In today’s environment, doing business has changed to the point where concentrating and focusing on one area is no longer sufficient. Most medium and big enterprises have become so diverse that they now run many enterprises in different industries. A single organization might contain many parts or undertakings, each with its own assets and liabilities and each focused on a particular activity. As a result, if the necessity arises, the organization will be able to sell a segment or the entire undertaking. This is referred to as a slump sale.
WHAT IS A SLUMP SALE?
For tax purposes, a slump sale is one in which an undertaking is sold without taking into account the individual valuations of the assets and liabilities contained within the undertaking. It’s worth noting that identifying individual valuations may be relevant solely for the purposes of calculating stamp duty or other equivalent taxes.
TAXATION OF SLUMP SALE
Under the Income Tax Act, the gain or loss arising from a slump sale is a Capital Gain/Loss. The resultant capital gain or loss will be long-term if the undertaking is held for more than 36 months and short-term if it is held for less than 36 months. Furthermore, no taxation advantage will be available when calculating the capital gain.
- The following are the tax rates that apply to a capital gain in a slump sale:
- Short-Term Capital Gains: Normal Tax Rates
- 20 % for long-term capital gain
According to Form 3CEA, the Company must provide a report from a Chartered Accountant.
GST TAXATION
The Goods and Services Tax Act’s taxation is based on the concept of “supply.” A slump sale would be considered a supply and so subject to GST. The supply would be in the form of a “transfer as a continuing concern,” which is subject to a 0% GST rate.
A transfer as a going concern essentially means that the present business will be carried on by a different individual or that the ownership of the firm will change.
RULES FOR VALUATION OF ASSETS IN SLUMP SALE
Net assets transferred were previously evaluated at book value owing to non-prescribed rules for the purpose of section 50B. With notification by the CBDT published Rule 11UAE, which states that the Fair Market Value of the net assets transferred should be higher of the FMV 1 or FMV2.
FMV1=A+B+C+D-L, where A+B+C+D-L
- A refers to the book value of all assets (excluding jewelry, artistic works, securities, and immovable property) as listed in the undertaking’s BOA or divisions transferred via slump sale.
- B is the amount that the jewelry and creative piece would sell for if they were sold on the open market.
- C stands for the fair market value of shares and securities.
- D is the value accepted, evaluated, or assessable by any government entity for the purposes of stamp duty payment on immovable property.
- The letter L stands for the undertaking’s liabilities.
FMV2=E+F+G+H, where E+F+G+H
- E denotes the amount of money received or accruing as a result of the transfer.
- F stands for the fair market value of any non-monetary compensation obtained or accruing as a result of the property transfer.
- G is the value of the non-monetary compensation received or accruing as a result of the transfer of property that is not immovable.
- In the instance of non-monetary consideration received or accruing, H denoted the value adopted, assessed, or assessable by any government authority for the purpose of stamp duty payable in respect of the immovable property.
The fair market value of capital assets is calculated on the day of slump sale, and the valuation date referred to in rule 11UA also refers to the date of a slump sale for this purpose.
The terms “registered valuer” and “securities” shall have the same meanings as they have in rule 11U for the purposes of this rule.