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Businesses may have to reassess tax liability, ongoing M&As after slump sale rule change

Businesses would have to reassess their tax liabilities and possibly re-structure mergers and acquisitions in order to comply with new rules for computation of fair market value of capital assets in slump sales.
Transactions where the business entities have been transferred – within a group or outside a group - at book value rather than market value are likely to see a higher tax liability depending on the fair market value of the assets, as per the new rules.
“It will affect group restructuring transactions, where business undertakings used to be transferred for book value irrespective of fair market value of underlying assets, especially immovable property, since now such transactions may attract higher tax liability,” said Shailesh Kumar, partner, Nangia & Co LLP.
"The rules will apply to ongoing transaction as well as those coompleted in FY21 since the rules come into effect from April 1, 2020, so, in some cases, the entities will need to evaluate if the consideration is in accordance with these rules," said Amit Maheshwari, Partner at AKM Global.
The slump sale amendment rules notified on Monday by the Central Board of Direct Taxes provide for taking the higher of the fair value of the business transferred or the fair value of the consideration received as the deemed consideration for computing capital gains on slump sale or exchange, even if the actual consideration received is lower.
The fair value of assets transferred is defined to mean the book value except in case of certain assets where it could be the quoted price, such as shares, securities, fair market value as per valuation report for jewellery or artistic work. The fair value of consideration received is defined as fair market value as per valuation report except that in case of immovable property received for which the stamp duty value has to be taken.
Some experts added that the computation mechanism spelled out by the rules could lead to litigation since slump sale take the combined value of the assets being transferred as consideration without getting into individual assets.
“This may open a Pandora’s box on determining whether the transaction undertaken is a slump sale transaction or an itemised asset sale,” said Amrish Shah, partner at Deloitte Haskins & Sells LLP.
The rule essentially provide that all assets of the business undertaking other than five specific categories of assets - immovable property, jewelry, shares, securities and artistic work – will be valued essentially based on book value. On the other hand, fair market value of these five categories will be determined as per existing valuation rules, assuming these assets are being transferred individually.