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.

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.”

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