Article explains Conditions for Tax Neutral Demerger, Reasons for Demerger, Tax Implications of Demerger, Tax implications of Demerger in the hands of the transferor entity, Tax implications of Demerger in the hands of shareholders of the transferor entity, ACCOUNTING IMPLICATIONS of Demerger, Accounting Aspects in Different Demerger Situations, Applicable Sections for Slump Sale, Taxability on gains arising from Slump Sale, Tax Effect on Slump Sale, Computation of Net worth in Slump Sale, Stamp duty on Slump Sale, DEMERGER V/S SLUMP SALE – Comparison and Important Regulations for Demerger & Slump Sale.
Division of a company with two or more identifiable business units into two or more separate companies.
In accordance with following Sections:
♣ Section 2(19AA) of Income Tax Act, 1961
♣ Section 230-232 of Companies Act, 2013
The income tax laws specifically provide that in case of a tax neutral demerger, no capital gains tax implication will arise on the transferor entity on transfer of capital assets to the transferee entity, so long as the resulting company is an Indian company.
In case of demerger of a foreign entity into another foreign entity, wherein capital assets being shares of an Indian company are transferred, no capital gains tax implication will arise in India if the following conditions are satisfied:
In the case of a demerger, the issue of shares by the transferee entity to the shareholders of the transferor entity (in lieu of shareholding in transferor entity) is not regarded as ‘transfer’ and hence it is not subject to capital gains tax.
Wholly Owned Subsidiary Difference between value of shares issued and net asset taken over to be credited to Capital Reserve or be adjusted against reserve and balance debited to goodwill.
Demerged Company Deficit to be adjusted against General Reserve or any other reserve including P&L
Excess of net assets over share issued to be transferred to General Reserve and in case of shortfall, be debited to goodwill/ securities premium account.
Value of net assets transferred to be adjusted against securities premium, to the extent available and then against General Reserve.
Gain on revaluation of the one of the residual undertaking transferred to Revaluation Reserve.
Section 50B of Income Tax Act, 1961
Section 180 of Companies Act, 2013
Slump Sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
|Full Value of Consideration||xxx|
|Less: Expenses in Relation to Transfer||(Xxx)|
|Less: Cost of Acquisition/Net worth||(xxx)|
In computing the net worth of the entity, the following points need to be considered:
Stamp duty shall be levied on investment and immovable property.
|Document||Scheme of Merger||Business Transfer Agreement|
|Mode of Consideration||Cash or Shares||Shares|
|Receiver of Consideration||Shareholders of Demerged Company||Demerged Company|
|Order to be filed with RoC||Required||Not Required|
|Timelines||4 Months||3 Months|
|Capital Gains||No tax if it is in compliance with section 2(19AA) of the Income Tax Act, 1961.||Attracts long term or short term capital gains tax|
|Accounting Treatment||No prescribed. Purchase method to be recorded at book values to avoid violation of Section 2(19AA) of the Income Tax Act, 1961.||No specific Accounting Standard prescribed.|
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