By CA Surekha S Ahuja
India’s corporate landscape is witnessing an unprecedented wave of pre-IPO reorganisations, mergers, demergers, and cross-border M&A. From digital startups to established industrial groups, companies are actively reshaping structures to unlock efficiencies, streamline portfolios, and maximise shareholder value.
Yet, even “compliant” business transfers often fail — not for ignorance of law, but because Income-tax and GST are applied in isolation. In many cases, GST exposure alone exceeds the tax optimisation achieved.
Key Structural Gaps
| Dimension | Income-tax Act | GST Law | Risk / Consequence |
|---|---|---|---|
| Nature of transfer | Capital asset | Supply of service | GST may apply even if tax-neutral |
| Slump sale | Recognised | No automatic exemption | Going concern must be proven |
| Appointed date | Retrospective allowed | Ignored | Interim GST exposure |
| ITC vs depreciation | Mutually exclusive | Conditional migration | Dual disallowance risk |
GST now often drives transaction economics, not just downstream compliance.
Critical Insights for Boards & CFOs
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Slump Sale (Sections 2(42C) & 50B)
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Must transfer entire undertaking as functional business
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Lump-sum consideration, no asset allocation
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Form 3CEA certification mandatory
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Misallocation post-deal destroys slump-sale character
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Tax-Neutral Reorganisations (Section 47)
Transaction Condition GST Implication Amalgamation 75% shareholder continuity ITC transferable Demerger Proportional transfer Rule 41 apportionment Firm → Company All assets & liabilities Going concern Company → LLP 100% partner continuity Credit preserved -
ITC vs Depreciation
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Election is one-time, irreversible: ITC migration or capitalisation
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Post-Alstom (Guj. HC, Jan 2026): 100% ITC must migrate, partial retention impermissible
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Interim Period & Litigation Risk
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Appointed date → NCLT/court order: distinct taxable persons
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Risks: GST on inter-entity supplies, no ITC cross-utilisation, separate returns
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Inter-State Mergers
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IGST/CGST transferable; SGST is state-locked → permanent credit loss
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Must plan deal economics upfront
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Buyback & Redemption in Startups
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Legitimate: shareholder exits, capital rebalancing, preference simplification
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Misuse triggers: funded via share premium/fresh issue, disguised exits
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Tax consequence: dividend treatment, denial of capital loss, GST risk if linked to slump sale or going concern
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Key Recommendations (Budget 2026)
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Fast-track demerger neutrality – RD route aligned with NCLT
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OFS holding period rationalisation – Reduce to 1 year
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Cross-sector loss transition – Continuity + anti-abuse safeguards
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Slump sale holding period – Align to 24 months
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Buyback rationalisation – Exclude premium/issue proceeds, allow cost set-off
Five Outcomes of a Successful Transfer
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Income-tax neutrality / concessional taxation
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GST exemption as a going concern
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Full ITC preservation
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Zero penalty exposure
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Immunity from proceedings against dissolved entities
Anything less is deferred litigation.
Closing Thought:
In India’s enforcement environment, execution discipline matters more than intent. The most effective restructuring strategies anticipate audit, align statutes, preserve credit, and withstand scrutiny — delivering long-term, risk-proof shareholder value.
