The Central Board of Direct Taxes (CBDT) has notified Rule 8AC regarding computation of short-term capital gains where companies have claimed depreciation on goodwill from April 2020 till now.

The budget this year has said depreciation and, hence, relief cannot be claimed on goodwill from this fiscal. Relief claimed for the last fiscal will be taxed.

The CBDT has notified the Income tax Amendment (19th Amendment) Rules, 2021 which seeks to amend Income-tax Rules,1962 Rule 8AC in respect of computation of short term capital gains and written down value under Section 50 where depreciation on goodwill has been obtained.

The notification said capital gains for the purposes of goodwill shall be the excess of the written down value of the block of assets at the beginning of the relevant year and the actual cost of any asset (goodwill). Such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

Further, where the goodwill is the only asset in the block of asset for which depreciation was obtained by the assessee in the assessment year beginning on the 1st day of April, 2020, and the block of asset ceases to exist on account of transfer, there will not be any capital gains or loss on account of the block of asset having ceased to exist.

Lastly, capital gains on transfer of goodwill shall be computed in accordance with the normal provisions of the income tax law, it said.

Aravind Srivatsan, Partner & Tax Leader, Nangia Andersen LLP, said, “India Inc has witnessed a record number of M&A deals and emergence of Indian unicorns with intangibles fetching substantial value. Transactions done in the past five years in sectors such as pharma, lifesciences, startups lining for IPO would have to closely evaluated. Companies where the goodwill has not been substantially depreciated by April’ 2020, need to immediately quantify their tax impact.”

“The impact for such corporate houses is that now short term capital gain taxes need to be computed and be paid before filing of return of income for FY 202021. Further corporate houses who have not opted for the lower tax rate regime should also closely evaluate the financial impact of this rule change,” Srivatsan said.

“Companies shall, therefore, have to reassess their tax liabilities for the assessment year 202122 by ignoring depreciation on goodwill... in case such depreciated cost of goodwill formed a substantial part of the block of assets to the extent that it exceeded the written down value of the residual block of assets itself, they may also be subject to short term capital gains tax on such excess,” Kumarmanglam Vijay, partner at J Sagar Associates, said.