By Anish Shah
Union Budget 2021 introduced significant amendments in the provisions relating to the taxation of slump sale transactions. One of the key amendments is in relation to computation of consideration value for slump sale taxation. Earlier, the consideration actually paid or received on the slump sale was considered for determining the capital gains tax on the sale.
The Finance Act, 2021 has however provided that to compute the tax arising on account of such slump sale, the Fair Market Value (FMV) of the capital assets (being an undertaking or division transferred by way of slump sale) shall be deemed to be full value of the consideration. However, the methodology to compute FMV was not prescribed by the Finance Act, 2021.
The Central Board of Direct Taxes has now prescribed the rules containing the mechanism relating to computation of the FMV in slump sale transactions. The rule provides two methods to calculate the FMV of the capital assets transferred by way of slump sale.
As per method 1, FMV is essentially the book value of the undertaking which is adjusted for fair value of certain assets such as jewellery, artistic work, shares, securities, and immovable properties (Adjusted book net worth method). The fair value of such assets specified above needs to be computed as per the prescribed tax valuation norms. Whereas as per method 2, FMV is the total of both monetary and non-monetary consideration received or accruing on slump sale. Where the consideration includes non-monetary consideration as well, the fair value of the assets which represent the non-monetary consideration is to be determined as per the prescribed tax valuation norms.
The higher of the FMV derived using the above 2 methods shall be deemed to be the full value of consideration for calculating the capital gains arising on such slump sale.
Since the higher of the two FMVs need to be adopted for calculation of capital gains and tax thereon, in a case where, the actual sale consideration is less than the adjusted book net worth of the undertaking, the tax will need to be computed using the adjusted book net worth as the consideration amount.
Another important aspect to keep in mind is that the amendment pertaining to determination of consideration amount on slump sale is applicable retrospectively from FY 20-21. Therefore, companies which have undertaken slump sale transactions in FY 20-21 may need to re-visit and if required re-compute their capital gains to determine any additional tax liability that could arise on the slump sale transactions undertaken by them in FY 20-21.
These new rules for determining the deemed consideration amount may have an impact on slump sale transactions between group entities where the consideration amount is either nominal or restricted to the book value of the undertaking being transferred.
(Anish Shah is Associate Partner, M&A Tax and Regulatory Services at BDO India. Views expressed are author’s own.)