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New valuation rules around slump sales could create tax troubles, say experts

New valuation rules around slump sales could create tax troubles, say experts, as the latest norms contradict the Income Tax Act definitions of this manner of asset divestment.
In a slump sale, companies, entities or assets are sold lock, stock and barrel.
The rules announced recently mention ways in which a seller can sell the assets or companies. The rules prescribe that if a company owns various assets such as shares, land, gold or paintings, those can be valued individually and then sold.
However, the income tax act defines slump sale as any transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
This is set to create trouble with the taxman, say industry trackers.
“Under the slump sale rules, valuation of different assets would have to be done separately and their fair value ascertained, but this is a contradiction of the very definition of slump sale in the Income Tax Act,” said Amrish Shah, Partner at Deloitte Haskins & Sells LLP. “This is likely to create an unwarranted tax dispute at a time when several companies may look at this method to hive off assets.”
In practice, the sale consideration cannot be less than the adjusted net asset value of the undertaking.
“However, it does restrict the sale consideration value of the assets such as immovable property, securities etc,” said Yashesh Ashar, Partner, Bhuta Shah & Co.
“The rules set a certain floor where if the transaction value is lower than the valuation, it shall still be taxed in the hands of the seller,” said Amit Maheshwari, Tax partner AKM Global, a tax consulting firm.
He said the rules also take into consideration the situation of exchange. In such cases where assets received in exchange have higher valuation, such valuation shall be used for setting this floor.
In the past, too, the tax department has questioned several transactions under the slump sale for various reasons and some of those matters have been litigated.
In the recent budget, the government made announcements around disallowing goodwill that is also set to impact slump sale valuations further, say tax experts.
Under the income tax framework, slump sale is treated separately from other sales such as merger or acquisition and the capital gains and other such accounting entries differ in slump sale.
Tax experts fear that after the lockdown, instances of slump sales may jump and the differences could result in litigation.
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