Businesses in today’s era of fierce competition have diversified to survive. Nowadays, businesses not only cater to one market but rather provide a wide selection of products and solutions under many labels.
In this way, businesses may liquidate a division just in time. Any profits made from this sale will be subject to taxes under the terms of the slump sale section.
This article will provide you with a comprehensive analysis of the circumstances under which the income tax on slump sales is applicable.
See also: Tax on commercial property: Tax on capital gains, rent and more explained
Slump sale: What is it?
In its most basic definition, slump sale is the selling of a firm or a portion of a business to another party for a lump sum of money. Everything from assets to debts to contracts to intellectual property to debtors to staff is handed over to the buyer in a slump sale conducted on a going concern basis. Additionally, the requirements mandate that the purchasing entity maintain continuous operations going forward.
Slump sale: Why does it work so well?
The transfer of assets and obligations through a slump sale is efficient and, in some cases, the quickest option. The following are some of the many reasons why the slump sale works so well:
- When the buyer is trying to expand its horizons and enter a new market or simply wants to grow its current operations, acquiring a business is a logical next step.
- For tax or other reasons, a corporation or group may decide to separate one of its segments from the rest of the company or group to attract private investment.
- The seller would prefer to separate their primary operation from the operations that are not important to their business.
- Slump sales are an alternative to mergers and demergers when transferring a business that is not a corporation.
Slump sale: Income tax implications of a slump sale
The income tax act of 1961 recognises slump sales under section 2 (42C). According to the rules, a slump sale sells multiple businesses at once without valuing the liabilities or assets separately. Even if the worth of individual assets is ascertained, it will be done solely to determine the amount to be paid for things like registration fees, stamp duties, and so on. These arbitrary prices will have zero impact on the final sale price.
Any potential capital gains resulting from a slump sale will be subject to the tax mechanisms specified in Section 50B of the Income Tax Laws, which was enacted in 1961. Read through the points below to better understand how the legislation calculates taxes on capital gains.
- Capital gains resulting from a slump sale are often categorised as long-term capital gains. However, if the purchaser retains the business for more than three years, a corporate tax of 20% will be imposed.
- The endeavour is not often owned and retained for a term of three years in the majority of circumstances. Gains in asset value that result from such transactions will be referred to as “short-term capital gains.” A 30% tax rate will be applied in each instance.
- The taxable event is the calendar year in which the undertaking is transferred. A slump sale’s capital gain is determined by deducting the acquisition price from the business’s net value.
Slump sale: The impact of the 2013 Company Act on a slump sale
Imagine that the slump sale comprises more than 20 per cent of the total undertakings that contribute to the net worth of the selling firm. In such a scenario, the corporation’s shareholders need to approve the transfer in the form of a special resolution before it can go through. The Companies Act of 2013 has a provision for this purpose under Section 180. After a special resolution is enacted, the business transfer Contract will become effective.
Slump sale: Modifications to slump sale regulations
The Slump Sale Regulations have been modified in a few different ways according to the Finance Bill of 2021, and these changes became operational on April 1st, 2021. In the past, the disparity between the value in consideration and the net worth of the undertakings was used to calculate the number of capital gains that resulted from a slump sale.
As per the new terms, the value of consideration shall be the Fair Market Value of both the assets and liabilities on the precise day of transfer. In addition, if goodwill constitutes the capital gain, its value will be disregarded if it has not been transferred from the prior owner.
Slump sale: Possible alternatives
Asset Sale
An asset sale may be described as selling some or all of the target’s assets to the acquirer, with unique valuations for each item. No judicial authorisation is necessary for the asset sale. The transfer of assets or obligations is contingent on the buyer. He has the choice between selecting and choosing his liabilities.
The stamp duty for a given transaction is determined by the kind of document used and varies from one state to the next. Schedule I of the Stamp Duty Act 1899 details the stamp duty rates applicable to various instruments. Any losses you incur cannot be carried over to subsequent transactions when you sell an asset.
Share sale
The purchase of shares is a reasonable stage in acquiring a business since shares reflect the whole underlying worth of an organisation’s assets and liabilities. The acquirer’s primary objective is to get control of the entity responsible for the company and the brand. When a target firm has developed a devoted client base and a reputation for itself in its industry, a normal step for an acquirer to take is to purchase shares in the target company.
Amalgamation
When two firms merge into one, known as an “amalgamation,” their respective assets become part of the new corporation. When two or more firms merge into one, the existing shareholders of each become stakeholders of the new company. Internally, a major organisation may choose to merge two of its subsidiaries into a single entity to save money on overhead.
Demerger
It’s possible to think of a demerger as the counterpart of an amalgamation, as it involves splitting an organisation apart through a legal procedure established by the court. In most cases, a demerger will include selling an operating business from one firm to another.
After the court issues its demerger orders, the resulting firm may be established or have legal standing. Business entities choose demergers to dedicate their resources to their individual missions. The inability of the parent group to maximise revenues is a further justification for the demerger. In certain cases, shareholders may want to demerge to realise the full potential of their core firm.
Slump sale: Difference between slump sale and individual asset sale
| Parameter | Slump Sale | Individual Asset Sale |
| Acquisition | The purchaser ultimately acquires the whole company venture as a whole. | The purchaser can pick and choose the assets it will acquire. |
| Valuation | The whole of a business project or asset is the only thing valued; individual components or assets are not considered at any point in the process. | A valuation may be performed on each individual asset or component. |
| Rights and liabilities | The purchaser is given both the rights and liabilities associated with the assets. | According to the terms of the mutual agreement, the rights and obligations associated with the assets might or might not be passed on to the purchaser. |
| Tax breaks | The new owner may be eligible to inherit the current company’s tax breaks, breaks on certain types of taxes, and other perks. | The new owner will not be able to inherit the tax breaks and advantages that the present company now enjoys. |
| GST applicability | If the business is transferred on a continuing concern basis, GST will not be imposed. | There will be a charge of GST. |
| Capital gains | Any depreciable asset that is sold during a slump sale may be eligible for a long-term capital gain of up to 20% if the undertaking lasts for more than three years. | The entity would be subject to the short-term capital gain tax at the rate that is applicable if it transferred any depreciable asset as part of an Individual Asset Sale. |
| Stamp duty | In the event of land and buildings, the provided under section 50C of the Internal Revenue Code about the stamp duty value is not applicable. | The requirements of subsection 50C concerning the stamp duty value are applicable in the event of land and buildings. |
| Gift Tax | The gift tax obligation under section 56(2) is not applicable to slump sale transactions. | The transfer may trigger a gift tax liability if a purchased capital asset is on the list of “specified assets” under section 56(2). |
FAQs:
What is a slump sale agreement?
In a slump sale, the company's assets and liabilities are sold as is without any valuations being placed on them. Companies may choose to sell their assets in this manner by entering into a Business Transfer Agreement by Section 230-232 of the Companies Act, 2013.
How is a slump sale regarded for tax purposes?
Any profits or gains realised through a slump sale are subject to income taxation as either short-term or long-term capital gains or losses, depending on the circumstances.
How are gains on a slump sale computed?
The capital gain may be calculated by taking the sales into consideration and subtracting the cost of purchase (net worth).
What happens during a sales slump?
A slump sale is when one or more enterprises are moved for a one-time, lump-sum payment without defining the worth of the undertaking's separate assets or liabilities.
Can slump sale losses be permitted to be carried forward?
The transferor will be permitted to carry forward unused losses and amortisation of the transferred enterprise into future years. However, the transferee company will not receive the tax benefits of the transferor in the event of a slump sale.
