The induction of Goods and Services Tax (GST) in India is a significant shift from the current...
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.
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.
The process of Merger and Acquisition can take place through the following ways –
Also, Read: Mergers & Acquisitions and Joint Ventures.
Various reasons reason for merger and acquisition which can be:
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.
As per clause 4(c) of the Schedule II of the CGST Act 2007,
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.
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-
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.
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-
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.
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.