Summary
Transferring your business? Be prepared for capital gains tax. Whether it’s a slump sale, merger, or asset transfer—Income Tax Act provisions still apply. Here’s what Indian entrepreneurs need to know.
Capital Gains Tax on Business Transfer: Explained Simply
When a business changes hands—whether sold, merged, or restructured—capital gains tax on business transfer may apply. Many assume tax relief applies in all such cases, but in reality, the Income Tax Act closely tracks and taxes such transactions unless specific exemptions are met.
What Triggers Capital Gains Tax in Business Transfers?
Under Section 45 of the Income Tax Act, any transfer of a capital asset is chargeable to tax under the head Capital Gains.
Here’s when tax applies:
- Slump sale of entire undertaking (Section 50B)
- Asset-wise sale of plant, machinery, goodwill, etc.
- Conversion of firm to company (unless Section 47 exemptions apply)
- Amalgamations or demergers not meeting conditions under Section 47
- Share transfers, even between related parties or during restructuring
Legal Provisions That Govern Business Transfer Taxation
| Transfer Type | Section Invoked | Tax Implication |
|---|---|---|
| Slump Sale | Sec 50B | Capital gains on net worth basis |
| Asset Sale | Sec 45 + 50/50C | Short/long term CG based on asset |
| Amalgamation/Demerger | Sec 47(vi)/(vib) | Exempt only if specific conditions met |
| Share Transfer (Closely Held) | Sec 56(2)(viib) | Valuation-based taxation |
CBDT Clarification: No Escape Route in Slump Sales
CBDT Notification No. SO 1004(E) dated 24.03.2021 clarifies that goodwill is not a depreciable asset post-01.04.2021, making it fully taxable on transfer—even in slump sales.
This impacts startups and family-run businesses monetizing intangibles.
Expert Tip: Restructuring? Don’t Skip a Tax Impact Assessment
Before any transfer—especially through reconstitution or slump sale—get a tax valuation done. Courts have repeatedly held that substance over form matters.
See: Supreme Court in McDowell & Co. Ltd. vs CTO, 1985 AIR 1057 – tax avoidance in structuring is not permissible.
Exemptions Under Section 47 (With Conditions)
Some transfers are not regarded as transfers, provided strict compliance:
- Firm to company conversion – Section 47(xiii)
- Company to LLP conversion – Section 47(xiiib)
- Amalgamation of companies – Section 47(vi)
- Demergers – Section 47(vib)
Any breach in conditions (like stakeholding thresholds or asset holding periods) nullifies the exemption.
Real-Life Example:
A Chennai-based manufacturing unit transferred its business under a slump sale for ₹10 crore. Net worth as per books was ₹6 crore.
- Capital gain = ₹4 crore
- Taxed under Section 50B
- Buyer liable for stamp duty and GST (if applicable)
FAQ Section
Q1. Are slump sales always taxable?
Yes. Unless exempt under specific restructuring schemes, capital gains under Section 50B apply.
Q2. Is goodwill sale taxable post-2021?
Yes. Goodwill is no longer eligible for depreciation and its transfer is fully taxable.
Q3. Can I avoid capital gains if I gift my business?
Not always. Tax may apply depending on the structure—especially if consideration exists indirectly.
Q4. Does GST apply on business sale?
If it qualifies as a going concern (per CBIC Notification No. 12/2017-Central Tax (Rate)), no GST is levied.
Conclusion: Plan Your Transfer, File Smartly
Transferring a business isn’t tax-free by default. From slump sales to mergers, capital gains tax on business transfer must be assessed case by case. One wrong move could invite scrutiny or litigation.