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Ritika Sharma

Corporate Lawyer B.A. LL.B, LL.M (Business Laws). Pursued Diploma in Corporate Laws and Diploma in Merger and Acquisition.

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Ritika Sharma

GST will have a significant impact on diverse businesses and/or transactions. In this article, an attempt has been made to cover the potential GST impact on some corporate transactions including Business    Transfer, Merger and Acquisition, Joint Venture, Transaction pertaining to Securities and Joint Development Agreements. The views expressed by the author herein is limited to routine transactions and is only preliminary. It is therefore advisable that businesses exhibit preparedness and vigilance before undertaking any transaction, so that the GST impact is fruitful and positive.

Background

The implementation of Goods and Services Tax (GST) to subsume the various central and state taxes in India, lately has led to creation of a tax efficient and organized economy. Moreover, GST will mitigate the cascading effect or double taxation in a major way and pave the way for a common national market. Furthermore, it will also facilitate easy administration of taxes because of the transparent nature of the legislation.

Business transfers

We know that business transfers can take place either by a share sale or an asset sale. An asset sale can further take place through either a slump sale or an itemised sale.

The transfer of the whole or a unit of business division was neither taxable under VAT and nor is taxable under GST. This is because the sale of whole business or a unit or an undertaking of a business cannot be equated to sale of moveable goods. Additionally, a notification has also been issued in this respect which exempts services by way of transfer of a going concern, either as whole or a part thereof[1].

Conversely, in case of an itemised sale where the assets (more particularly goods) are being transferred, GST shall be applicable. The rationale is that individual assets being transferred in an asset sale are covered within the ambit of the definition of goods and the specific values of such goods can be determined accordingly.

Transaction in securities   

Notably, ‘securities’ do not fall within the definition of either goods or services and have a distinct definition under GST. Securities have been ascribed the same meaning as provided under Section 2(h) (i) of the Securities Contracts (Regulation) Act, 1956. Any transaction in securities have been explicitly excluded from being taxed either as goods or as services under GST and consequently GST shall not be applicable on transactions namely buy back of shares and share swap.  Having said that, any bank charges, commission, brokerage etc. which may accompany a transaction in securities will be taxable under GST because while such bank charges, brokerage, commission etc. may facilitate the transaction in securities, the exclusion under GST is limited to securities and not to any other supplies made in relation to such securities.

Barter transactions

Under VAT, barter transactions involving exchange of goods were not taxable whereas barter transactions involving exchange of services were taxable. Now with GST, all barter transactions whether involving exchange of goods or services or both are taxable and therefore every transaction of exchange needs to be examined closely.

Illustration:

B exchanges his old cell phone at a store XYZ for a new cell phone.

The important question to be addressed here is the valuation of the barter transaction. It needs to be ascertained whether the taxable amount in the transactions should be the value of the new cell phone or old cell phone.

Liability in case of Merger and Acquisition

In all routine transactions of merger and acquisition, there is no major impact of GST. This is because in routine transactions there is no output tax liability attracted and therefore business shall be able to utilize their input tax credit in the usual manner. Here, based on the concept of the dual GST model, a single entity is split into distinct persons depending upon the number of states in which the entity has its businesses. Therefore, in such a transaction the decision relating to the choice and structure of the transaction whether as a slump sale, amalgamation or an itemised sale becomes critical.

Immoveable Properties

Immoveable properties are excluded from the ambit of goods as defined under GST.

However, the definition of service being inclusive in nature, allows inclusion of immoveable properties as well. Notably however, the sale of land and building (other than under construction flats or units) have been excluded from taxability under GST.

Joint Development Agreements

In a Joint Development Agreement entered between a landowner and a developer there is an exchange of services between a landowner and a developer and vice-versa (JDA). In a JDA the landowner and developer jointly agree to develop the land owned by the landowner into a complex or an agreed number of flats. It is to be noted that for the services provided by the developer to the landowner, the landowner would not make any monetary payment to the developer but only grant development rights concomitant to the land. The developer would then be entitled to develop a complex or an agreed number of flats on such land and be entitled to sell his proportionate undivided share of land, retaining the proceeds from such sale. Thus, JDA is merely a compound version of a simple barter transaction. It is therefore important to ascertain the value which is to be assumed and adopted by the developer in relation to the services provided by the developer to the landowner in accordance with the JDA.

Another important aspect in case of a JDA is to ascertain the point of supply (or the incidence of taxation). This aspect remains a legal quandary – whether the point of supply is where the development rights are received by the developer from the landowner or where the JDA is executed.

Joint Ventures

A joint venture is a business undertaken by two or more persons engaged in a single defined project. The necessary elements of a joint venture[2] includes presence of (a) an express or implied agreement; (b) a common purpose intended to be carried out; (c) shared profits and losses; and (d) each member’s equal voice in controlling the project.

The pivotal question that needs to be addressed at the very outset itself is whether an arrangement, constitutes an “association of persons” or not. To answer this, the concept of association of persons needs to be understood in the light of various judicial pronouncements, and consequently apply the tests laid down in such judicial pronouncements to the case at hand.

Basis these judicial pronouncements[3], a joint venture is where (i) two or more persons get together to form an association, (ii) there is a voluntary combination, (iii) the persons associate for a common purpose or action, with an object to produce profit or gain, (iv) there is a combination in joint enterprise i.e. the persons undertake collective efforts to earn income, (v) there is some scheme of joint or common management i.e. the work being carried out is managed in a joint or collective manner.

Thus, from a taxability perspective, we note that, where (i) a joint venture entity (unincorporated) qualifies as an ‘association of persons’, the joint venture entity shall be treated distinct from its members and consequently any transaction between the joint venture entity and its members shall be taxable under GST; and (ii) a joint venture entity (unincorporated) does not qualify as an ‘association of persons’, the transaction shall be treated as a self-supply and shall not be taxable under GST.

Assessing the way forward

With this paradigm shift in the taxation sphere in India, there will be a far-reaching impact on almost all business operations in the nation. Whilst there are numerous aspects which are yet to be cryptanalyzed, the most regular transactions or businesses will certainly be impacted by GST in some or the other way. Therefore, it is imperative that we attempt to understand how GST can impact the relevant industry or sector, prior to undertaking any transaction(s) pertaining to the same.

[1]  Notification no. 12/2017 dated June 28, 2017, Central Tax (Rate).
[2]  Garner, Ryan. A; Editor-in-chief; Black’s Law Dictionary, West publishing company, 1999, seventh edition, p. 843
[3]  G. Murugesan & Bros v. CIT [1973] 88 ITR 432 (SC); Smt. Jaswant Kaur Sehgal v. CIT [2004] 271 ITR 475 (Gauhati High Court); CIT v Shiv Sagar Estates (AOP) [1993] 201 ITR 953; Linde AG, Linde Engineering Division and Anr. v. DDIT (2014) 361 ITR 1 (Delhi)

 

 


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