The Centre has notified the revised rules for the slump sale of assets which will enable the government to tax the capital gains on non-monetary transactions. The move seeks to plug a major loophole that some companies misuse to dodge tax on plant and equipment by using the slump sale route under which capital assets are sold without assigning individual values to the components.

The change in the tax rule was revised in this year’s budget and was designed to stop companies from masking a slump sale as an “exchange of assets” or the exchange of non-monetary consideration such as securities.

The new rule requires the seller to carry out a fair value of the capital asset being sold with certain exemptions and also a fair value of the consideration received with a formula for the computation of the non-monetary consideration. The tax will be on the higher of the two amounts.

“Taxpayers will have to bear in mind that upon slump sale/exchange of a business, the fair market value as defined in these rules will be deemed to be the consideration received for computing taxable capital gains. In effect therefore even if the actual consideration received is lower, notwithstanding that, the capital gains will be computed and taxed based on this fair market value,” according to Pranav Sayta, partner and national leader – international tax and transaction services, EY India.

“If transfer is to a wholly owned subsidiary, there are exemptions that can be explored but these are subject to conditions like: it has to remain a 100 per cent subsidiary for at least a minimum eight years etc,” he said.

Kumarmanglam Vijay —partner, J. Sagar Associates, said: “The fair market value methodology prescribes two benchmarks and the higher of the two would be deemed as the sale consideration.”

“The first benchmark essentially refers to the adjusted book value of the business undertaking as on the date of transfer, while the second benchmark refers to the sum of actual monetary consideration and fair value of the non-monetary consideration (to be determined in the prescribed manner).... With the proposed changes, the minimum benchmark for computing gains on transfer of business and transfer of shares has been aligned. Thus, businesses may have fewer tax reasons to choose the manner in which a business is to be transferred,” he added.

Finance Bill 2021 proposed that the ‘‘fair market value” of the business undertaking would be deemed to be the sale consideration for such computation.

The amendment is effective from April 1, 2020, and shall accordingly apply from assessment year 2021-22.