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Mergers and Slump sales are not defined in the GST law. In General, a \u201cMerger\u201d involves a process of combining two or more companies into one single entity.<\/p>\n
Example:<\/u> Company A and Company B agree to merger and create Company C.<\/p>\n
As per Section 2(42C) of the Income-tax Act 1961, \u2018slump sale\u2019<\/u> means the transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. E.g., Company A sells its business unit (either whole or part of it) to Company B for a lumpsum amount.<\/p>\n
Generally, in Mergers as well as in Slump Sale transactions, business is transferred as a going concern. A going concern is\u00a0a concept of accounting that applies to the business of the company. Transfer of a going concern means the transfer of a running business that is capable of being carried on by the purchaser as an independent business.<\/p>\n
[Rajashri Foods Pvt. Ltd., Karnataka AAR dated 23rd April 2018].<\/p>\n
Under such transactions, each business asset would not be given valuations.<\/p>\n
Provisions under GST law:<\/u><\/strong><\/p>\n By Section 22(3) of the CGST Act, 2017, where a business carried on by a taxable person registered is transferred, the transferee or the successor would be liable to be registered with effect from such transfer or succession and he will have to obtain a fresh registration with effect from the date of such transfer or succession.<\/p>\n The transferee would be liable to obtain registration from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.<\/p>\n As per Schedule II of CGST Act, 2017, transfer of business assets is the supply of goods except in the case where business is transferred on a going concern. In such a case, backed by the definition of services under section 2 (102) of CGST Act, 2017 (anything other than goods is a service), transfer of business on a going concern basis would be treated as supply of services.<\/p>\n As per Sr. No. 2 of Notification No. 12\/2017- Central Tax (Rate) dated 28th June 2017, rate of GST would be Nil in case of \u201cServices by way of transfer of a going concern, as a whole or an independent part thereof.\u201d<\/p>\n If there is any supply of goods or services or both, between any two or more of such companies (merged, amalgamated, etc.), between the date of effect of such order and the date of the order, such supply and receipt will be included in the turnover or receipt of the respective companies, and they shall be liable to pay taxes. Such Companies would be treated as \u201cdistinct persons\u201d<\/u> for this Act.<\/p>\n Section 18 of the CGST Act, 2017 enshrines the provisions regarding availing of ITC by the taxable person. Section 18(3) of CGST Act, 2017 as well as Rule 41 of CGST Rules, 2017 stipulates that in case of change of constitution of a registered taxable person on account of the sale, merger, demerger, amalgamation, lease, or transfer of business, the registered person would be allowed to transfer the unutilized ITC.<\/p>\n In this context, the registered person is required to furnish the details of sale, merger, de-merger, amalgamation, lease, or transfer of business in the Form GST ITC-02 electronically on the Common Portal along with a request to transfer the unutilized ITC lying in his electronic credit ledger to the transferee.<\/p>\n Transfer of business as a going concern to different persons qualifies exemption from GST, a pivotal question that arises here is the requirement of reversal of ITC.<\/p>\n As per Section 17(2) of CGST Act, 2017, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies, and partly for effecting exempt supplies, the amount of ITC shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.<\/p>\n Since services by way of transfer of going concernedhave been specifically exempted, as per law, there is a requirement of reversalof ITC attributable to such exempt supply. The impact of the same appears to be very harsh on businesses, especially where the businesses are making 100% taxable supply.<\/p>\n\n
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