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April 5, 2023

Business sector sold as a “going concern” exempt from GST

Business sector sold as a “going concern” exempt from GST

The sale of a business vertical as a “going concern” will not attract the goods and services tax (GST), provided the requirements are met, according to a recent decision by the Karnataka bench of the Authority for Advance Rulings (AAR). This is due to a June 28, 2017 notification that states clearly that “services by way of transfer of a going concern, as a whole or an independent part thereof, attracts nil rate of GST.”

The requirements for a transaction to qualify as a going concern should be fulfilled, according to tax experts. Indirect tax expert and chartered accountant Sunil Gabhawalla asserts that “it is crucial that the company should be maintained by the buying entity. In addition to all of the assets and liabilities, contingent obligations should also be transferred (subject to any agreed-upon exclusions); an example of this would be an ongoing lawsuit that might or might not result in a tax demand down the road. Last but not least, it should be a single purchase.

Advance decisions influence assessments even though they don’t create a legal standard.According to tax specialists, this decision will benefit entities who are thinking about selling their businesses.

In this instance, Pico2Femto Semiconductor Services, headquartered in Bengaluru and involved in semiconductor-related research, development, and engineering services, entered into a business transfer agreement for one of its independently operating divisions. (termed as the staffing division). This division was to be transferred in its entirety, including all of its assets and liabilities, on a “as is, where is basis” and as a going concern.

The business claimed that since the arrangement was a slump sale and there was no provision for the supply of goods or services, no GST was due. In addition to the assets and obligations, it made note that the buyer, Tessolve Semiconductor, would also receive the company’s current contracts and assume responsibility for them going forward. Tessolve Semiconductor would be the one to send out future invoices. All current staff members of the staffing section will also be moved to the purchasing entity’s payroll.

With a performance guarantee and income sharing, the transfer’s consideration would be paid in several states. If the performance criteria were satisfied, the lowest consideration would be Rs 4.5 crore and the maximum, Rs 27.5 crore.

According to the AAR, the sale of a running autonomous business division, including all of its assets and obligations, to a business concern constitutes the “supply of services.” For the provision of services, the GST charge is 18%. It did, however, note that subject to the fulfilment of the requirements of a going concern, the benefit of the June 2017 notification’s nil rate prescription would be available.

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