A company that wishes to transfer an undertaking has three principal routes: a business transfer, a slump sale, and a demerger. The three routes are similar in their economic effect—the undertaking moves from one entity to another—but they differ in their legal mechanics, their tax treatment, and their procedural burden.
The Business Transfer
A business transfer is a contractual transfer of the undertaking, including its assets and liabilities, from the transferor to the transferee. The transfer is governed by the agreement between the parties, and it does not require the approval of the NCLT or the shareholders, unless the company's memorandum or articles require it. The transfer is taxable as a capital gains transaction, and the transferor may be liable to tax on the difference between the consideration and the cost of the undertaking. The transfer of the business as a going concern is exempt from GST under Notification No. 12/2017, provided the conditions are satisfied.
The Slump Sale
A slump sale is a transfer of an undertaking for a lump-sum consideration without individual values being assigned to the assets and liabilities. Section 50B of the Income-tax Act, 1961 provides the computation mechanism: the capital gains are computed as the difference between the lump-sum consideration and the net worth of the undertaking. The slump sale is a taxable transaction, and the transferor is liable to capital gains tax. The advantage of the slump sale is its simplicity: the parties do not need to value each asset, and the transfer can be completed through a business transfer agreement.
The Demerger
A demerger is a transfer of an undertaking pursuant to a scheme of arrangement sanctioned by the NCLT under Sections 230 to 232. The demerger can be tax-neutral if it satisfies every condition of Section 2(19AA). The transfer of the undertaking is exempt from capital gains tax, and the resulting company issues its shares to the shareholders of the demerged company on a proportionate basis. The demerger is a court-supervised process, and it takes longer than a business transfer or a slump sale. The advantage is the tax neutrality, but the condition is the compliance with the entire Section 2(19AA) checklist.
The Choice
The choice between the three routes depends on the tax position, the procedural timeline, and the commercial objective. A company that wants to transfer an undertaking quickly and is willing to pay the capital gains tax may choose a slump sale. A company that wants tax neutrality and is prepared to undergo the NCLT process may choose a demerger. A business transfer is appropriate where the transfer is part of a larger commercial arrangement and the parties want the flexibility of a negotiated agreement.
A company that chooses the wrong route can incur an unnecessary tax cost or an unnecessary procedural burden. The analysis must be conducted at the structuring stage, before the transaction documents are drafted.
Call to Action
Anuj Desai & Associates advises companies on the choice between business transfer, slump sale, and demerger—from the tax computation and the Section 2(19AA) analysis to the drafting of the transaction documents and the NCLT process. If you are planning to transfer an undertaking, we can help you choose the route that best fits your objectives.
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