GST

Slump Sale under GST

Slump Sale under GST

The term “Sump sale” primarily refers to the transfer of one or more enterprises as a consequence of a sale for a single sum of money without assigning specific asset and liability values. Due to the numerous mergers, demergers, and other kinds of business reorganization, the term “slump sale” has evolved under income tax. Prior to AY 2000-01, Section 45 of the Income applied to capital gains realized on the sale of an “undertaking.” Although it was challenging to pinpoint the price of improvement and the date of acquisition of the “undertaking,” as required by section 48, the gain on the sale of the undertaking was nevertheless subject to capital gains tax.

New Section 50B of the Income Tax was adopted beginning with the AY 2000–01 and lays out unique requirements for calculating capital gains in the event of a slump sale.

Section 2 (42C) of the Income Tax Act of 1961

As per section 2 (42C) of the Income Tax Act of 19611, a “Slump Sale” is defined as the transfer of one or more of an organization’s economic activities. It is carried out without giving each asset and liability a specific value.

It includes:

  • Selling one or more business ventures.
  • It is necessary to transfer all of the undertaking’s assets and liabilities.
  • When assets and liabilities are sold collectively for a predetermined price, they cannot be given independent values.

Calculation of Capital Gains from Slump Sale

The following are special provisions for computing capital gains on “slump sales” under Section 50B of the Income Tax Act of 1961:

1. Any profits or gains from the slump sale that occurred in the prior year are subject to income tax as capital gains resulting from the transfer of long-term capital assets and are considered part of the prior year’s income:

With the restriction that any profits or gains resulting from the transfer of any capital asset, one or more undertakings under the slump sale that were owned and held by an assessee for no longer than 36 months prior to the date of the asset transfer will be considered capital gains resulting from the transfer of short-term capital assets.

2. With regard to capital assets transferred as part of such a slump sale by an enterprise or division,

  • As per sections 48 and 49, the undertaking’s or the division’s “net worth” shall be assumed to be the cost of purchase and the cost of improvement, as applicable, and the requirements of the second proviso to section 48 shall not be taken into consideration;
  • It must be considered that the entire sum of the consideration, whether received or accruing due to the transfer of such capital asset, represents the capital assets’ fair market value as of the transfer date, calculated in the manner specified.

3. Before the date mentioned in section 44AB, every assessee in the case of a slump sale shall provide, in the form, a report of an accountant, as mentioned in the Explanation below sub-section (2) of section 288, attesting to the computation of the undertaking’s or division’s net worth and attesting that the undertaking’s or division’s net worth has been correctly determined in accordance with the provision.

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With the restriction that any revaluation-related change in asset value will not be taken into account when calculating net worth.

Concept of Slump Sale Under GST

What does the GST Act mean by the term “supply”? The GST Act is quite explicit that goods and services must be supplied separately for GST to apply.

The following is stated in Section 7 of the Central Goods and Services Tax or CGST.

The following are included in the provision of products and services that are necessary for the operation of the business: transfer, sale, exchange, barter, rental, lease, license, and disposal. A “slump sale” is not a transaction made within the normal course of business or while the business is still in existence.

The extent of supply goes beyond the continuation of the business, according to CGST Act Section 7(II). As a result, the sale of the company, also referred to as a “going concern,” would be treated as a “supply” for GST purposes.

Do these qualify as products and services? The particular parts of the Income Tax Act that provide clarification on the subject are listed below.

The following is implied by the phrase “goods” in Section 2 (52) of the CGST Act:

  • Moveable property other than cash and securities, excluding Revenue from claims that can be brought in court.
  • Grass and agricultural cultivation.
  • Agreement to separate all items that are attached to the land and all items that were previously regarded to be a part of the land under the terms of a supply agreement.

The term “service” is defined under Section 2 (102) of the CGST Act as follows:

  • Goods
  • Money and securities will incur fees in accordance with their use, including activities involving the use of money or cash conversions from one currency, denomination, or form to another.

Schedule II – Clause 4 (c) of CGST Act

Any goods that in any way constitute a portion of the company’s assets must be delivered by the person who was once deemed tax-responsible in order for the firm to continue. As soon as he is no longer required to pay taxes, it will need to be completed.

This provision, however, shall not apply if:

  • A different person is receiving the concerned business as a going concern.
  • A personal representative who is responsible for tax payments is in charge of the company.
  • ‘Services’ refers to anything that is not goods. Any company transferred as a “going concern” is not included in the list of suppliers of goods. It turns the transfer of a business into a “going concern” and a service provision, and GST is applied to both. Thus, whether in full or in part, the transfer of a running company is free from GST. However, the transfer of company assets would have an impact on GST.

Notification No.12/2017- Central Tax (Rate)

According to this announcement, GST is not applied to services that are transferred as a going concern in whole or in part.

The Revenue has made it clear through its announcement that a company transfer that is treated as a going concern is free from GST. However, the GST has no definition for the phrase “going concern.”

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According to the announcement, the activity of transferring a firm as a going concern is regarded as a provision of services and is, therefore, free from GST. Similar to Schedule I of the CSGT Act, Schedule II includes the transfer of business assets as a supply of goods but excludes the transfer of a firm as a going concern.

Important Case Law Pertaining to slump sale under GST

Karnataka Authority for Advance Ruling in Case of M/s Rajshri Foods Private Limited

Facts:

The applicant owned three manufacturing facilities, and he wanted to sell one of them together with current assets, liabilities, and fixed assets, including land, buildings, plant, and machinery, for a one-time payment.

Issues:

  • Whether the transaction taking place will be regarded as a supply of goods or services or both?
  • Whether the transaction will be covered under notification no. 12/2017-Central Tax?

Analysis:

  • One of the units is being auctioned in its whole here. The unit in question is fully operational, and the sale includes the transfer of all assets and obligations to the buyer. Not just certain company assets but the whole firm is transferred. The whole business being transferred pursuant to clause 4(c) of Schedule II is not regarded as a supply of products under Schedule II.
  • According to Notification 12/2017, the transaction of transferring a going concern is treated as a provision of services, and there is no tax rate applicable to it.

Judgement:

  • When an entity is sold as a whole to one of the applicant’s units as a continuing concern, the transaction is regarded as a service supply.
  • As long as it is a running company, it is covered by notification no. 12/2017-Central tax(rate).

Frequently asked questions

  1. Is there GST on slump sales?

    Since the products and services produced from the assets acquired would continue to be taxed as previously from a GST viewpoint, we believe slump sale transactions, which are comparable to the exemption above in nature, should not be subject to GST.

  2. Are slump sales taxable under GST?

    Under the GST regime, bulk sales are viewed as taxable supplies. A slump sale will be considered a supply of goods or services under GST and will be subject to GST. The lump sum payment made for the transfer of the undertaking will be used to determine the supply's worth.

  3. Is GST ITC available in case of slump sale?

    Since a slump sale is not specifically defined by the GST Act, there is no GST on them. Slump sale refers to the transfer of a company as a continuing concern to encompass all business transfer-related transactions.

  4. What is the taxability of slump exchange?

    A slump sale would qualify as a supply for GST purposes. However, because this kind of supply would constitute a “transfer as a going concern,” there would be no GST to pay. Only the present business as a whole is transferred and will be continued by the buyer when anything is transferred as a going concern.

  5. Is the sale of a building liable to GST?

    Therefore, the GST is only applicable to commercial property (stores, godowns, offices, etc.) that is under construction and not to the sale or transfer of real estate that has been issued a completion certificate or that has been occupied for the first time.

  6. Is GST chargeable on slump sales?

    GST should not apply to Slump Sales. In order to clarify the taxability of these activities, Schedule II's activities and transactions are referred to in Section 7 of the GST Act, which specifies the scope of supply.

  7. In which cases ITC is not available?

    ITC is not accessible when taxes are paid late or insufficiently when there is an excessive refund, when facts are withheld or omitted, when products are seized or confiscated, or when fraud is involved.

  8. What are the conditions for GST ITC availability?

    The buyer is required to submit Form GSTR-3B with their GST returns. When the last lot or instalment of goods is received in cases where they are received in lots or in instalments, ITC will be available for use. The buyer has 180 days from the date of the invoice to make payment towards the delivery of goods and/or services.

  9. Can we claim ITC on a flat purchase?

    The ITC on any goods or services acquired by a taxable person for the building of immovable property is now restricted under Section 17(5)(d). You are unable to use the ITC for the GST that must be paid on the acquisition of real estate from a builder as a result of this restriction.

  10. What is the GST rate for building sales?

    Residential structures with up to 15% of commercial space are subject to GST. GST on commercial real estate is 12%. Purchases of plots are free from GST. Apartments that are ready for move-in are GST-free.

  11. Who will pay GST, builder or buyer?

    On homes that are still under construction, the buyer is responsible for paying the GST under the current system. The tax payment is obtained from the buyer by the developer or builder, who then sends it to the government.

  12. Is there GST on the sale of commercial land and buildings?

    All immovable properties, including those that are commercial and residential, are subject to GST. Commercial building contractors must register for GST and submit regular GST returns to the government.

  13. What is the treatment of slump sales in income tax?

    Gains from the assets will be classified as short-term capital gains and subject to a 30 per cent tax if the undertaking is not held for a duration of fewer than three years. The GST requirements do not apply to the transactions included in the slump sale category.

  14. What is slump exchange?

    Slump exchange refers to the acquisition of a business by paying a one-time payment in the form of shares and debentures of the acquiring business without valuing each of its assets and liabilities separately.

  15. What is slump sale as defined in Section 2(42) of the Income Tax Act 1961?

    As per Section 2(42C) of the Income Tax Act of 1961, a “slump sale” is the transfer of one or more undertakings as a consequence of a sale for a single sum of money without the individual assets and liabilities in such transactions having separate values.

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References

  1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

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