Understanding Slump Sales and Their GST Implications

While Indian Goods and Services Tax (GST) legislation does not explicitly define 'slump sale,' the term generally refers to the comprehensive transfer of an entire business operation as a going concern.

What is a Slump Sale?

A slump sale represents a business restructuring strategy where a collection of assets and liabilities is collectively divested for a single, overall consideration. In this type of transaction, the individual values of the transferred assets and liabilities are not separately determined.

Is a Slump Sale Liable to GST?

Within the GST framework, the term 'supply' encompasses a broad range of transactions involving goods and services, including sales, transfers, leases, rentals, licenses, barters, or disposals conducted for a fee in the course or furtherance of business. Given this expansive definition, a slump sale is typically regarded as a supply under GST.

Schedule II of the Central Goods and Services Tax (CGST) Act outlines activities classified as either a supply of goods or services. Specifically, Clause 4 stipulates that while the transfer of individual business assets is considered a supply of goods, Clause 4(c) explicitly states that the transfer of an entire business as a going concern is not treated as a supply of goods.

Furthermore, Notification No. 12/2017-Central Tax (Rate) exempts services involving the transfer of a going concern, whether in whole or in part, from GST. This notification clarifies that such business transfers are exempt from GST, although the GST law itself does not provide a specific definition for the term 'going concern'.

Therefore, based on these provisions, the activity of transferring a business as a going concern is categorized as a supply of service and is exempt from GST. Correspondingly, Schedule II of the CGST Act excludes the transfer of a business as a going concern from being classified as a supply of goods, while individual business asset transfers are deemed a supply of goods. This leads to the following interpretations:

• Transfer of business assets: Classified as a supply of goods.
• Transfer of a business (general): Classified as a supply of service.
• Transfer of a business as a going concern: Classified as a supply of service and exempt from GST under the specified notification.

Advance Ruling on Slump Sales Under GST

A noteworthy advance ruling from the Karnataka Authority for Advance Ruling, involving M/s Rajshri Foods Private Limited, provides further clarity on this matter.

Facts of the Case

In this case, the applicant operated three manufacturing units and proposed to sell one complete unit, including all fixed assets (such as land, buildings, plant, and machinery), current assets, and liabilities, for a consolidated consideration. The central questions posed were:

• Would this transaction be classified as a supply of goods, a supply of services, or a combination of both?
• Does this transaction fall under the purview of Notification No. 12/2017-Central Tax?

Analysis by the Authority

The Authority's analysis confirmed that an entire functional unit was being sold, involving the complete transfer of both assets and liabilities to the purchaser. This constituted the transfer of a whole business rather than merely specific assets. In line with Schedule II, Clause 4(c), the transfer of an entire business is not deemed a supply of goods. Furthermore, Notification 12/2017 designates the transfer of a going concern as a supply of service, subject to a NIL tax rate.

The Ruling

The ruling concluded that the transfer of one of the applicant's business units as a going concern qualified as a supply of service. This transaction was confirmed to be covered by Notification No. 12/2017-Central Tax (Rate), provided the unit was indeed transferred as a going concern.