Heard about slump sales ?? Plans to sell off or transfer of the whole undertaking with all its assets and liabilities……you are at the right place
As per section 2(42C) of the Income Tax Act, slump sale means transfer of one or more undertakings/divisions for a lump sum consideration without assigning value to the individual assets and liabilities in such sales. Slump sale actually refers to selling of all the undertakings for a single price. For example, in case of transfering of a company having 3 types of different divisions for productions like cosmetics, food products and textile products, it is very difficult to identify the sale price, assets, liabilities etc. of each and every division. In these cases, the assessee transfers the whole undertakings for a single sale price value.
Slump sale allows acquiring companies to enter into business quickly. It helps to expand ongoing business to a new location. Slump sale separates core operations from other non core operations. It also enables the selling company to acquire private equity investment.
Conditions to do slump sale
- Business needs more than one division.
- The business as a whole must be sold.
- The company must be sold as a continuing business.
- The company’s assets and liabilities are not assigned individual values.
- Transferring of business is in exchange for lump sum consideration.
SECTION 50B OF INCOME TAX ACT
As per section 50B of income tax act, the gain or loss resulting from a slump sale should be considered as capital gain or loss. When units are sold for a single price ,the computation of capital gain cannot be calculated in a normal way. Here we don’t know the sale consideration for each of the individual assets.
Computation of capital gain:
1.Check the period of how long the undertakings are held. In view of the number of months the capital gain can be arranged as:
- LTCG (Long Term Capital Gain) – If it is held for more than 36 months. There is no indexation in LTCG, and the tax rate is 20 percent.
- STCG (Short Term Capital Gain) – If it is held for less than 36 months. The normal tax rate is applied.
2.Determine the full value of consideration
- FMV of the capital asset transferred by way of slump sale
- FMV of consideration Whichever is higher
3.Find the cost of acquisition:
Deemed cost of acquisition- Section 50B provides for the deemed cost of acquisition which is
Net Worth = Total asset (-) Total liabilities
Total asset – Asset under balance sheet will be divided into 3:
a)Depreciable Asset = WDV as per Section 32
b)Non Depreciable Asset = book value excluding revaluation
c)Asset on which 100% deduction claimed = Nil
d)Self generated goodwill – Nil
Total liabilities : As given in the books of accounts.
Steps to be followed :
- Compute the total value of asset
- Aggregate the liability given in the balance sheet
- Networth = Step 1 – Step 2
- Determine whether it is a LTCG or STCG as explained above.
Calculation of capital gain
Full value of consideration XXX
Less: Transfer expenses (XX)
Net consideration XXX
Less: cost of acquisition (XX)
1. In the event of a slump sale, should the COA (Cost of Acquisition) be considered
to account for the revaluation of assets?
When calculating net worth, assets should not be revalued. Book value of resources will be viewed as for this situation.
2. In the event of a slump sale, can the transferee carry forward the cumulative business sale ?
The transferee cannot carry forward accumulated losses, in contrast to amalgamation or demerger.
3. Is there any reporting requirement for the slump sale?
The entity shall submit a report in form 3CEA by a Chartered Accountant within the due date specified under section 44AB
4. Whether Slump sale is a supply under GST? What is the taxability of slump sale under GST?
Slump Sale is a supply under GST. However such supply is in the nature of transfer as a going concern. Therefore slump sale attracts a nil rate of tax.