General Analysis with relation to GST on Merger and Acquisition

Shailza Sharma

20 Mar, 2021

Merger and Acquisition involves a process of combining two companies into one single entity known as business consolidation. To attain accelerated growth and corporate restructuring companies in India, the process of M&A has become very vital.  A process typically takes place when two companies of the same size, recognize advantage the other offer with regards to sales, capabilities, and efficiencies. This a kind of business alliance used by companies either to grow or to expand its business. In this article, we will discuss about GST on Merger and Acquisition.

Introduction;

Merger and Acquisition both are the different words used where “Merger” is used to the merging of two companies where one of the company continue to exist. Whereas, “Acquisition” refers to the acquisition of assets by one company from another company. The process of merger and acquisition represents the eventual change for a business.

Section 391 and 394 of companies act, 1956 deals with Merger and Acquisition.   The process can often take anywhere from 6 months to several tears to complete.

How Merger can take place?

The process of Merger and Acquisition can take place through the following ways –

• through purchasing assets
• through purchasing shares
• through the exchange of share for assets
• through exchanging share for share

What are the methods in which Acquisition can take place?

• Merger – One the most common way of acquisition is through a merger. Where two companies merge together to form a single company.
• Demerger- A process where whereby the business/undertaking of one company is demerged into the resulting company.
• Share Purchase- By purchasing the share of the target company by the acquirer acquisition can be done.
• Slump Sale- It’s a kind of sale of business/undertaking whereby a seller as going concern to an acquirer, without specific value being assigned.

Also, Read: Mergers & Acquisitions and Joint Ventures.

What are the reasons behind the Merger and Acquisition?

Various reasons reason for merger and acquisition which can be:

1. Synergy: The foremost reason for merger and acquisition is that the company wants to create synergy. By the combination of two business activities, overall performance efficiency tends to increase.
2. Diversification: Sometimes companies merge together in order to diversify their activity through amalgamation. Two companies may merge to emphasize its product and service to gain a competitive edge over other companies providing the same product and service.
3. Growth: A company may not grow through internal expansion but through a merger which is a cheap and less risky process company can seek its growth.  A merger can give the acquiring company an opportunity to grow the market without doing any investment or lifting. Acquiring a company can simply buy a competitor’s business at a certain price, which is also known as a horizontal merger.
4. Eliminating the competitor:  Merger and Acquisitions deals allow eliminating many future competitors and can gain a larger market share. With these companies will be able to save their advertising expenses which can lead to reducing their product price, and the consumer can also get the benefit by the reduced price.

What are the types of Merger?

• Horizontal Merger: This type of merger takes place when two same types of companies, who are in direct competition and share the same market and product combine with each other.
• Vertical Merger: Merger between customer and company or supplier and company. This means before the merger there was a potential buyer and seller relationship. 
• Conglomerate Merger:  Generally a merger between companies which have different business areas and have no common relationship of any kind. Kinds of Conglomerate merger are – Product Extension Merger, Market extension Merger.

What are the steps involved in Merger and Acquisition process?

What is the Impact of GST on Merger and Acquisition?

The impact and effect of taxes the primary issue with the companies who are going to involve in the process of Merger and Acquisition. Due diligence is required for such business combinations. Merger and acquisitions required in-depth analysis of cost benefits, with the understanding of the impact of GST for such kind of processes.

Deemed Supply and Its Exceptions

As per clause 4(c) of the Schedule II of the CGST Act 2007^[1], 

1. the business is transferred as a going concern  to another person; or
2. the business is carried on by a personal representative who is deemed to be a taxable person”.

GST Implications on Slum Sale

A Slum Sale is defined under ITA as the sale of an undertaking for lump sum consideration, without assigning value to its individual assets or liabilities. Under GST regime slum sale will be treated as the normal supply, in virtue of which the tax will be payable registered taxable person during the supply of goods or service. GST law does not specifically cover the meaning of the term ‘undertaking and slump sale’. According to section 2(42C) of Income-tax, 1961

Further, for more clarifications, we can refer the following judgment

CIT vs. Equinox Solutions (P.) Ltd. Where Supreme Court held that where the entire business is sold off as going/running concern than it would be considered as a slump sale.

Section 45/50(2): If undertaking is sold as a running business with all assets and liabilities for a slump price, not part of the consideration can be attributed to depreciable assets and assessed as short-term capital gain u/s 50(2). If the undertaking is held for more than three years, it constitutes a “long-term capital asset’’ and the gain is assessable as long term capital gain.

Also, Read: GST Transition: How to Migrate Existing Input Credits?.

GST Implications on the Sale /Transfer of Securities

One of the most common methods of acquisition of a business is share acquisition. According to GST law, part of company share is covered under ‘securities’. The term securities are specifically have been excluded from the definition of goods and services. Henceforth, no GST will be levied on the sale of securities. The term securities are covered under the head ‘Services’. As per section 2(102) of CGST Act-

GST Implications on Itemized/Piecemeal sale

Where assets and liabilities of a business are transferred by way of assigning the value to each item it is called as an itemized sale. This means the sale by the way of transfer of specific assets of a business after assigning a value to these assets. Transaction of itemized assets is considered as supply under the ambit of GST and individual assets would be covered under the definition of goods as per schedule II of central goods and service activities, and hence GST will be applicable in case of Itemized/piecemeal sale at the rate applicable to respective goods.

Registration

Under section 22(3) of the CSGT Act, where a business is carried on by a taxable person registered is transferred, the transferee or the successor would be liable to be registered with effect from such transfer or succession and will have to obtain a fresh registration with effect from the date of such transfer or succession.

In addition to this, Section 22(3) states that if the business is transferred as an order of a high court, tribunal, or otherwise pursuant to-  

1. Sanction of Scheme
2. Arrangements for Amalgamation
3. De –Merger of two or more companies, the transferee shall be liable to be registered, with effect from the date on which the registrar of the companies issues a certificate of incorporation. 

Input Tax Credit

Section 18 (3) of the GST law enshrines the provision regarding the availment of the input tax credit by the taxable person. The said section permits the transfer of unutilized GST credit to the transferor in case of transfer of business. Further, Rule 41of the GST rules prescribed rules Form ITC -02which is required to be submitted by the transferor furnishing complete details of the sale, merger, demerger, amalgamations, etc…

Our Recommendation: Changes in Utilization of Input Tax Credit under the GST Act.

Conclusion

GST is considered as the one the biggest tax reform in India and has been welcomed by the society at large. During the process of Merger and Acquisitions, it’s important for both transferor and transferee to determine the provision of transfer of liabilities. However, still, there are many laws and concerns related to GST on Merger and Acquisition where Govt. needs to carefully discern.