Fair value rules – A new facet to slump sale

Presently, the tax legislation supplies for deemed honest valuation guidelines for specified asset transfers.

By Amrish Shah, Madhvi Jajoo and Shefali Ganatra

The federal government has repeatedly introduced in applicable amendments, guidelines and clarifications to streamline the tax legislation and discourage tax avoidance schemes which generally defeat the aim of the legislation. One such crucial modification which impacts the deal area is the introduction of the deemed honest worth idea for enterprise transfers, launched in the course of the current adjustments to the Revenue Tax Act (the Act) and the newly prescribed guidelines for figuring out the identical.

Switch of a capital asset sometimes triggers capital features within the fingers of the vendor, and the speed of tax relies upon upon the kind of capital asset transferred and the interval of holding of such asset within the fingers of the vendor. Switch of enterprise as a going concern has been considered a capital asset and thus, such switch attracts capital features tax if the enterprise is transferred for a lump sum consideration i.e. with out assigning particular values to every constituent of the enterprise (generally known as ‘stoop sale’).

There have been a number of ambiguities so far as the taxation of enterprise switch is anxious and most of them have been ironed out by the federal government vide Finance Act, 2021 with impact from April 1, 2020. Presently, the tax legislation supplies for deemed honest valuation guidelines for specified asset transfers. In a state of affairs the place the sale consideration of the asset being transferred is decrease than the deemed honest worth so decided, then for the aim of computing capital features, the precise sale consideration is changed by such deemed honest worth. Until monetary 12 months 2020, for the aim of enterprise switch pursuant to a stoop sale, the tax legislation didn’t present for any deemed honest valuation mechanism and thus, predominantly sale worth disclosed by the vendor could be the thought-about for computing capital acquire tax.

As per the principles notified by the Central Board of Direct Taxes, the consideration for enterprise switch or stoop sale shall be computed based mostly on the upper of the next:

A. Internet ebook worth of belongings much less liabilities transferred with substitution of honest worth for prescribed belongings (i.e. jewelry, creative work, shares, securities and immovable property); or

B. The precise consideration obtained by the vendor. In case non-monetary consideration is obtained then the honest market worth of such non-monetary consideration (as decided by the mechanism said in level A. above) could be the deemed consideration.

With reference to level A. above the substituted honest worth for – (i) immovable property, it shall be the stamp responsibility worth, (ii) fairness shares it is going to be the adjusted internet asset worth of the underlying firm, and (iii) jewelry, creative work, non-equity shares and every other securities could be the value it will fetch within the open market.

The moot level to think about is that whereas the genesis of stoop sale / enterprise sale beneath the Act is that the switch must be consummated with out assigning particular values to the belongings and liabilities, the principles framed beneath the identical for deemed honest worth present for a mechanism to find out the particular worth for every asset (i.e. both ebook worth or specified honest worth). That is prone to trigger challenges for the corporates whereas sustaining that the transaction they’ve entered into is a stoop sale if questioned by the Income authorities.

The above guidelines for computing tax honest worth for enterprise switch are relevant regardless of whether or not the transaction is with associated events or with unrelated / third events and shall be relevant from monetary 12 months 2020-2021.

The modification pursuant to Finance Act, 2021 is efficient from 1 April 2020 and it will affect the transactions already concluded earlier than the modification got here into mild. The identical could result in a revision within the provision for tax for taxpayers, in circumstances the place the enterprise transferred entails the desired belongings and there may be an upward revision within the sale consideration as a result of newly included deeming fiction in legislation. This may increasingly additionally give rise to outflow of curiosity on account of brief fee of advance tax for monetary 12 months 2020-2021. Even the corporates which have adopted their monetary statements previous to the principles being prescribed must issue this facet.

As well as, because the honest worth guidelines prescribe a selected mechanism to find out the deemed honest worth of immovable property or every other items (forming a part of the enterprise endeavor), it provides rise to a gray space as as to whether the client could be obligated to deduct tax at supply on the time of their switch.
We must wait and watch as as to whether the brand new guidelines will present readability or spur a debate amongst the taxpayers and the Income authorities.

(The authors are Amrish Shah – Accomplice with Deloitte India, Madhvi Jajoo – Senior Supervisor with Deloitte Haskins and Sells LLP and Shefali Ganatra – Deputy Supervisor with Deloitte Haskins and Sells LLP)