income tax
Slump sale is an entrenched tool of mergers & acquisitions (M&A) and reorganization of a business in India, controlled under Section 50B and Section 2(42C) of the Income-tax Act, 1961. There has been greater clarification of its meaning, its taxing impact, and practical side recently through recent enactments in legislations as well as from judgements. A slump sale is the transfer of one or more undertakings for an aggregate lump sum consideration, without specifying individual values for the assets and liabilities being transferred.
Definition of 'Undertaking': The term encompasses any unit, division, or business activity as an entirety, but not individual assets or liabilities or combinations not a business activity.
Holding Period:
36 months or lower: Normal taxation for short-term capital gains (STCG).
Calculation:
Acquisition cost = Net worth (aggregate valuation of assets less liabilities on a books basis).
Filing: Form 3CEA is to be filed.
Indexation: Benefit of indexation is not available in the case of slump sales.
Depreciation: Calculated at the rate based on duration of use.
Carry Forward of Losses: The carried-forward losses and the unabsorbed depreciation of the business transferred do not get transferred to the buyer.
In general, the sale of a business as a going concern is exempt from Goods and Services Tax (GST). Certain authorities do classify such sales as 'supplies' nil-rated under GST. Subparties are requested to check the latest GST notifications and AAR rulings applicable to their region.
It is necessary for both the parties to ensure proper documentation of business succession under Section 170 of the Income-tax Act in terms of tax liability.
Judicial rulings, such as the case of Triune Projects Pvt. Ltd v. DCIT, reaffirm that removal of non-core or redundant assets and liabilities is not invalid in a slump sale transaction, provided the core business remains a going concern. The transaction must not be similar to cherry-picking; instead, the assets and liabilities transferred should be part of a viable enterprise.
Q1: How is a slump sale different from an asset sale? A: In a slump sale, a business undertaking is sold whole for a lump sum, without valued-itemizing the assets or liabilities. On the other hand, in an asset sale, selected assets are valued and sold separately.
Q2: Is GST payable on a slump sale? A: Generally, sale of a business as a going concern is exempt under GST. However, parties can make it applicable by verifying the recent GST notifications and AAR rulings.
Q3: Is it possible to exclude certain assets or liabilities in a slump sale? A: Yes, judicial precedents allow exclusion of non-core or redundant assets or liabilities, as long as the transferred business is still capable of operating effectively as a going concern.
Q4: How is capital gain computed in a slump sale? A: Capital gain is computed as the higher of actual consideration or FMV (under Rule 11UAE), minus the net worth (assets less liabilities as per books). A slump sale is an effective and efficient tool of business restructuring in India. The recent developments and judicial pronouncements have clarified its scope, particularly as regards transfer of undertakings, calculation of capital gains, GST impact, and allowing the exclusion of non-core assets or liabilities. It remains a viable option for firms looking to optimize their restructuring exercise.