1. A business can be transferred in piecemeals, that is, by the sale of individual assets (in stages) or by way of a slump sale. Slump sale has become a regular business phenomenon in today’s business world. ‘Slump sale’, in terms of natural meaning, is transfer of a whole or part of business as a going concern in which all the assets and liabilities of a business are transferred to a purchaser for a lump-sum consideration without assigning values to the individual assets and liabilities. In other words, there must be a sale of all assets and liabilities of the target business for a lump-sum price.
The concept of slump sale is quite old but it gained popularity after the economic reforms of 1991that focused on liberalization, privatization and globalization. In the process of integration of the Indian economy with the world economy, a number of companies went in for and are still going for restructuring to gain benefits from large scale operations and focusing upon its core competencies. In the restructuring exercise, companies sell off their unprofitable business activities, wherein the business activity as a whole is sold along with assets and liabilities.
The extant indirect tax regime primarily constitutes three levies, namely, Excise Duty, Service Tax and Sales Tax.
A brief analysis of the current as well as proposed indirect tax regime on slump sale transactions
2. Since excise is a levy on manufacture of goods, there is no question of any excise duty on the transaction of slump sale, as it does not result in manufacture of article as per excise law.
Further, service tax is a levy on any activity carried out by a person for another for consideration. The word ‘activity’ is not defined under the service tax law. ‘Activity’ being word of wide connotation, it can be interpreted to include slump sale, leading to levy of service tax on the same. It may be noted here that ‘mere transfer of title in goods’ is an exception to levy of service tax. As already discussed above, since slump sale constitutes to be more than a ‘mere transfer of title in goods’, it may still qualify for service tax levy. However, Mega Exemption Notification No.25/2012-ST exempts services by way of transfer of a going concern, as a whole or an independent part, making the transaction of slump sale exempt from the levy of service tax.
As far as sales tax is concerned, it is a tax which a dealer is liable to pay on sale of goods.Under sales tax laws, ‘sale’ is defined as any transfer of property in goods by one person to another for a valuable consideration.The term ‘dealer’ means any person who carries on the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash, or consideration.Reading together, slump sale not being a sale of goods and also not made in course or furtherance of business, the same may not be exigible to sales tax.
The courts have also held a similar view that, what attracts sales tax is ‘sale’ of ‘goods’ by a ‘dealer’ in course of his ‘business’. When a person sells his entire business or a branch of business, he sells the same as a running business or a going concern. Sale proceeds from such sale of business are not proceeds of sale of goods made in course or furtherance of business. Such sale proceeds cannot form part of ‘turnover’ of a dealer and such transaction is not in connection with or incidental or ancillary to trade, commerce, adventure, etc. Rather the transaction of slump sale indicates closure or winding up of a business. Therefore, such proceeds of sale of business as agoing concern are outside the scope of sales tax and so are not exigible to tax.
Now with the proposed structural change in Indirect Tax Regime by way of subsuming of present indirect taxes, such as Service Tax, Excise, Sales Tax by Goods & Service Tax (GST), the natural question would be on taxation of slump sale transactions under the GST Law. Herein below an attempt has been made to analyze the implications of Model GST Law on slump sale transactions.
3. Goods and Service Tax (GST) is a tax on supply of goods or services or both.Under Model GST Law; a transaction will qualify as ‘supply’ if there a ‘supply of goods/ services‘ made or agreed to be made ‘in the course or furtherance of business‘.
From the precedents cited above, slump sale does not amount to sale of goods, as it is a contract for sale of business as a whole and not mere sale of goods. However, in terms of the peculiar definition of service under the Constitution of India to mean anything other than goods, slump sale can qualify as service under the Model GST Law. Further, as per the rulings cited above, slump sale is a transaction not carried out in the course or furtherance of business. However, the definition of ‘business’ under Model GST Law includes supply of goods/services in connection with closure of business. Thus, the transaction of slump sale can be said to be ‘supply’ and, hence, leviable to GST.
The makers of the Model GST Law in a desperate attempt to overcome the above highlighted shortcomings in the existing regime in levy of indirect taxes on slump sale transactions, have incorporated Entry Nos. 4(a) & 4(c) in Schedule II of the Model GST Law. The said Schedule provides as to what is to be treated as ‘supply of goods’ or ‘supply of services’. Entry Nos. 4(a) and 4(c) of Schedule II, relevant for slump sale transactions are as hereunder:
“4(a)Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
4(c) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
|(i)||the business is transferred as a going concern to another person; or|
|(ii)||the business is carried on by a personal representative who is deemed to be a taxable person”.|
It may be noted that Entry No.4(c) goes beyond its scope to deem, amongst other things, slump sale transactions as a supply made in course or furtherance of business. But at the same time, sale of business as a going concern to another person is provided as an exception to Entry No.4(c), meaning thereby that, it can be said that slump sale is neither supply of goods nor supply of services.It is important to mention that the transaction of slump sale may be included under Entry No.4 (a) or under normal meaning of supply, in which case an argument can be that once a transaction is excluded from levy under one entry, the same cannot be covered by way of another entry.
4. In light of the above discussed chequered history of levy of indirect taxes on slump sale transactions, and the desperate bid as also confused attempt of the Model GST Law to tax such transactions under the tax net, it would be interesting to see as to how GST on slump sale transactions will surface in the time to come.