Doing business in today’s world has evolved to such an extent that it is not enough that we concentrate and focus only on one area. Most medium and large entities have become so multifaceted that they operate multiple businesses across different areas of the industry. Thus a single entity could have separate segments or undertakings with its own set of assets and liabilities each focused on a different business.
Therefore, when the need arises, it is possible for the entity to sell off a segment or the undertaking as a whole. This is called a slump sale. We shall review the following aspects with regard to a slump sale:
Slump sale under income tax
A slump sale for income tax purposes would be one where an undertaking is sold without considering the individual values of the assets or liabilities contained within the undertaking. It may be important to note here that finding out individual values may be of relevance only for the purpose of determining stamp duty or any other similar taxes.
Tax effect in a slump sale
The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation has been prescribed as follows:
The capital gain or loss as computed above will be either long term or short term depending upon the period for which the undertaking is held. If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term. Further, there will be no indexation benefit available in the computation of the capital gains.
In computing the net worth of the entity, the following points need to be considered:
|Full value of consideration
|(-) Expenses in relation to transfer
|(-) Cost of acquisition/ Net worth
|Capital Gain or (Loss)
The rates of tax applicable to the capital gain in a slump sale are as follows:
Short Term Capital Gain: Normal Rates of taxation
Long Term Capital Gain: 20%
The Company has to furnish a report by a Chartered Accountant as per Form 3CEA.
Taxation under GST:
The basis of taxation under the Goods and Services Tax Act revolves around ‘supply’. A slump sale would also be a supply and hence fall under the purview of GST. The supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts nil rate of GST. Transfer as a going concern would roughly mean that the current business as a whole will be carried on by a different person or that there is a change in the ownership of the business.
- The value of net worth should not take into account any change in the value of the asset or liability resulting from revaluation of such asset or liability.
- In case of depreciable assets under the Income Tax Act, the Written Down Value of such assets as per the Act shall be considered.
- In case of assets on which 100% deduction has been allowed u/s 35AD (specified business), the value of such assets will not be considered.
- In case of any other asset, value as appearing in the books of accounts shall be considered.
- After considering the above points, if the resulting net worth is negative, then the cost of acquisition shall be taken as nil for the purpose of computation of capital gains.
Slump sale vs. Itemised sale
In order to really appreciate the benefit of transferring an undertaking via a slump sale, let us take a look at the alternative: Itemised sale. This is where every asset would be separately valued and sold, each having its own separate consideration. The same can be analysed as follows:
Assuming that since an entire business/undertaking is being transferred, all the assets within a particular block are sold off. In such a case, the following amount shall be chargeable to tax as short-term capital gain/(loss):
Net Sale consideration – WDV of the block = Capital Gain / (Loss)
Irrespective of the period of holding, depreciable assets will always result in a short term gain or loss. As already mentioned earlier, a short term capital gain would result in being taxed at the normal rates applicable to the company (say 30%). However, if such depreciable assets are sold as a part of a slump sale, they may attract long term capital gains tax at a lower rate of 20% if the undertaking as a whole has been held for more than 3 years.
Similar to the above, when other short-term capital assets are transferred, the capital gains tax is attracted at the rates as applicable to the company. It will be advantageous to transfer the same through a slump sale where the undertaking is held for more than 3 years which would attract long term capital gain taxable at 20%.
However, in the case of transfer of business (not being a slump sale), the gain on transfer of such non-depreciable assets would be chargeable to tax as business profits (under the head ‘profits and gains of business or profession’). Such business profits would be taxable at the normal rates applicable to the company.
In the case of a loss making company that has brought forward business losses, transfer of business using the itemised sale methodology might be more preferable since the resulting business profits can be set off against the brought forward business losses thereby reducing their tax liability
Summary of the case:
The assessee was engaged in the business of manufacturing sheet metal components. This undertaking was held by the assessee for more than 6 years.
It transferred its entire business in one go with all its assets and liabilities to another company for a consideration.
The assessee, in its return of income, treated such sale as a slump sale of the going concern and paid tax on such long term capital gains.
The assessing officer was of the opinion that since the transfer involved sale of depreciable assets, it was covered u/s 50(2) (STCG on transfer of depreciable assets) and short term capital gains tax needs to be paid thereon.
The Supreme Court ultimately was of the view that Section 50(2) (STCG on transfer of depreciable assets) may apply to a case where the assessee transfers one or more block of assets which were used by the assessee in the running of his business but where the entire business with is assets and liabilities is sold by the assessee as a running concern, the gain on such transfer cannot be considered as a short term capital gain.
The above case covers one of the basic direct tax considerations in a slump sale. However, there is also an Advance Ruling by the AAR, Karnataka in the case of Rajashri Foods (P) Ltd. where the following conclusions can be drawn from indirect tax (GST) perspective:
The slump sale amounts to ‘supply’ under the CGST Act; and
Such a supply would be a nil rated supply
A slump sale can have multiple implications other than those already discussed. The following points are noteworthy:
Where a person receives any property for inadequate consideration, the difference between the fair market value (FMV) and the actual consideration paid for such property will be chargeable to tax under the head ‘Income from Other Sources’ subject to certain conditions. However, where an entire undertaking is transferred as part of a slump sale (including the immovable property), this provision will not apply.
It is not necessary that all the assets need to be transferred to qualify for a slump sale. However, the assets that are transferred should be able to form an undertaking by themselves.
The consideration for a slump sale has to be in cash – if the consideration is in the form of shares, bonds, debentures, etc., the transaction will be called an ‘exchange’ and not a sale.