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No GST on business vertical sold as 'going concern'

Mumbai, Apr 5, 2023

The Karnataka bench of the Authority for Advance Rulings (AAR) held in a recent ruling that sale of a business vertical as a 'going concern' will not attract the goods and services tax (GST), provided the conditions are met. This is because a notification dated June 28, 2017 specifically prescribes that "services by way of transfer of a going concern, as a whole or an independent part thereof, attracts nil rate of GST".

Tax experts state that it is important the conditions that qualify a transaction to be a going concern should be met. According to Sunil Gabhawalla, an indirect tax expert and chartered accountant, "It is essential that the business should be continued by the buying entity. In addition to all the assets and liabilities, the contingent liabilities should also be transferred (subject to any exclusions agreed upon) - this could, for instance, be an ongoing litigation which may or may not result in tax demand in the future. Lastly, the payment should be a lump sum."

While advance rulings do not set a judicial precedent, they have a persuasive impact on assessments. This ruling will help entities contemplating sale of business, say tax experts.

In this case, Bengaluru-based Pico2Femto Semiconductor Services - engaged in research, development and providing engineering services in the semiconductor space - entered into a business transfer agreement for one of its independent running divisions (termed as the staffing division). This division, along with all its assets and liabilities, was to be transferred as a whole - as a going concern - on an 'as is, where is basis'.

The company submitted that the agreement was that of a slump sale, it did not involve any element of supply of goods or services, and hence no GST applies. In addition to the assets and liabilities, it pointed out that the existing contracts of the company will also be transferred and taken over by Tessolve Semiconductor, the buyer, who will initiate the invoices in the future. All existing employees of the staffing division will also be transferred to the payroll of the purchasing entity.

The consideration for the transfer would be received in multiple states, with a performance guarantee and sharing of revenues. The minimum consideration would be Rs 4.5 crore and the maximum (given that the performance criteria were met) would be Rs 27.5 crore.

The AAR held that the transfer of an independent running business division, along with all its assets and liabilities, as a business concern amounts to a 'supply of services'. The GST rate for supply of services is 18%. However, it added that the benefit of the notification of June 2017, which prescribes a nil rate, would be available subject to the fulfilment of the conditions of a going concern.

[The Times of India]

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