Impact of GST on Mergers

by Vinaya HS on June 27, 2017

in Finance

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The Indian economic reforms back in the year 1991 had created a lot of scope and challenges for the Indian businesses and industries in the domestic and global market. It became essential for the companies to keep pace with the cut throat competition on national and international level. This led to the acceptance and growth of the process of mergers and acquisitions. In today’s world, M&A has gained a lot of significance. The companies opt for Merger to restructure their organization and keep them at a competitive position in the market. Acquisitions are another way where a company takes over another company to expand their market presence. Companies planning mergers in the future are following news on GST closely to get an idea on how they might be impacted.

The impact and effect of the taxes becomes a matter of primary importance to the companies who adopt M&A. GST news today is giving some indications of the changes that are in the offering.

As per GST news, it is believed that the daily transactions of sales, mergers, acquisitions and other forms of unifications that do not have output-linked GST obligation, might not be impacted by this tax. However, the clearer picture is yet to come. The latest legal news suggests that, there is still a lot of haze on the issues such as details of itemized sales, blurred language regarding slump sales, problems regarding valuation for shares, out-of-court settlement issues and many more.

The updates on the M&A news on GST and the CGST sheds some light how the tax will be levied on the sale of the assets. This sale of assets can be done either as itemized sale or as a slump sale. GST is quite clear when it comes to the itemized sales, but how a slump sale will be treated is yet to be discerned. An itemized sale would mean sale of of assets and liabilities where the value of each item is known along with the value of goodwill and liquid cash etc. which can be easily calculated. Under GST, this can be treated as a supply transaction. But the CGST Act does not clearly say whether the transfer of a business in the case of slump sale would be taxed or not. Also whether there will be tax exemption or exemption with the refund of ITC or input tax credit (zero rated) in case of a slump sale is not clear. However news on GST does seem to imply that there will be no GST on slump sales as per experts.

In case of services transactions, where the company does transactions of goods and services via shares, the GST news today does not make the treatment of GST clear. Some experts believe that fair market value of share will be taken into account on the date of issue for calculating GST while other believe that since supply of shares does not become part of GST and hence no tax will be levied on service transactions. The same confusion is there in the matter of out of court settlement and the GST news today has not shed further light on the same.

There are many companies like BPCL, L&T, Mahindra, GE shipping, Sun Pharma, Sundaram Finance, Religare Enterprises, etc. who in order to save tax, lower their multiple legal implications, and reduce otheroverhead costs are is a hurry to have merger with their subsidiaries before the GST comes into force. News on GST suggests that this is being done because the subsidiaries which were created to avail the excise duty incentives will be immaterial under GST. According to the GST news today, under the GST rule, the cascading effects of CENVAT and Service Tax will be eliminated and hence merger of subsidiaries will help to reduce the compliance cost.

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Read more on the latest GST tax rates in India.




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