It is very crucial to set a business from zero in India as there are many formalities with regard to formation & Taxations. Also for growing of business, businessman have to capture huge market capitalization as well as many customers and another factor which leads to progress of a business. Therefore the concept of Merger and Amalgamation & Corporate restructure came in to the light. In the Corporate restructure, Merger, Amalgamation, the transferee will get ready possession of market capitalization and customers and other benefit associated with the business in return to lump-sum consideration. Hence it is most ideal tool to capture big advantages of existing business.
In this article, we will discuss the implication of tax in slump-sale as far as GST is concerned.
What is Slump-Sale?
Slump-Sale is the sale of an undertaking as a going concern for a single consideration. However, the CGST Act didn't provide the definition of Slump-Sale so we need to move towards Income tax Act, 1961 for Slump-Sale.
As per section 50 B read with Section 2(42C) of Income-tax Act 1961, "slump sale" means transfer of a whole or part of business as a going concern in which all the assets and liabilities of a business are transferred to a purchaser for a lump-sum consideration without assigning values to the individual assets and liabilities.
Salient features of Slump-Sale are as under
(A) The transfer of one or more undertakings.
(B) As a result of the sale.
(C) For a lump sum consideration.
(D) Without values being assigned to the individual assets and liabilities in such sales.
Whether Slump-Sale is Supply?
GST law provide the definition of supply under Section 7(1) of CGST Act, 2017 the expression "supply" includes, all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
From the above mentioned definition it is clear that slump sale does not amount to sale of goods or Service, as it is a contract for sale of business as a whole or part as a going concern and not mere sale of goods. Further, slump sale is a transaction not carried out in the course or furtherance of business.
However, the definition of "business" under section 2(17)(d) of CGST Act 2017, supply or acquisition of goods including capital goods and services in connection with commencement or closure of business. Due to clause "d" definition of "Business", "Slump-Sale" fit in to the definition of "Business" hence "Slump-Sales" would be treated as Supply and GST will be comes in to the picture.
Slump-Sales is Supply of "Goods" OR "Service"?
Once it is clear that Slump-Sale is Supply, now question is to whether it is supply of "Goods or Service".
GST Act provide "Schedule II" which clearly specified which transaction to be consider as Goods & which transaction to be consider as Service.
One of the Clauses of Schedule II i.e. Clause 4(c) provide "Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-
(i) The business is transferred as a going concern to another person; or
(ii) The business is carried on by a personal representative who is deemed to be a taxable person.
In light of the above provision it is clear that Slump-Sales is excluded from the list of supply of goods and so It becomes very obvious that transfer of business as a going concern is considered to be a supply of service and such clarification also supported by the definition of Service provided in Section 2(102) of CGST Act, 2017 which state "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Valuation of Slump-Sale
Once it is clear that the activity of transfer of a going concern constitutes a supply of service & GST will be levied on it we must to identify the valuation for such sale as per Section 15 of CGST Act, 2017 read with rule 28 of CGST rule 2017.
Rule 28 of CGST Act, 2017 provide three base for valuation in case of consideration is in form in form of Money
(A) Be the open market value of such supply.
(B) If the open market value is not available, be the value of supply of goods or services of like kind and quality.
(C) If the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 (Value of supply of goods or services or both based on cost) or rule 31 (Residual method for determination of value of supply of goods or services or both), in that order.
From the above three base of Valuation it can noted that
(1) Slump sale is not an open market sale, since it is not normally made available in the market.
(2) Each slump sale is unique and there cannot be any services of a like kind and quality.
Thus in the light of the above analysis it is clear that Rule 28 is not applicable.
Now move towards the Rule 30 (Value of supply of goods or services or both based on cost)
Cost of acquisition is not applicable as the supply is one of service of business as going concern, so we have to rule out the Rule 30.
Now move towards the Rule 31 (Residual method for determination of value of supply of goods or services or both)
The option we have left is only the transaction value, Hence we may conclude that the "Transaction value" will be the net consideration agreed between the parties.
GST Rate for such service
GST has provided many exemption for supply of services i.e. supply of such service will attract NIL rate of GST wide Notification No.12/2017-Central Tax (Rate) dated 28.06.2017, one of the such service is as under, as per serial No. 2 of such notification "Services by way of transfer of a going concern, as a whole or an independent part thereof" will be NIL Rated.
Hence supply of Slump sales is exempted from GST without any conditions.
Availability of ITC in case of Slump-Sale
Since the lump sum consideration received for "Slump Sale" of business is exempt from GST, as stated above thus no tax would be charged on the consideration exchanged between the parties. The transferor would be issuing a bill of supply as per section 31(3) (c) of the CGST Act, 2017. Since no tax would be charged on the consideration, therefore the question of availability of input tax credit would not arise at all.
Transfer of ITC lying in electronic credit ledger in the books of transferor
Section 18(3) of CGST Act, 2017 state that "Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specificprovisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed."
As per Section 18(3) of CGST Act 2017 read with Rule 41 of CGST Rules 2017 it is clear that the registered person shall be allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business.
(1) A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, demerger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.
(2) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
(3) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC 02 shall be credited to his electronic credit ledger.
(4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.
(5) And by such way the transferee shall be entitled to the ITC transferred as part of transfer business as a going concern in the form of slump sale.
Relevant Authority for Advance Ruling
- Name: M/s Rajashri Foods Pvt. Ltd
- Advance Ruling No.: KAR ADRG 06/2018
- Date: 23.04.2018