Through Anish shah
The 2021 Union budget introduced significant changes in the provisions relating to the taxation of sales at a loss. One of the main amendments concerns the calculation of the value of the consideration for the taxation of sales at a loss. Previously, the consideration actually paid or received on the steep sale was taken into account when determining the capital gains tax on the sale.
However, the finance law for 2021 provides that in order to calculate the tax resulting from such a transfer of transfer, the fair market value (FMV) of the fixed assets (being a company or a division transferred by way of transfer) is deemed to be full. value of the consideration. However, the methodology for calculating the FMV was not prescribed by the 2021 finance law.
The Central Commission of Direct Taxes has now prescribed the rules containing the mechanism relating to the calculation of the FMV in slump sale operations. The rule provides two methods for calculating the FMV of fixed assets transferred by collapsed sale.
According to method 1, FMV is essentially the carrying amount of the business which is adjusted to the fair value of certain assets such as jewelry, works of art, stocks, securities and real estate (method of adjusted net book value). The fair value of these assets specified above should be calculated in accordance with prescribed tax valuation standards. Whereas, according to method 2, the FMV is the total of monetary and non-monetary consideration received or accumulated during the discount sale. When the consideration also includes non-monetary consideration, the fair value of the assets that represent the non-monetary consideration should be determined in accordance with prescribed tax measurement standards.
The higher value of the FMV obtained using the 2 methods above will be deemed to be the total value of the consideration for the calculation of the capital gains resulting from such a roundup sale.
Since the higher of the two FMVs must be used for the calculation of capital gains and the tax thereon, in the event that the actual consideration for the sale is less than the adjusted net book value of company, the tax should be calculated using the adjusted net book value as the amount of the consideration.
Another important aspect to keep in mind is that the amendment relating to the determination of the amount of the consideration on the discount sale is applicable retrospectively from FY 20-21. Therefore, companies that entered into discount sales transactions in fiscal year 20-21 may need to review and, if necessary, recalculate their capital gains to determine any additional tax liability that may arise. retail transactions they entered into in fiscal year 20-21.
These new rules for determining the amount of the deemed consideration may have an impact on short sale transactions between group entities when the amount of the consideration is either nominal or limited to the book value of the company sold.
(Anish Shah is Associate Partner, M&A Tax and Regulatory Services at BDO India. The views expressed are those of the author.)