump sales:

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  • Sale consideration: lump sum price negotiated based on business performance, prospects, etc. rather than asset values.
  • Nature of transfer: The entire business was transferred as a going concern, along with relevant assets and liabilities.
  • Undertaking transferred: can be a whole company, unit, division, or product line capable of independent operations.
  • Tax impact: Tax incidence arises on an overall basis, not on individual asset transfers. Capital gains tax is applicable.
  • Approvals: Shareholder and board approval are required. SEBI and NCLT approval may be required in certain cases.
  • Compliances: Relevant intimations to appropriate authorities, stakeholder communication required.
  • Documentation: A business transfer agreement, valuation reports, and board resolutions need to be in place.

Thus, slump sale provides a means for quick, seamless transfer of a business for a lump sum negotiated price. Proper approvals and diligent compliance are key.

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GST Framework and Slump Sale

The introduction of Goods and Services Tax (GST) in 2017 has brought about a comprehensive reform of the indirect tax structure in India. It has subsumed multiple federal and state-level taxes like excise duty, VAT, service tax, etc. into one unified tax regime. GST has been implemented concurrently by the center and states.

The GST law contains certain provisions and definitions relevant in the context of the taxation of slump sales:

  1. Definition of Supply, Section 7

Section 7 of the CGST Act provides for an inclusive definition of ‘supply’ under GST. It covers all forms of supply of goods and services, or both, such as sale, transfer, exchange, disposal, barter, rental, lease, etc., done for consideration by a person in the course or furtherance of business.

Thus, the transfer of business as a slump sale would get covered under the wide ambit of’supply’ unless exempted.

  1. Meaning of Goods, Section 2(52)

Section 2(52) defines ‘goods’ to mean every kind of movable property other than money or securities but includes actionable claims, growing crops, etc. It also includes intangible and movable property.

This definition indicates that individual assets transferred under a slump sale may qualify as ‘goods’.

  1. Meaning of Services, Section 2(102)

As per Section 2(102),’services’ under GST have been defined to mean anything other than goods, money, or securities. It thus covers intangibles other than goods.

  1. Business Definition, Section 2(17)

Section 2(17) defines ‘business’ to include the provision of services in connection with the commencement or closure of business.

This indicates the transfer of business may be treated as a supply of services.

  1. Schedule II

As per Schedule II of the CGST Act, the transfer of business assets is treated as a supply of goods, while the transfer of business is considered a supply of services.

  1. Exemption: Notification No. 12/2017

This exemption notification exempts services by way of the transfer of a going concern, as a whole or an independent part thereof, from the levy of GST.

Thus, the above GST provisions indicate the transfer of business on a slump sale basis would qualify as a supply of service and be exempt subject to going concern conditions.

Also Read: Clearance Of Stock And Assets In GSTR-10

GST Treatment in Slump Sale Scenarios

Based on specific transaction structures, GST implications vary for slump sales.

Slump sale of the entire company

  • Tax treatment: supply of service, exempt
  • Consideration: Agreed lump sum price
  • ITC transfer: Permitted (GSTR-5A)
  • Compliance: minimal, no invoicing

Slump sale of a business unit or division

  • Tax treatment: supply of service, exempt
  • Valuation: Negotiated lump sum price
  • ITC: Transfer to Buyer (Form ITC-02)
  • Returns: GSTR-1, GSTR-3B continue

Share sale resulting in slump sale

  • Tax treatment: not a supply, no GST
  • Valuation: Based on the share price
  • ITC: seamless flow, no reversal
  • Compliance: No change for the company

Itemized sale of assets

  • Tax treatment: supply of goods
  • Valuation: Individual assets, GST applicable
  • ITC: Reversal under Rule 42/43
  • Invoicing: Tax invoices for asset transfers

Thus, GST treatment varies based on whether the slump sale is of shares or assets and on a going concern basis or an itemized basis. Proper structuring is vital.

Advantages of Slump Sale under the GST Regime

Slump sales offer multiple benefits under the GST regime:

  • Limited compliance requirements: As it is an exempted supply, minimal registration, invoicing, and return filing are required.
  • No GST outflows: GST is not levied on lump-sum consideration, bringing down costs.
  • Asset valuation flexibility: Overall consideration is negotiated based on business potential rather than asset values.
  • Input tax credit retention: ITC transfer is possible in the event of a slump in the sale of units, preventing credit loss.
  • Continuity of business operations: Exemption contingent on running business transferred as going concern.
  • Simplicity and speed: It enables quicker takeover as a business transfer, not an asset transfer.
  • Tax efficiency: Capital gains tax is leviable on slump sale consideration instead of multiple assets.

Thus, slump sale offers a tax-optimal structure for strategic transfer of business compared to piecemeal sale of assets.

Challenges and Considerations

While slump sales provide multiple advantages, there are certain limitations and downside risks involved that need to be carefully assessed.

  1. Ambiguity in law

The GST law does not explicitly define and provide for taxation of slump sales under a specific section. The applicable provisions regarding supply, exemptions, etc. have to be interpreted to determine GST treatment.

This has resulted in a lack of clarity and divergent views on whether GST is payable on slump sales or is exempt. For instance, some experts argue that the transfer of a business undertaking does not qualify as a transfer of goods or services, while others opine that it constitutes a supply of services.

The absence of definitive provisions has created uncertainty regarding GST applicability on lump sum business transfers. This ambiguity needs to be addressed through a clarificatory circular or suitable amendment.

  1. Valuation disputes

In cases of slump sales, the lump sum transfer price is arrived at based on an independent valuation of the business and commercials. However, this composite valuation could potentially be contested by tax authorities.

For instance, the worth assigned to acquired trademarks, brands, or other intangibles under slump sale may be questioned as being inadequate. Similarly, land and building values may be disputed as being lower than guideline rates.

This can increase income tax incidence and trigger disputes regarding capital gains valuation. Appropriate documentation, expert valuations, and transparent communication are vital to addressing potential valuation challenges.

  1. Going concern assessment

A crucial requirement for slump sales to qualify as exempted supply under GST is transfer on a going concern basis. The transferred undertaking should essentially remain a continuously operating business unit in the hands of the acquirer after takeover.

However, meeting this condition requires the unit to have an independent identity without being interlinked with other units. Tax officials may possibly dispute the distinct identity if there are shared centralized facilities, common procurement, or other overlaps.

If the nature of the going concern is not adequately established, GST exemption may be denied and lump sum consideration made taxable. Companies must therefore showcase the standalone functionality to be a going concern.

  1. Compliance requirements

Availing GST exemption for slump sales also necessitates meeting the relevant compliance mandates, like:

  • Furnishing of ITC-02 for transfer of seller’s input tax credit
  • Seeking NCLT approval if share acquisition triggers slump sale
  • Appropriate intimations to concerned authorities
  • Disclosure of transactions in GST returns

Meeting these procedural requirements imposes additional responsibility. Any gaps, like incorrect details in ITC-02 or delayed NCLT approval, can undermine tax efficiency and trigger scrutiny.

  1. Withdrawal of tax exemption

Currently, the sale of an undertaking as a going concern is exempt from GST through a notification. But as a notification, this exemption status can potentially be withdrawn anytime by the government if required.

The levy of GST on slump sales in the future cannot be ruled out if the exemption is revoked through notification. This keeps a lingering sword hanging over the long-term sustainability of such exemptions.

  1. Transfer of licenses and approvals

In the slump sale of a business, the transfer of relevant licenses, registrations, approvals, etc. is a critical activity. Various entities like the RBI, SEBI, IRDAI, and environmental authorities may be involved, depending on the sector.

Procedural delays, objections, or non-consent to such transfers can severely disrupt or derail transactions. Seeking approval on time and diligent follow-up are crucial.

  1. Manpower transfer

HR issues surrounding the transfer of personnel from the seller to the buyer entity can pose integration challenges. Factors like cultural mismatch, differing policies on remuneration or benefits, trade union intervention, etc. need resolution.

A smooth transfer of manpower is essential to demonstrating continuity as a going concern. Hence, change management requires focus.

  1. Due diligence

Given the complexities of business transfers, comprehensive due diligence of financials, contracts, litigation, compliance, etc. is indispensable.

Any latent risks or liabilities not identified in diligence can significantly erode value post-acquisition. Due diligence helps ensure no legacy issues are inherited through slump sales.

Thus, these varied aspects require close consideration when planning and executing slump sales to derive optimal benefits within the GST framework. 

Impact on Various Business Sectors

captainbiz impact on various business sectors

GST treatment has implications across sectors deploying slump sales for strategic transfers:

IT/ITeS

  • Software technology transfer requires customized structuring.
  • Copyrights and IP transfers should not attract GST.

E-commerce

  • The tax department may scrutinize exclusivity rights transfers.
  • The valuation of customer contracts and the loyalty base are open to debate.

Pharma

  • Business continuity needs to be established for going concern.
  • Product registrations and licenses require specific transfer modalities.

Telecom

  • Spectrum trading transaction terms require review.
  • Tower infrastructure transfer may attract GST if it is not a concern.

Textiles

  • Old tax concessions should be available under GST as well.
  • Machinery transfers may be construed as a supply of goods.

Automobile

  • Treatment of leased assets like vehicles requires clarity.
  • Inventory not consumed to be transferred to book values

FMCG

  • Brand valuations in the case of slump sales are open to questioning.
  • Distributor relationships and continuity are to be showcased.

PSUs

  • Valuations in cases of disinvestment through slump sales are closely scrutinized.
  • Profitability potential is an important parameter for price discovery.

Thus, sector-specific nuances, assets, and valuations need to be carefully considered under GST for optimal slump sales.

Conclusion

Slump sales have gained popularity as the preferred approach for strategic transfer of business undertakings in India. For investors consolidating operations or companies divesting non-core assets, slump sales provide an efficient structure. However, the absence of detailed guidelines has resulted in ambiguity regarding applicable GST provisions.

Based on an analysis of the definitions and exemptions under GST law, the sale of a business on a going concern basis should ideally be exempt as a transfer of service. But the possibility of future disputes cannot be ruled out. Thus, companies should maintain diligent documentation and compliance around the operational continuity of the transferred undertaking.

As GST implementation stabilizes with time, clarity on the taxation of complex M&A transactions like slump sales should also increase, either through clarificatory circulars or jurisprudence. This will provide the needed certainty to businesses on the GST impact of their strategic deals. Overall, evaluating GST implications forms an integral part of planning and executing slump sale transactions.

Also Read: GST: Everything You Need To Know

FAQs

  • Does slump sale require valuation of individual assets?

No, in slump sales, valuation is not undertaken for individual assets. Lump sum consideration is agreed upon based on business potential.

  • Can an unregistered company acquire a registered company through a slump sale?

Yes, the exemption is available to unregistered entities as well if the transferred company continues operations.

  • Does slump sale require NCLT approval?

NCLT approval is not mandatory in all cases. It is required if the buyer is acquiring shares of a company under a slump sale.

  • Can input tax credit be transferred in the event of a slump in the sale of shares?

No, ITC transfers are allowed only where slump sales are undertaken for an asset transfer, not a share transfer.

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Ahana Das

Ahana is an accomplished SEO writer who has covered her graduation in English Honours. Having written in various subjects, she takes particular interest in writing content on personal finance, investing, budgeting and financial planning and her articles on finance and current affairs are seldom published in global newspapers.

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