GST on Slump Sale

A slump sale is a widely adopted mechanism for corporate restructuring in India, involving the transfer of an entire undertaking, distinct unit, or specific division as a "going concern" for a consolidated lump sum consideration. This lump sum is determined without assigning individual values to the assets and liabilities transferred. The definition is rooted in Section 2(42C) of the Income-tax Act, 1961, and underscores the holistic nature of the transaction. An "undertaking" is broadly defined to include any part of an undertaking, specific unit, division, or business activity considered as a whole. Key conditions for a slump sale include the sale of one or more identifiable undertakings, the absence of individual asset/liability valuation, and a lump sum consideration. While traditionally all assets and liabilities were transferred, judicial precedents have allowed for the exclusion of non-essential assets if the "going concern" nature is preserved.

Under the Goods and Services Tax (GST) regime, the transfer of a business as a "going concern" is uniquely classified as a "supply of service" and is explicitly exempt from GST, attracting a "nil rate" of tax. This exemption is enshrined in Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

Interpretation of "Going Concern" under GST

The GST legislation does not precisely define "going concern". Instead, it relies on its conventional meaning as an accounting assumption, implying an actively operational business that will continue indefinitely. Indian Authority for Advance Rulings (AARs) often reference international guidelines, which suggest criteria such as: (i) assets being sold as part of a functioning "business"; (ii) the purchaser intending to continue the same business type; and (iii) if part of a business is transferred, it must be capable of independent operation. A typical "going concern" transfer involves a comprehensive transfer of all essential tangible and intangible assets, liabilities, employees, unexecuted orders, and existing contracts, enabling seamless continuity by the transferee.

Crucial Distinction: "Not a Supply" vs. "Exempt Supply"

This distinction is fundamental for GST reporting and Input Tax Credit (ITC) calculations. A transaction characterised as "not a supply" falls entirely outside GST scope, requiring no reporting or ITC reversal. Conversely, a "nil-rated supply" or "exempt supply," such as a slump sale, is still recognised as a "supply" under GST law. This means it must be reported in GST returns, and any ITC attributable to inputs or input services used for making these exempt supplies may be subject to reversal. For an exempt supply like a slump sale, the transferor must issue a Bill of Supply instead of a tax invoice.

Since a slump sale is an "exempt supply," Section 17(2) of the CGST Act, 2017, and the corresponding Rules 42 and 43 of the CGST Rules, 2017, become directly applicable to the transferor. This means that despite no GST being levied on the slump sale transaction itself, the transferor may incur a significant financial outflow due to the reversal of previously availed ITC, which acts as a "hidden cost" that must be factored into the transaction's financial modelling.

Input Tax Credit (ITC) Treatment in Slump Sale

• Non-Availability of ITC to Transferee: As a slump sale of a going concern is an exempt supply, the transferee is generally not eligible to claim ITC on the consideration paid for acquiring the business itself.

• Transfer of Unutilised ITC: Section 18(3) of the CGST Act, read with Rule 41 of the CGST Rules, provides a specific mechanism for transferring unutilised ITC from the transferor's electronic credit ledger to the transferee's. This applies to business transfers where there is a specific provision for the transfer of liabilities in the business transfer agreement.

• Legal Challenges for Non-Transfer of ITC: Not transferring ITC related to the transferred business may pose significant legal challenges. While Income Tax precedents allow for the exclusion of non-essential physical assets, ITC is a statutory financial credit intrinsically linked to the business's operational and financial flow. Tax authorities could argue that if a substantial ITC balance attributable to the transferred business is deliberately withheld, the "business as a going concern" has not been transferred "as a whole in its true sense". This could lead to a re-characterisation of the transaction from an exempt "transfer of going concern" to an "itemised sale of assets," which would then be subject to GST on individual assets, posing a significant legal and financial challenge. The essence of a "going concern" in GST extends to the financial viability and operational flow, implying that the "going concern" test is not limited to merely transferring physical assets and liabilities, but ensuring financial operational continuity.

Mandatory Filing of ITC-02

Form GST ITC-02 is the prescribed electronic form for transferring unutilised ITC balances between transferor and transferee GSTINs in business restructuring scenarios, including slump sales. It requires the transferor to submit the form electronically, along with a certificate from a Chartered Accountant or Cost Accountant verifying the business and liability transfer, which the transferee then accepts.

Filing ITC-02 is mandatory, even when ITC is not transferred. Rule 41(1) of the CGST Rules 2017 mandates filing Form GST ITC-02 for all business transfers. While its primary function is ITC transfer, the rule also mandates furnishing "details of sale, merger... of business". This implies the form serves as a formal notification to GST authorities about the change in business constitution. Even if the ITC balance to be transferred is nil, filing with a nil amount is a prudent and highly recommended compliance practice to ensure full disclosure, maintain a clean compliance record, and mitigate future challenges. Non-filing or incorrect filing could lead to disallowance of credits or scrutiny from tax authorities.

ITC Reversal Obligations for the Transferor

As a slump sale of a going concern is categorised as an "exempt supply", the transferor is generally obligated to reverse the ITC attributable to inputs, input services, and capital goods used for making this exempt supply. This stems from Section 17(2) of the CGST Act, which denies ITC for goods/services used for exempt supplies. Methodologies for reversal are prescribed under Rule 42 (for inputs and input services) and Rule 43 (for capital goods) of the CGST Rules. This mandatory ITC reversal directly reduces the transferor's electronic credit ledger balance and can represent a direct, often substantial, financial cost to the seller, frequently overlooked in initial deal valuations. This "hidden cost" should be explicitly identified, quantified during due diligence, and factored into Business Transfer Agreement (BTA) negotiations.

• Rule 42 (Inputs & Input Services): Reversal of ITC for inputs and input services used for both taxable and exempt supplies. The reversal amount is calculated based on the proportion of exempt supplies to total turnover and includes a 5% reversal for non-business purposes. This reversal is monthly, with annual reconciliation.

• Rule 43 (Capital Goods): Reversal of ITC on capital goods used for both taxable and exempt supplies. ITC is reversed monthly, based on the ratio of exempt turnover to total turnover, with a specific reduction of 5% per quarter or part thereof for the period used for exempt supplies.

Risk of Disregard or Re-characterisation of Slump Sale

GST authorities may challenge the "slump sale" characterisation if the transaction does not genuinely meet the conditions for a "transfer of a business as a going concern". The primary risk is re-characterisation from an exempt "supply of service" to an "itemised sale of assets," which would attract GST on individual assets. However, slump sale transactions cannot be entirely disregarded under current GST law. Schedule III of the CGST Act lists activities that are neither supply of goods nor services, and slump sale is not included, confirming it as a taxable event (albeit at a nil rate). Courts have consistently held that business transfers as a going concern constitute valid, albeit exempt, supplies. Judicial precedents have largely supported the taxpayer's position against "sham transaction" claims, emphasising the intent to transfer a business as a going concern for a lump sum and the actual continuity of business operations.

Strategies to Mitigate Re-characterisation Risks:

• The Business Transfer Agreement (BTA) must unequivocally state the intention to transfer the business as a whole and as a going concern for a lump sum consideration. While internal valuations for stamp duty are common, the BTA should avoid assigning individual values to assets and liabilities for the slump sale consideration itself.

• It is crucial to ensure all critical assets, liabilities, employees, and ongoing contracts necessary for seamless business continuity are transferred.

• Meticulous documentation is key, explicitly defining the transaction as a slump sale of a going concern, articulating the lump sum nature, and detailing provisions demonstrating continuity.

• The mandatory certificate from a Chartered Accountant or Cost Accountant for ITC-02 filing serves as an independent attestation supporting the "going concern" claim.

• GST authorities increasingly scrutinise operational continuity and completeness of the business transfer from a GST "supply" perspective, even if the transaction qualifies as a slump sale under Income Tax. The BTA must be drafted with both direct and indirect tax implications in mind.

Post-Slump Sale Arrangements and GST Levy

Such transactions are likely subject to separate GST levy and are not considered extensions of slump sale arrangements.

• Non-Compete Conditions and GST Levy: Non-compete agreements are generally considered a "supply of service" under Section 7(1)(e) of Schedule II to the CGST Act. The Central Board of Indirect Taxes and Customs (CBIC) has taken an aggressive stance, demanding 18% GST on non-compete fees. If a separate, identifiable consideration is explicitly attributed to the non-compete clause within the BTA, it is highly probable that this amount will be subject to GST. Even if integrated into the lump sum, tax authorities might attempt to dissect and levy GST on the deemed attributable portion, posing a significant risk. This means specific covenants in an exempt slump sale, if identifiable as distinct "supplies," might be carved out for taxation.

• Transfer of Non-Concluded Business Imports/Contracts: The transfer of "unexecuted orders," "rights and obligations of existing contracts," and "non-concluded business imports" are generally considered essential and integral components of a business being transferred as a "going concern". If genuinely integral to the overall slump sale, they should be covered by the nil-rate exemption. However, a risk of GST levy arises if these are transferred separately from the main business, or if the "going concern" characterisation is challenged. In such cases, they could be treated as distinct "supplies" subject to their respective GST rates. The BTA must meticulously articulate that these elements are an inseparable part of the "undertaking" transferred as a going concern, subsumed within the lump sum, to reinforce their integral nature.

Key Takeaways and Recommendations

• ITC Reversal is unavoidable for the transferor despite the "nil rate" status of the slump sale.

• Slump sales remain valid taxable events within the GST framework.

• ITC-02 filing is non-negotiable regardless of whether ITC is actually transferred.

• Post-transaction activities, such as non-compete clauses or specific asset transfers, require independent GST assessment and cannot simply piggyback on the original exemption.

• Meticulous due diligence and clear, comprehensive contractual drafting are paramount.

• Strategic ITC management by the transferor (quantifying reversal liability) and transferee (understanding non-availability of ITC on acquisition consideration and ensuring ITC-02 filing) is crucial.

• Careful handling of non-compete clauses is necessary, as they are highly likely to attract 18% GST.

• The BTA must integrate ongoing contracts/imports as indispensable parts of the "going concern".

• Given the complexities and aggressive stance of tax authorities, engaging experienced legal and indirect tax professionals is essential.

The success of a nil-rated slump sale arrangement hinges on the meticulousness of documentation and the alignment of the transaction's substance with its legal form, particularly in demonstrating a genuine "going concern" transfer and defending against re-characterisation.