A Slump Sale is the sale of an entire business undertaking for a lump sum consideration, without values being assigned to individual assets or liabilities. This structure is governed by Section 50B and Section 2(42C) of the Income Tax Act, 1961 (ITA).

Key Characteristics and Compliance

The entire undertaking must be transferred on a going concern basis. The core requirement is that the business must satisfy the undertaking criteria and the sale price must be a single, non-allocable figure.

Tax Implications

1. Taxable Event: The transaction is taxed as Capital Gains in the seller’s hands.
2. Cost Basis: The cost of acquisition is generally deemed to be the net worth of the undertaking computed as per the mechanism provided in ITA.
3. Tax Rate: The applicable rate depends on the holding period of the undertaking:
   • Long-Term Capital Gains (LTCG): If held for more than 36 months, taxed at 12.5%.
   • Short-Term Capital Gains (STCG): Taxed at the seller’s applicable tax rate.
4. GST is not applicable on transfer of an undertaking on a going concern basis.

Seller’s Advantage

• Simplified Process: The overall transfer process is significantly quicker and less administrative since individual asset and liability transfers aren’t required.
• Favourable Tax Rate: The transaction may qualify for the lower LTCG tax rate (12.5%) if the undertaking has been held for over 36 months. Holding period of each individual asset is not relevant.

Buyer’s Advantage

• Simplified Due Diligence: Avoids administrative work involved in valuing and transferring individual assets and liabilities.
• Mitigated Entity Risk (Risk Ring-fencing): The buyer is protected from potential undisclosed entity-level liabilities (like old tax disputes or regulatory non-compliance) that could be inherited in a share purchase.

Navigating a Slump Sale requires specialized expertise. Contact us to ensure your entire undertaking transfer is executed optimally for maximum tax efficiency and complete regulatory compliance.