Business Restructuring Tax Guide: Slump Sale, Demerger and Asset Transfer

Beyond Structure: GST, Capital Gains and Stamp Duty Implications of Slump Sale, Demerger and Asset Transfer

The most commonly adopted business restructuring mechanisms are slump sales, demergers and itemized asset transfers and is driven by commercial objectives such as unlocking value, separating business verticals, attracting investors, facilitating succession planning, or preparing for an IPO. Although all three routes may ultimately achieve a transfer of business operations or assets, the tax consequences under each structure differ considerably.

Our earlier article, “Business Transfer via Slump Sale or Demerger: A Practical Comparison,” examined these structures largely from an income-tax and valuation requirement perspective. That article drew several responses from readers seeking a closer look at the Capital gains, GST and stamp duty dimensions of these transactions, that can materially alter the overall cost and feasibility of a chosen structure. This second part accordingly turns to the GST, stamp duty and residual tax aspects of slump sales, demergers and itemized asset transfers, so as to present a more complete picture of the compliance and cost considerations involved in each route

Capital Gains Implications

The capital gains implications often play a decisive role in determining the preferred restructuring route.

Slump Sale

As per Section 2(103) of the Income-tax Act, 2025, Slump sale means the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer. In the case of a slump sale, the transfer of an undertaking (defined under Section 2(35)(i)) as a going concern for a lump-sum consideration attracts the provisions of Section 77 of the Income-tax Act, 2025 (corresponding to Section 50B of the Income-tax Act, 1961) for computation of capital gains.

Section 77 provides a special mechanism for computation of capital gains whereby the “net worth” of the undertaking is deemed to be its cost of acquisition and cost of improvement. Unlike conventional capital assets, the benefit of indexation is not available. Further, where the actual lump-sum consideration received is lower than the fair market value of the transferred assets, the FMV computed in accordance with Rule 53 of the Income-tax Rules, 2025 (erstwhile Rule 11UAE) shall be deemed to be the full value of consideration. An accountant’s report in Form 28 (as prescribed under the Rules) is required certifying the computation of net worth and the fair market value of the capital assets.

Where the undertaking has been held for more than thirty-six months, the gains are treated as long-term capital gains. If held for thirty-six months or less, short-term capital gains tax applies. It is pertinent to note that an undertaking includes any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

The judicial understanding of slump sale has evolved through a series of decisions. In CIT v. Electric Control Gear Manufacturing Co. Ltd. (1997) 6 SCC 502, the Supreme Court observed that where a business undertaking is transferred as a whole without assigning individual values to assets, the transaction acquires the character of a slump sale. Similarly, in CIT v. Artex Manufacturing Co. [(1997) 6 SCC 437, the Supreme Court distinguished between the transfer of individual assets and the transfer of a business undertaking as a going concern, emphasising the importance of the underlying structure of the transaction.

Several more recent decisions have further refined the law. In CIT v. Max India Ltd. (2009, Punjab and Haryana High Court), the Court clarified that it is not necessary for every asset of the business to be transferred in a slump sale, provided the assets that are transferred are capable of operating independently as a going concern. The ITAT, Mumbai Special Bench in DCIT v. Summit Securities Ltd (March 2012) held that where the net worth of a transferred undertaking is negative, it cannot be equated to zero for determining the capital gains on account of slump sale and the negative figure of the net worth should not be ignored. In the case of Mahindra Engineering & Chemical Products Ltd. vs ITO, the ITAT, Mumbai looked into the substance of agreements and held that transfer of significant tangible and intangible assets of a business, even though through separate individual agreements, was in the nature of a transfer of a single undertaking. The ITAT, Mumbai in M/s. Archroma India Pvt. Ltd. v. ITO (June 2020) held that a slump sale constitutes succession of business within the meaning of Section 170 of the Income-tax Act, 1961 (now Section 201 of the Act of 2025), with important consequences for pending assessments and tax demands. The ITAT, Bengaluru in ACIT v. M/s. Bhoruka Aluminium Limited (August 2022) reaffirmed that taxability of capital gains on a slump sale arises in the year of transfer and Section 77 (formerly Section 50B) constitutes a complete code governing slump sale taxation, overriding other provisions of the Act.

Demerger

The position is markedly different in the case of a demerger. The Income-tax Act, 2025 grants tax neutrality to qualifying demergers through Sections 70(1)(j), 70(1)(k), 70(1)(l) and 70(1)(m) of the Income Tax Act 2025. Transfers of capital assets by the demerged company to the resulting company are not regarded as transfers, provided the conditions prescribed under Section 2(35) of the Act of 2025 are satisfied. These conditions include, inter alia, that all properties and liabilities of the undertaking become those of the resulting company, that shareholders holding at least three-fourths in value of the shares of the demerged company become shareholders of the resulting company, and that the consideration for the demerger is discharged by the resulting company only by the issue of its shares.

Consequently, neither the demerged company nor its shareholders ordinarily suffer an immediate capital gains tax liability. In addition, subject to the provisions of Section 116 of the Act of 2025 (corresponding to Section 72A of the 1961 Act), accumulated losses and unabsorbed depreciation relating to the transferred undertaking may also be carried forward by the resulting company, subject to the satisfaction of prescribed conditions including continuity of business and shareholder continuity requirements.

This tax neutrality has made demergers one of the most preferred modes of corporate restructuring, particularly in large group reorganisations and pre-IPO restructuring exercises. However, practitioners should note that the conditions under Section 2(35) are stringent and must be satisfied in their entirety for the exemption to apply. The ITAT, Mumbai in Grasim Industries Limited v. DCIT (Income Tax Appeal No. 1935 of 2020, decided April 2021) considered in detail the interplay between demerger tax neutrality and the applicable conditions, reinforcing that any deviation from statutory requirements may result in the loss of exemption.

Asset Transfer

Asset transfers do not enjoy similar treatment. Since assets are transferred individually, each asset must be evaluated separately for capital gains purposes. Depreciable assets may be taxed under Section 74 of the Act of 2025 (corresponding to Section 50 of the 1961 Act), while long-term capital assets may qualify for indexation benefits, subject to applicable provisions under Section 72 of the Act of 2025 (corresponding to Section 48 of the 1961 Act). Although this route offers flexibility in selecting the assets to be transferred, it requires a separate tax analysis for each asset and the overall tax burden will depend on the nature of the assets transferred and the applicable provisions of the Act.

GST Implications

The GST treatment of business transfers has been the subject matter of considerable discussion since the introduction of the GST regime.

Slump Sale

A slump sale involving the transfer of an undertaking as a going concern is generally regarded as a supply of service under the CGST Act, 2017. However, Entry No. 2 of Notification No. 12/2017-Central Tax (Rate) exempts services by way of transfer of a going concern as a whole or an independent part thereof. As a result, a genuine slump sale of a business undertaking can be completed without any GST liability, provided the transaction genuinely qualifies as a going concern transfer.

The importance of the “going concern” principle has been reaffirmed in several advance rulings. In Rajashri Foods Pvt. Ltd., the Karnataka Authority for Advance Rulings held that the transfer of an independent business unit together with its assets and liabilities constituted a transfer of a going concern and therefore qualified for exemption. Similar views were expressed by Gujarat AAR in RDB Infrastructure & Power Ltd., where the transfer of a business undertaking was held to be exempt from GST.

Demerger

The GST position in a demerger is largely similar. Since a demerger typically results in the transfer of an entire undertaking under a scheme approved by the National Company Law Tribunal, the transaction generally qualifies as a transfer of a going concern and therefore enjoys GST exemption. An additional advantage available in a demerger is the transfer of unutilised input tax credit under Section 18(3) of the CGST Act read with Rule 41 of the CGST Rules.

Asset Transfer

The GST implications become more complex in the case of an itemised asset transfer. While the sale of land remains outside the ambit of GST and completed buildings are generally not subject to GST, the transfer of machinery, inventory, furniture, software, trademarks, licences and other business assets may attract GST. Consequently, where an undertaking is transferred asset by asset instead of as a going concern, GST becomes payable on the individual assets so transferred.

Stamp Duty Implications

While tax advisors often focus on direct and indirect taxes, stamp duty can frequently become the largest transactional cost in a restructuring exercise.

In a slump sale, the transfer is typically implemented through a Business Transfer Agreement and separate conveyance documents wherever immovable property is involved. Since stamp duty is a state subject, the duty payable varies across jurisdictions. In most states, the transfer of immovable property forming part of the undertaking attracts stamp duty at rates applicable to conveyances. Consequently, the presence of substantial real estate assets can significantly increase the transaction cost.

Demergers were historically perceived as a relatively efficient mechanism from a stamp duty perspective. However, judicial developments have clarified that orders sanctioning schemes of arrangement also constitute instruments of transfer for stamp duty purposes. The landmark decision of the Supreme Court in Hindustan Lever Ltd. v. State of Maharashtra settled the principle that a court-approved scheme resulting in transfer of assets is liable to stamp duty. Similar views were expressed in Li Taka Pharmaceuticals Ltd. v. State of Maharashtra. Although many states provide concessional rates for mergers and demergers, the availability and extent of such concessions vary considerably from one state to another.

Under Article 20(4) of the Schedule to the Karnataka Stamp Act, 1957 relating to conveyance, following are the rates of stamp duty payable in case of Amalgamation and Demerger:

• Amalgamation: Stamp duty is 5% of the higher of (i) the market value of the transferor company’s property in Karnataka, or (ii) the aggregate value of shares (face value or market value, whichever is higher) plus any consideration paid, subject to a maximum of ₹25 crore.
• Reconstruction/Demerger: Stamp duty is 5% of the higher of (i) the market value of the transferor company’s property in Karnataka, or (ii) the aggregate value of shares (face value or market value, whichever is higher) plus any consideration paid, subject to a maximum of ₹25 crore.

In an asset transfer structure, transfer of immovable property attracts stamp duty under the applicable State Stamp Act. Where properties are situated in different states, stamp duty is payable separately in each state. Transfer of movable assets generally does not attract stamp duty. However, where movable and immovable assets are transferred under a single instrument, certain states may levy stamp duty on the value of the entire instrument.

Comparative Analysis: Slump Sale vs Demerger vs Asset Transfer

Conclusion

Business restructuring is not merely a legal exercise; it is equally a tax planning exercise. The distinction between a slump sale, a demerger and an asset transfer extends far beyond their legal form and has significant consequences under GST laws, the Income-tax Act and state stamp duty legislation. While demergers generally offer the most tax-efficient route where statutory conditions can be satisfied, slump sales continue to remain a preferred option where speed and flexibility are critical. Asset transfers, though useful in specific situations, often involve the greatest tax leakage.

Accordingly, businesses contemplating a restructuring exercise should evaluate the transaction from a holistic perspective. A comprehensive assessment of GST, capital gains and stamp duty implications at the structuring stage can often determine the success of the transaction itself.