SLUMP SALE AND ITS IMPLICATIONS
A slump sale for income tax purposes would be one where an undertaking is sold without considering the individual values of the assets or liabilities contained within the undertaking.
Tax Effect in Slump Sale
The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation has been prescribed as follows:
|Full Value of Consideration
|(-) Expenses for transfer
|(-) Cost of Acquisition/ Net Worth
The capital gain or loss as computed above will be either long term or short-term depending upon the period for which the undertaking is held.
If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term.
Further, there will be no indexation benefit available in the computation of the capital gains.
Points to be considered while computing Net Worth of an Entity:
Tax Rate for Capital Gain:
Reporting Formality: The Company has to furnish a report by a Chartered Accountant as per Form 3CEA.
Taxation under GST: The basis of taxation under the Goods and Services Tax Act revolves around ‘supply’. A slump sale would also be a supply and hence fall under the purview of GST. The supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts nil rate of GST.
Companies Act implications
Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions is ‘to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.’
Therefore, in case of slump sale, section 180 shall get attracted and a special resolution of the members shall be required.
For the purpose of this section, ‘undertaking’ shall mean an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.
‘Substantially the whole of the undertaking’ shall mean 20% or more of the value of undertaking.