Taxman still wants share when businesses transfer

Business transfers or reorganisations are complex, involving compliance with business and tax laws. These laws are detailed, requiring completion of various conditions as well as statutory and regulatory compliance. In business transfers, tax considerations play a critical role. These include ascertaining whether profits or gains arising from the transactions are liable to taxation.

Under the goods and services tax (GST) legislation, Notification No. 12/2017-Central Tax (Rate) of 2017 exempts a transfer of a business as a going concern from GST. No other provision of GST legislation deals with taxing the transfer of a business. This suggests that GST is irrelevant when considering the transfer of a business. However, the term going concern is not defined in the Central Goods and Services Tax Act, 2017 (CGSTA). This opens the floodgates of disputes about what the term means, includes and, importantly, excludes.

GST legislation neither defines going concern, nor borrows the definition of slump-sale from the Income-Tax Act, 1961. The term going concern is an undefined accounting concept used in Indian Accounting Standard 1, the presentation of financial statements, to imply that such statements are to be prepared on the basis that the business is running and will sustain itself in the future. A running business will use its assets, incur liabilities and employ staff to sustain itself. It could therefore be implied that a transfer of business as a going concern means that all assets, liabilities and employees are transferred to another entity for a consideration.

In the context of value added tax (VAT), the authorities have assumed that the transfer of a business involves an item-by-item approach. That is, each asset to be transferred has been identified and a consideration assigned to it. The authorities contend that such an itemised sale of assets is a sale of goods, which is subject to VAT. Tax departments disregard the fact that when a business is transferred as a going concern, the transferee pays a lump sum consideration instead of an individualised purchase of each component.

In Piramal Enterprises Limited v The State of Maharashtra and Anor, the Bombay High Court rejected the revenue’s contention that the transfer of a business was taxable under the previous state VAT framework. The court held that the itemised value was set out in the business transfer agreement for the limited purpose of computing stamp duty. It could not be used to show that there was an itemised sale of assets. The court relied on the definition of a slump sale under section 2(42C) of the Income-Tax Act, 1961, to hold that irrespective of the itemised value assigned, the transaction would be classed as a slump sale. Accordingly, no VAT was payable on the transaction. The decision upheld the principle that the transfer of assets and liabilities together constitutes a transfer of a business.

In Paradise Food Court v State of Telangana, the Andhra High Court held that when a transfer of a business is undertaken as a going concern, the itemised value of each component cannot be taxed differently. The court restated that the essence of such a transaction is the continuity and transfer of the business in its entirety.

Similar disputes have arisen under the GST regime. Recently, the Jharkhand High Court in Usha Martin Limited v Joint Director stayed the proceedings demanding GST on the transfer of a business. The transaction was the acquisition of a steel business through a slump sale on a going concern basis.

Despite courts holding that transfers of business as going concerns were not taxable under the old VAT regime as individual asset sales, tax authorities continue to levy GST on such transactions. They argue that transfers of businesses are a supply of service under schedule II to the CGST act, attracting GST at the rate of 18%. This is not only inconsistent with the principle of GST, which is intended to tax supplies made in the course or furtherance of business, but also disregards settled law. It adds unnecessary uncertainty and doubtful tax liability to legitimate corporate restructuring. The legislature should urgently enact guidance or amendments to define the term going concern. This will provide certainty to taxpayers and tax administrators, reduce litigation and promote the ease of doing business.