BTA - Useful way to transfer business
By Rishi Saraf 18-Oct-2016
Individuals and companies at some point of time require to purchase or sell a business. The business may be registered under excise, and sales tax and have stock of raw materials, capital goods and different assets and liabilities.
Problem: In such cases various taxation issues crop up post sale of the business which include summons from excise department and sales tax department for payment of duty on such sale and from Income tax for payment of capital gains on difference between transaction value & ready reconer value.
Possible solution: To make things easy, tax experts suggest that parties do this by way of a business transfer agreement with transfer of the undertaking on as-is-where-is basis inclusive of all assets & liabilities as a going concern. This is also known as slump sale in Income tax.
For the buyer: Income tax has a provision that ready reconer value shall be taken as sale value and as per sec 56 the buyer will have to pay short term gains tax for the difference between purchase value and the ready reconer value. (Upto 31-Mar-17, this section was applicable to individuals and HUF’s. So if the buyer had bought the undertaking in a company or LLP, this section would not have applied).
For the seller: Income tax has another provision for the seller, Sec 50C and the seller would have to pay capital gain for difference between sale value and the ready reconer value. However, it is now being challenged that leasehold lands in Industrial areas are not owned lands and this section would not apply to the lands sold.
To overcome the effect of Sec 50C a slump sale would be useful. In slump sale the transaction value would be taken as it is (without applicability of Sec 50C). The seller would only have to pay long term capital gains tax in such case on the difference between the transaction value and the cost in his books.
Documentation: The documentation part is equally important. The word sale should not appear in the agreement and needs to be replaced by the word transfer, so that sales tax is not attracted. Further, all assets & liabilities need to be transferred to the other party as it is without holding back.
(Disclaimer: Advise of tax experts in such matters would be needed. Feel free to contact with us, we will put you to the experts in the field).