Rationale: GST impact in case of Slump Sale/Demerger Scenario

 The GST Tax exemption is available for the transactions involved in the transfer of business undertaking as a whole, wherein all the assets and liabilities of the company are transferred by the target company to the acquirer.

In the case, where any particular liability or asset not part of the transferred business/group of assets challenges the provision of exemption mentioned above. However, rationale logic can't be given for the same in the act, if any can be easily become another provision have to face the continuous loss of purpose by the parties in the transaction. Hence, this gives raise to the uncertainty in the Mergers and Acquisitions transactions.

As due to the above, it is ordinarily suggested to get AAR before the transaction being entered into.

Rationale:

Question raised on whether the supply is of goods or services or not?

Why?

To resolve Sec.7 - Scope of Supply

In Sri Ram Sahai vs. Commissioner of Sales Tax [(1963) 14 STC 275 (All)] held that ‘business’ is admittedly not a movable property and, is therefore, not goods.

‘Services’ is defined u/s 2(102) of CGST Act to mean anything other than goods, money and securities. If one goes by textbook interpretation of ‘services’ definition, ‘business’ is ‘service’.

Further, transfer of business is categorized as service in the exemption Notification No. 12/2017– Central Tax (Rate) dt. 28.06.2017

What is Transfer of business?

“Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business but shall not cover mere or predominant transfer of an activity comprising a service. Such sale of business as a whole will comprise comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. Since the transfer in title is not merely a transfer in title of either the immovable property or goods or even both it may amount to service and has thus been exempted"

Complication Alert!!!!!!!

What is "transfer of going concern" in the course or furtherance of business??

Transferee has not closed the existing business but same is transferred. It, therefore, does not fall under definition of business and hence not a supply leviable to GST. This proposition was accepted by Andhra Pradesh Advance Ruling Authority in case of M/s. Shilpa Medicare Limited [2020(39) GSTL 334 (AAR-GST-AP)] but it held that transfer of business is a supply.

Things to be in mind:

1. It should be a live business, a business going on at the moment of the transaction

2. Business should be capable of running as an independent entity by the purchaser

3. All assets and liabilities transfer is not mandatory but the relevant liabilities must be transferred.

Additional Points:

The asset must be sold as a part of a ‘business’ as a ‘going concern’; 

Purchaser intends to use the asset to carry on the same kind of business as the seller; 

Where only part of business is sold, it must be capable of separate operation; 

There must not be series of immediately consecutive transfers