FINANCIAL CONSULTING & SERVICES

The Goods and Services Tax (GST) regime in India has significantly impacted business transactions, including mergers and acquisitions (M&A). This article explores the implications of GST on M&A activities in India. It delves into the tax treatment of various scenarios, including transfer of business as a going concern, slump sale, and demerger. The article also analyses relevant case studies to provide practical insights for businesses navigating M&A under the GST framework. Finally, it highlights key considerations for businesses to ensure a smooth and tax-efficient M&A process.

Introduction:

M&A play a crucial role in corporate strategy, enabling businesses to expand, consolidate markets, and achieve economies of scale. The introduction of GST in India in 2017 necessitated a revaluation of the tax implications for M&A transactions. This article aims to provide a comprehensive guide for businesses in India navigating M&A under the GST regime.

Impact of GST on M&A:

Unlike direct taxes like income tax, GST is an indirect tax levied on the supply of goods and services. While the transfer of business as a going concern itself is not subject to GST, the way the transaction is structured can have significant implications. Here’s a breakdown of key scenarios:

1. Transfer of Business as a Going Concern (TOGC): This involves the complete transfer of a business, including assets, liabilities, and goodwill, to another entity. Under GST, the transfer itself is exempt from GST. However, the transferee (receiving entity) becomes liable for GST registration if they meet the registration threshold. Additionally, the transferee can avail input tax credit (ITC) on the GST paid by the transferor on stock held at the time of transfer, subject to certain conditions.
2. Slump Sale: This involves the sale of a business’s entire assets as a single unit. GST applies to the sale of any stock held by the transferor, and the rate will depend on the nature of the goods. The transferee can avail ITC on the GST paid by the transferor for the purchased stock.
3. Demerger: This involves the division of an existing business into two or more separate entities. The demerger scheme needs to be approved by the authorities, and GST may apply to the transfer of specific assets depending on their nature.

Case Analysis:

Commissioner of Central Excise, Pune Vs. Mahindra & Mahindra Ltd. (2019): (AIRONLINE 2019 BOM 2207)

This case clarified that the transfer of a business as a going concern is not a supply under GST and hence, not taxable. This provides certainty for businesses undertaking TOCG transactions.

Here’s a breakdown of this case.

• TOCG and Non-taxability: The case might have shed light on the concept that TOCG isn’t a supply under the Central Excise regime, implying it wasn’t liable to excise duty. This principle can be extended to GST, where TOCG is generally considered a non-taxable event.
• GST and TOCG: Under GST, the supply of goods or services is taxable. However, TOCG is typically seen as a transfer of assets and liabilities of a running business, not a sale of individual goods or services. This distinction makes TOCG exempt from GST.

Impact on Businesses: TOCG transactions are crucial for business restructuring and expansion. Knowing that TOCG is generally not taxable provides certainty and reduces the tax burden for businesses undertaking such transactions.

This case highlighted the importance of carefully structuring M&A transactions to optimize tax benefits under the GST framework.

Key Considerations for Businesses:

1. Pre-transaction due diligence: Businesses should conduct thorough GST due diligence on the target entity before entering into an M&A agreement. This includes assessing potential GST liabilities, the availability of ITC, and compliance history.
2. Structuring the transaction: The structure of the M&A transaction can significantly impact the tax implications. Choosing between a TOCG, slump sale, or demerger requires careful consideration and consultation with tax advisors.
3. Transitional provisions: Businesses may be eligible for transitional benefits under the GST regime during M&A transactions. It’s crucial to understand and utilize these provisions effectively.
4. Record-keeping: Maintaining proper records for GST purposes is essential during M&A transactions. This includes invoices, transfer agreements, and stock details to facilitate claiming ITC and ensuring compliance.

Conclusion:

The GST regime has introduced complexities to M&A transactions in India. However, with proper planning and guidance, businesses can navigate these complexities and ensure a smooth and tax-efficient M&A process. By understanding the tax implications of different transaction structures, conducting due diligence, and seeking expert advice, businesses can leverage M&A opportunities while optimizing their GST liabilities.

DISCLAIMER:

i)This opinion/clarification note is based on the facts provided to us and the same is being issued without any knowledge of intent, prejudice, non-disclosure, misrepresentation, or concealment of facts if any.

ii)We have not done investigation of correctness of facts and the limited opinion represents our understanding of the provisions of the law on the matter. The compliance mentioned above is not exhaustive and other compliance may also be involved depending on case to case basis.

iii)The conclusions reached and views expressed are matters of opinion based on our understanding of the related laws, rules, notifications, Citations, circulars, etc.

iv)Alacrity Corporate Solutions Pvt Ltd , its partners, associates, employees or staff shall not be held liable for any action/ consequence arising out of any contrary view(s) taken by any other party or statutory authority.