Slump sale is an effective and maybe the quickest strategy to undertake business transfer with assets and liabilities. Slump sale is considered to be one of the most preferred ways of carrying out mergers & acquisitions deals. Compared to the other types of mergers/acquisition strategies, slum sale has the least complex yet well-defined tax implications along with other allied law procedures that are simple and time-efficient.
What is a Slump sale?
- Slump Sale means the transfer of one or more undertakings against a lump sum consideration without values being allocated to the individual assets and liabilities.
- The consideration for a slump sale should be settled in lump sum only which can be in cash, exchange of shares, debentures, bonds etc. The scope of slump sale is wide and it covers situations like exchange, barter etc.
Objectives of Slump Sale
Slump sale is intended to accomplish the following purposes:
- To strengthen the performance of the business with efficient management strategies
- To target and remove negative synergy and distinction between core and non-core operations
- To attain tax and regulatory benefits
Compliances under Companies Act 2013
- Companies Act 2013 has a unique and extended definition of undertaking by defining threshold limit.
- ‘Undertaking’ is defined as a unit/undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.
- In case of a slump sale, provisions of section 180 shall get attracted to any company other than a private company. Special resolution (with 75% approval) needs to be passed / approved in the general meeting of the company for undertaking the slump sale transaction.
- On passing the resolution successfully the board may authorize any person to finalise and execute on necessary documents including definitive agreements, business transfer agreements, deeds of assignment /conveyance and other ancillary documents.
- Form MGT-14 along with resolution and notice given under section 102 must be filed with the ROC within 30 days along with the prescribed fees based on share capital.
- If the above undertaking criteria is not satisfied, then there is no need of passing special resolution.
Compliances under Income Tax Act, 1961
- Transaction of slump sale is taxable as capital gain as per provisions of section 50B of Income Tax Act ,1961.
- The gain or loss resulting out of a slump sale shall be considered as capital gain/loss under the Income Tax Act in the manner prescribed below:
|Full value of consideration||XXX|
|Less: Expenses in relation to transfer||XX|
|Less: Net worth of the undertaking||XX|
|Short / Long term capital gain/loss||XXX|
In computing the net worth of the entity, following points need to be considered:
- Value of net worth should not take into account any revalued figures of asset and liability.
- The written down value of assets shall be considered in case of depreciable assets under the Income Tax Act.
- The value of assets will not be considered on which 100% deduction has been allowed u/s 35AD (specified businesses).
- The value as appearing in the books of accounts shall be considered in case of any other asset.
After considering the above points; the cost of acquisition shall be taken as Nil for the purpose of computation of capital gains, in case the resulting net worth is negative.
- Where the undertaking is owned and held by the transferor for 36 months or less immediately preceding the date of transfer, the undertaking would be regarded as short-term capital asset and the gains will be taxed at applicable rate.
- If the undertaking is owned and held for more than 36 months before the date of transfer, then the gains shall be treated as long-term capital gain and it will be taxed @ 20%. No indexation in case of long-term capital gain computation.
- A report by a Chartered Accountant in Form 3CEA certifying that the net worth of the undertaking has been correctly arrived at in accordance with the provisions of section 50B of the Income Tax Act,1961.
- Transferor shall be allowed to carry forward the unabsorbed losses and depreciation with respect to transferred undertaking in future years. In other words, in case of a slump sale, the transferee entity will not get benefits of tax losses of the transferor. Also, the credit in respect of minimum alternate taxes is retained in case of corporate assessee with the transferor company.
Proposed Amendment in Union Budget 2021
- With effect from 1st April 2021, it is proposed to widen the scope of slump sale u/s 2(42C) to include the transfer of one or more undertakings by any means’ for lump sum consideration.
- The above amendment also clarifies tax on ‘slump exchange’ of an undertaking which includes exchange, barter, relinquishment, extinguishment, etc as capital gains.
- Implication: Business transfer by any mode of the settlement would attract tax under capital gain.
Compliances under GST Act 2017:
- The transfer of an undertaking on a going-concern basis, as a whole or an independent part thereof, has been exempted from GST vide Notification No. 12/2017-Central Tax.
- Further, on slump sale of an undertaking, the transferee is eligible to transfer unutilized Input Tax Credits lying in the electronic credit ledger of the transferor in pursuance to change in the constitution due to sale, merger, demerger, amalgamation, transfer of business etc., subject to conditions by filing of Form ITC-02.
- Apart from the above-mentioned points, legacy of ambiguity continues as no clarity on reversal of credit claimed in past years.
Difference between Individual asset sale and slump sale:
|Slump Sale||Individual Asset Sale|
|The transferee ends up buying the whole of the business undertaking.||The transferee can cherry pick the assets it wants to acquire.|
|Valuation is not done for individual component or assets but is done only for the whole of the business undertaking/asset.||Valuation is done for individual component or assets|
|The rights & liabilities of the assets are transferred to the transferee.||The rights and liabilities of the assets may or may not be transferred to the transferee as per the mutual agreement.|
|The tax incentives/ tax holidays and benefits of the existing business can be transferred to the new owner.||The tax incentives and benefits of the existing business cannot be transferred to the new owner.|
|GST will not be applicable if transferred on going concern basis.||GST will be applicable.|
|Transfer of any depreciable asset under slump sale can attract long term capital gain of 20% if undertaking is more than 3 years.||Transfer of any depreciable asset under Individual Asset Sale would attract short term capital gain of applicable rate to the entity.|
|Provisions of section 50C as regard to stamp duty value in case of land & building does not apply.||Provisions of section 50C as regard to stamp duty value in case of land & building does apply.|
|Provision of gift tax u/s 56(2) does not arise for slump sale transaction.||Provision of gift tax u/s 56(2) arises provided for transfer specified assets u/s 56(2) are acquired as capital asset.|
How Can InCorp Help You?
At In.Corp, our team will offer you assistance on various services involved in a slump sale transaction. Our Direct tax team can assist you in ascertaining your Income-tax liability on Slump sale. On the other hand, our Indirect tax team can assist you in ascertaining your GST liability on the sale. Also, avail assistance on compliance & documentation with ROC /MCA under Companies Act along with assistance in valuation and computation of net worth of the undertaking.