Slump Sale a Supply of Goods or Service under GST?
Slump Sale a Supply of Goods or Service under GST- India is on its way to becoming a super-economy of the 21st century, driven by the exponential growth of its companies. The company will expand into two forms-organically or inorganically. The former refers to the internal forces of companies that are reorganized to bring development and growth into the sector, while the company goes into corporate restructuring in case of inorganic growth to restructure its external façade to support the expected development and growth. Business restructuring happens to be the perfect method in today’s fast-moving corporate world to achieve an edge in this search. Business restructuring happens to be the perfect method in today’s fast-corporate world to achieve an edge in this search.
Business transformation is an all-encompassing process, whether financial or technical, business, or organizational. The company may be rearranged by mergers, demergers, disinvestments, takeovers, strategic alliances, or recession sales.
This report focuses on GST slump sale consequences.
Concept of Slump sale
The slump selling term originates from the Income Tax Act, 1961. In section 2(42C), the IT Act describes “slump sale” as–”slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without attaching values to the individual assets and liabilities in such transactions. “Furthermore, as stated in clarification 1 to section 2(19AA),” undertaking “involves any part of an undertaking or business operation taken as a whole;
Slump sales, therefore, have the following conditions: selling of
- one or more undertakings,
- Any particular interest should be allocated to assets and liabilities, and the same should be sold for a lump sum fee,
- All the undertaking’s assets and liabilities must be transferred.
Transfer of all assets and liabilities
One of the key preconditions of a slump selling agreement is that all of the company undertaking’s assets and liabilities must be transferred to the buyer.
Under Section 50B of the IT Act, the expense of making such a transaction shall be the undertaking’s net worth (book value of assets and liabilities).
Explanation1 offers the method of measuring an undertaking’s net worth or a segment sold on the basis of recession revenue. According to Explanation 1 “Net worth” is the accumulated worth of the total assets of the undertaking or division for the purposes of this section as divided by the sum of the liabilities of such undertaking or division as existing in its account books. “This concept is no different from the sense of the net value of the term, as is generally understood in the accounting article.
There are numerous judicial pronouncements where there is a difference of opinion that the transfer of all assets and liabilities to apply for a slump sale is not necessary. This is, even if the transferee retains some properties and the undertaking carries out its business activities without any interruption after such transition, it will still count as a slump selling. Bombay High Court has also substantiated the same in its decision.
Because in a slump sale, all assets and liabilities are to be transferred, it is necessary for one to understand the principle of going Concern that is discussed in detail below. Slump Sale a Supply of Goods or Service under GST.
Going Concern concept
Within the definition of slump selling, the word “going concern” is not specifically specified. Change as a continuing company means converting a company or entity that can be carried out as an individual business by a purchaser. In order to qualify recession disposal, the company does not need to be continuous at the time of its transition.
Going Concern is a primary accounting principle, and Accounting Standard 1, Accounting Policy Disclosure describes it as follows:
“For the near future, the company is generally regarded as a continuing concern, that is, as continuing to function. It is believed that the company has neither the purpose nor the need to liquidate or to cut the size of the operations significantly.
Both of the undertaking’s assets and liabilities are to be transferred to trigger a slump sale. Therefore it can be said that companies whose operations are shut and is into liquidation may also opt for slump sale provided the conditions mentioned above are met. The purpose of such a condition is to ensure that the company continues with regularity and a kind of permanence in the new hands.
Further, the agency should not be a profit-making organization. The only relevant argument to be considered to constitute a transition as a “going concern” mean that it is a commercial operation capable of operating independently for the near future. These views have been taken In the M / S Subject. M/S. Indo Rama Textiles Ltd.
The word “going concern” does not have any place in the GST Act. However, in the case of Rajashri Foods Pvt Ltd, one may refer to the pronouncement of the Advance Authority Ruling for the same as stated below:
A going concern is an accounting term that refers to the company’s operations as a whole. Transfer of a continuing business involves selling a working company that can be carried out as an individual business by the purchaser. Such a company transition as a whole would include a thorough transition of immovable property, inventory, and the transfer of unfulfilled orders, staff, goodwill etc.
Transferring company assets means that the portion of the assets is transferred and not the whole company, i.e., the liabilities remain in the transferor’s accounts, while all assets and liabilities are transferred together in transferring property. The idea of moving the going Concern comes useful when shifting the company as a whole, but case laws and research also suggest the possibility of moving assets as a continuing concern. Slump Sale a Supply of Goods or Service under GST.
Slump sale: supply of goods or supply of service under the GST Act?
We shall therefore now refer to the scope of supply as referred to in Section 7 of the (Central Goods and Services Tax Act 2017 (CGST Act) which reads as follows:’
(1) For the purposes of this Act, the word ‘supply’ shall include––
All types of supply of goods or services or both, such as sale, transfer, barter, swap, license, rent, lease, or disposal, made or agreed to be made for consideration.
XX Supply involves things such as sale, exchanging, bartering, etc. for use in the course of business or furtherance. By this, we can conclude that the operations are to take place in the context of business or furtherance. The trade, going into recession selling, is neither in the course of a business nor in business continuity. However, since the word “includes” has been used in the meaning set out in Section 7(1) of the CGST Act, the reach of supply goes beyond the course of business or furtherance. Thus the switch will also be viewed as a “supply” under GST as a continuing issue.
Since slump sales are considered to be products under GST, we can now understand whether the same is goods or services.
Under section 2(52) of the CGST Act, the word goods were described as:
“(52) “goods” encompasses all forms of movable property other than money and securities which includes actionable claims, rising crops, grass, and items attached to or forming part of the land that are agreed to be severed prior to supply or under a supply contract; ”
the term” service “as specified in section 2(102) of the CGST Act is specified as:
“(102) “services” encompasses something other than goods, money, and securities but involves activities relating to the use of money or to its transfer by cash or by some other method, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is paid.
Clause 4(c) of Schedule II of CGST Act states that
(C) If a person is no longer a taxable person, then any goods that are part of the assets of any commercial business he performs are considered provided by him in the context of promotion of his business directly before he ceases to be a taxable person, unless …
(I) transfer the facility as a commercial facility to another person; or
(Ii) The work is performed by a personal representative considered to be a taxable person.
The second table of the Trade and Finance Law talks about activities that should be treated as a supply of goods or a supply of services, as the transfer of commercial assets in Section 4 is considered a supply of goods. In item 4 (c), moving the facility as an ongoing facility does not constitute a supply of goods.
According to the definition of services, anything other than goods is called a service. Businesses transferred as a going concern are excluded from the goods supply list. As the schedule specifically excludes this activity, it becomes very clear that moving the facility as a running facility is a supply of services.
Ministry of Finance Vid Notification No. 12 / 2017- Central Tax (Adjusted) On June 28, 2017, he came out with the list of services supply and brought more clarity about “service by
The method of transferring a continuous concern, as a whole or an independent part of it, “in series No. 2 of the aforementioned notification, to constitute a decrease in the offer from the service. Moreover, the activity of transporting the concerned parties must have” none “of the tax imposed on this offer.
Since the notification speaks of the activity of moving a current company as a supply of service, the same is exempt from GST. Likewise, the second schedule of the CSGT Law excludes the transfer of an enterprise as a commercial facility as a supply of goods, and the same is considered a supply of service and imposes a GST.
It is concluded that the transfer of current business as a whole or part thereof or the transfer of a commercial facility as a current facility is exempt from tax under GST and that the transfer of commercial assets will have effects on GST.
The above can also be justified by referring to the judgment issued by the Tax Authority of Karnataka’s prejudgment in the case of Rajashree Food Pvt Limited where it was decided that subject to the condition that the unit being transported is a constant concern, then the supply of the service will be considered, and the same is exempt from payment of GST To the extent that it can be imposed under subsection (1) of Section (9) of CGST Law, 2017.
Itemisation of assets for levy of GST
In the neglected sale, the assets proposed for transfer consist of both movable and immovable property, i.e., land, building, stock, plant, machinery, etc. Since these assets and liabilities are sold together to consider a lump sum, they do not rise to the level of “mixed supply” under GST.
Let us first understand the concept of mixed supply under GST
Article 2 (74) of the Trade and Commerce Law defines the mixed offer as stipulated in:
(74) “Mixed offer” means two or more individual supplies of goods or services, or any combination thereof, made by a taxable person for a single price in which this offer does not constitute a combined supply.
To form a mixed supply, there must be something on behalf of one or more goods or services, and it should be with each other. So if the item in the package is not goods or services, it will not be considered a mixed offer under GST.
Let’s understand the same thing with the help of an example. Suppose the assets that are transferred to the buyer are the plant, machinery, land, and shares at one price. Here there is more than one commodity that was transferred in the transaction. The package is not exclusive to goods or services, or both. This will not be the characterization of mixed supply, as the transferred lands are excluded from the jurisdiction of the GST (according to the third table of the GST Law that lists the items that neither provide the commodity nor provide the services).
GST, it requires an assessment of whether or not the transfer is a continuous concern.
The treatment of moving the facility as a whole from one of the units in the nature of the job is tantamount to supplying the service. The notification carries good but subject to the condition that the unit is a constant concern and therefore must itself be free of jurisdiction of GST.
To summarize the above concept
- Transfer of commercial assets: supply of goods Transfer of business:
- supply of services
- Transfer of business / or part thereof as a running facility: supply of service and exemption from it by notification
The corporate revival will certainly be more cost-effective than creating an entirely new structure. Also, this would give investors a boost to take control of these companies and create more job opportunities in India.
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