Budget 2021 Targets M&A Deals Designed To Avoid Tax
Budget 2021 expanded the scope of slump sale under the Income Tax Act. It will now include, among others, transactions such as exchange of assets, and giving up or extinguishing rights on assets.
The impact of this amendment appears to be to bring into the capital gains tax net all forms of transfers of an undertaking, said Nand Kishore, partner at DSK Legal.
Earlier only “sale” of an undertaking was subjected to capital gains under Section 50B of the act. By this amendment, any form of transfer of undertaking would be deemed to be a slump sale and would be subjected to capital gains.Nand Kishore, Partner, DSK Legal
The Section 50B of the Income Tax Act imposes a capital gains tax on any profit arising from a slump sale. Slump sale is defined under the Section 2(42C) of the act to mean a sale at a lump sump value without specific value being assigned to individual assets.
While discussing transfer as a result of sale, it needs to be kept in mind that it is the substance of transaction that is more important than the name given to it by the parties to the transaction, said the budget fine print explaining the need for the amendment.
“For example, a transaction of sale may be disguised as exchange by the parties to the transaction, but such transactions may already be covered under the definition of slump sale as it exists today on the basis that it is transfer by way of sale and not by way of exchange.” – Memorandum to the Finance Bill, 2021
The budget document noted that even the Supreme Court has explained this principle while deciding whether a transaction will be liable to capital gains tax. It is, however, still seen that tax avoidance schemes are drawn to defeat the intent of this provision, said the memorandum to the Finance Bill, 2021.
Therefore, through this amendment, the meaning of slump sale has been expanded to include all transfers which are described under the Section 2(47) of the Income Tax Act.
The amendment will take effect from the April 1, 2021 and will be applicable from assessment year 2021-22 onwards.