What’s a slump sale?
‘Slump sale’ involves transfer of a whole or part of business concern as a going concern; lock, stock and barrel. As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the 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.
A sale in order to constitute a slump sale must satisfy the following quick test:
- Business is sold off as a whole and as a going concern
- Sale for a lump sum consideration
- Materials available on record do not indicate item-wise value of the assets transferred
Why slump sale is relevant?
Simple answer? Tax benefit. Income Tax Act has special provisions for computation of capital gains in case of slump sale. Under the slump sale, long/short term capital gain is determined at the undertaking level rather than an individual asset level. Accordingly if the undertaking being transferred is owned by the entity for more than 36 months, the profits are taxed as long term capital gains and vice versa. This not only significantly simplifies the taxation but is tax efficient in a lot of situations. The undertaking’s net worth is assumed to be the cost of acquisition.
Steps in valuation under slump sale:
- Understanding the transaction and objectives
- Analysis and discussions with the management
- Choosing valuation approach and method
- Recommendation of valuation
- Purchase price allocation in the resultant entity
Is your company considering spinning off a division? Do you need advise on tax or valuation? Get in touch with us. Happy to help.