Taxation

An overview of Tax on Slump Sale

Many businesses have multifaceted operations where they have been indulging in various businesses. They have separate entities or undertakings having their own assets and liabilities focussing on different businesses. There are cases where one of these undertakings needs to be sold for the good of the business as a whole. Such sale or transfer is usually called slump sale. This piece of writing discusses about the meaning of slump sale, different aspects of tax on slump sale both under direct taxation and indirect taxation.    

What is a slump sale?

The concept of slump sale has been defined under section 2(42C) of the Income Tax Act, 1961. After the amendments introduced in the Finance Act of 2021, a slump sale has been defined as a type of transfer where one or more undertakings of a business is transferred by any means for a lump sum consideration without assigning value to the individual assets and liabilities of the undertaking.

Here the meaning of ‘transfer’ has been defined under section 2(47) of the Income Tax Act and includes the following kind of transactions such as sale, exchange, relinquishment, extinguishment of any rights, compulsory acquisition of an asset, conversion of capital asset into stock-in-trade, extinguishment of any rights, conversion of capital asset into stock in trade, redemption or maturity of zero coupon bond, allowing possession of immovable property to the buyer as part performance of the contract, any kind of transaction which has the effect of transferring or enabling enjoyment of immovable property or disposing of or parting with an asset or an interest within that asset or creating an interest in any asset in any manner.

From the above clarification, it can be seen that almost every kind of transfer has been brought within the ambit of slump sale. 

Retrospective effect of the amendments introduced by Finance Act, 2021   

The amendments introduced by Finance Act, 2021 have been given retrospective effect with effect from April, 2020 onwards. Therefore, all the transactions that took place after 1^st April, 2020 shall be computed according to the changed scenario and their tax liabilities shall be computed again.

Tax on slump sale under Direct Tax

According to section 50(B) of the Income Tax Act, 1961^[1], the slump sale transactions have been subjected to short term and long term capital gains. Prior to the amendment of Finance Act, 1961, capital gains was computed on the net worth of the capital gains.

Further, these computed capital gains are again classified as either long term or short term. If the assets derived from the slump sale have been held over for more than thirty six months, then the gains or losses so derived shall be considered as long term capital gains and will be computed under a lower tax bracket. However, if the assets have been sold in a period less than thirty six months, then it shall be classified as short term capital gains and accordingly taxed. Indexation, which is the process to adjust the cost of inflation, is not allowed in slump sales.

Parameters to be considered while evaluating the Net worth of an entity

While calculating the value of net worth of an entity, changes resulting in the value of the asset or liability resulting from revaluation of that asset or liability should not be taken into account.

Where the assets of the undertaking are considered as depreciable assets according to the Income Tax Act, then only the Written Down value of such assets shall be taken into account.

Where the assets on which 100% deduction is allowed under section 35AD (Specified business) as per Income Tax Act, the value of such assets shall not be considered.

In case of any other assets, the value of the assets which is reflected in the books of accounts shall only be considered.

After having considered the above points, if the cumulative net worth is found to be negative, then the cost of acquisition shall be considered as nil for the purposes of computation of capital gains.

Rate of tax on slump sale

• Short term capital gains on slump sale: normal rate of taxation
• Long term capital gains on slump sale: twenty percent   

Reporting by the company

A company needs to furnish a report by a Chartered Accountant under Form 3CEA.

Tax on slump sale under Indirect Tax

The event of taxation under Goods and Services Tax Act is ‘supply’. This event of slump sale is also considered as an event of supply and fall under the purview of GST. However, this supply is covered under ‘transfer as a going concern’ and this event of transfer attracts nil rate of GST. So, there is no indirect tax on slump sale.  

Conclusion

The amendments introduced by the Finance Act, 2021 have brought to an end the interpretations made by the courts with respect to tax on slump sale. The corporate sector now needs to change the manner of their corporate restructuring not only for their future actions but also of their past actions since the amendments have been made applicable retrospectively from 1^st April, 2020 onwards. Even after the introduction of amendments, slump sale is still an attractive and advantageous route for corporate restructuring. It has the advantages of shorter time and effective transfer for transferring an undertaking as an undergoing concern.   

Read our Article:Provisions related to cash transactions under Income Tax