As the county moves to GST, we are offering extensive research, trainings, workshops and services to help our clients transition to the new regime.
We anticipate clients in the financial services industry to expect a bouquet of services to enable a smooth transition to the GST. Some of the services we are providing are:
-Impact study of GST: includes studying implications of GST on organizational cash flows
-Assisting in identifying the different benefits that can be availed by the company
-Preparation of detailed checklists for GST administration
-Organizing intermediate and advanced training programs for groups of employees based on specific organizational needs
-Reviewing the existing documentation to ensure that they are aligned with the law
Write to us at gst@vinodkothari.com if you wish to know further details with respect to the above.
For our workshops and training click here
Please drop an email to events@vinodkothari.com to register your interest.
Project Rupee Raftaar: An Analysis
-Kanakprabha Jethani | Executive
Vinod Kothari Consultants Pvt. Ltd.
kanak@vinodkothari.com, finserv@vinodkothari.com
BACKGROUND
The Working Group on Developing Avenues for Aircraft Financing and Leasing Activities in India, constituted by Ministry of Civil Aviation submitted its report[1] on measures for developing this industry in the country. The Working Group was formed to examine the regulatory framework relating to financing and leasing of aircrafts. The idea was derived from the Cape Town convention and it has also been proposed to enact a bill in order to fully implement the convention. This project is based on the theme “Flying for All”. The Indian civil aviation market has been exhibiting tremendous growth for past years. There is an overwhelming increase in demand for passenger transportation for which airlines in India have placed orders for more than 1000 aircrafts. Moreover, Indian airlines have been relying on other countries for financing acquisition of aircrafts on export credit, loan or lease basis. This hair-triggers the need for India to have in place its own systems for financing of such acquisitions.
One of the motivations of the project is to ensure that the dependence of Indian aviation industry on import leases is reduced. Currently more than 90% of the aircrafts operating in the country are on import lease basis, and there is a huge monthly outflow of foreign exchange by way of lease rentals, which is not reported as ECB, since it is an operating expense.
GLOBAL PERSPECTIVE TO AIRCRAFT FINANCING AND LEASING
The key players in global aircraft financing and leasing market are Ireland and the US. Countries like China, Singapore, Hong Kong and Japan are emerging competitors in the market. The structures of aircraft financing, however, differ largely in all of these countries. The overall trends in the global arena can be evaluated on following bases:
Regional Outlook: through a research conducted for the Aviation Industry Leaders Report[2], it was concluded that North America is viewed as the most optimistic market player. Europe shows mixed signals due to market being strong and simultaneous slowing down of economy and other political issues. The Middle Eastern countries show a slow pace of growth and their models exhibit signs of stress. African airline market still has a lot of unrealised potential.
Financing Trends: sale and lease back transactions have become the most frequently used medium of aircraft finance over the world. Other forms of financing such as commercial bank debt, pre-delivering payment financing etc. have picked up pace. Also, traditional forms of financing such as export credit continue to be in operation but with reducing levels. Overall, the capital market remains very active and innovative in the aircraft finance sector.
Technology: new technology in aircrafts is being introduced frequently. However, implementation and commercialisation of the same continues to be a challenge. The Aviation Working Group’s Global Aircraft Trading System (GATS) proposed digitisation of transfer of lease deed ownership system which shall be expected to be activated by end of the year 2019.
CURRENT SCENARIO OF AIRCRAFT FINANCING IN INDIA
In terms of growth and advancement, India is far behind other Asian economies such as China, Singapore and Hong Kong. However, the Indian Aviation market has shown exponential rise in the past few years with an annual growth rate of 18.86% in 2017-18 and overall growth of 16.08% in passenger traffic. From 74 operational airports in 2013, it has reached a height of 101 operational airports in 2016. Expectations of having 190-200 operational airports by the end of 2040 are pointed out through various studies.
Currently, India has large aircraft order books, virtually all of which are leased through leasing companies located offshore. Under the regional connectivity scheme Ude Desh ka Aam Nagrik (UDAN), the government has decide to lease out operations, maintenance, and development of certain airports under Public private Partnership (PPP) model.
Overall, India has immense potential for growth in aviation sector but little means to aid the growth. It is in need of systems that aid the growth in a cost-effective and sustainable manner.
AIRCRAFT FINANCING STRUCTURE
Why is it needed?
In the view of increasing demand and non-availability of own sources of aircraft financing, it is essential for India to set up its own structures for the same. Moreover, civil aviation sector is an important sector for development of the economy. In the civil aviation industry, aircraft financing is the most profitable segment and there are no entities in the country exploring this line of business. All the benefits from this gap are being enjoyed by foreign entities.
What will be the structure?
For this structure, GIFT-CITY in Gujarat has been identified as preferred destination for initiation of operations in this industry as it offers a tax regime competitive to that of leasing companies all over the world.
Barriers in the structure
The aforementioned structure will face following barriers:
- GAAR prevents Indian financers from taking advantage of other jurisdictions.
- Aircraft financing is not a specifically permitted activity for banks.
- Units operating in GIFT-CITY not permitted to undertake aircraft financing.
- Framework for setting-up of NBFCs in GIFT-CITY and provisions as to treatment of income from operating lease is not provided.
- Taxes and duties:
- GST of 5% on import of aircraft
- GST on lease rentals
- Interest amount which forms part of lease rentals in case of financial lease is not eligible for any tax benefit.
- No exemptions from withholding taxes
- Stamp duty on instruments and documents executed.
The working group has proposed corresponding changes and amendments to be made to overcome these barriers. The response of relevant authorities is awaited.
Tax implications of the structure
| Particulars |
Tax rates |
|
| IFSC-GIFT CITY (proposed structure) | INDIA (not following the structure) | |
| INCOME TAX | ||
| Corporate Tax Rate: | 34.94 | |
|
o Year 1 to 5 |
0.00 | |
|
o Year 6 to 10 |
17.47 | |
|
o Year 11 onwards |
34.94 | |
| Minimum Alternate Tax | 10.48 | 21.55 |
| Capital gains on sale of aircraft | 0.00 | 34.94 |
| Withholding tax | ||
|
o Operating lease rentals |
0.00 | 2.00 |
|
o Interest payment (USD debt) |
0.00 | 5.46 |
|
o Interest payment (INR debt) |
0.00 | 0.00 |
|
o Other payments |
0.00 | 10.00 |
| Dividend Distribution Tax | nil | 20.56 |
| GOODS AND SERVICES TAX | ||
| Purchase of aircraft | 0.00 | 0.00 |
| Operating lease rentals | 0.00 | 5.00 |
| Underfinance lease(interest portion) | 0.00 | 5.00 |
| Other services | nil | 18.00 |
| Stamp duty on lease related documents | 0.00 | 3.00 |
ANALYSIS OF TAX IMPLICATIONS UNDER VARIOUS MODELS OF FINANCING
Following table shows an analysis of indirect tax implications from the point of view of lessee and compares the proposed structure with the existing practice of financing as well as situation if financing is done outside the proposed structure but in India.
This table is based on following assumptions:
- Value of aircraft- Rs.3500 crores
- Residual value- Rs.500 crores
- Rate of interest- 7.5%
- Lease tenure- 25 years
- Processing fee- 2%
On the aforesaid assumptions, lease rental per annum would amount to Rs.306.63 crores
Amount (in Rs. crores)
| Tax expenditure | Ireland | IFSC-GIFT CITY | Rest of India |
| GST on lease rentals | 15.3315 | 0.00 | 15.3315 |
| Stamp duty | 0.00 | 0.00 | 105 |
| GST on other services | 0.00 | nil | 12.6 |
| Overall indirect tax expenditure | 15.3315 | 0.00 | 27.9315 |
OVERCOMING THE BARRIERS
Recommendations have been made by the Working Group to various regulatory authorities in order to overcome various barriers that are a hindrance to establishment of India’s own structure of aircraft financing and leasing. Following table shows some of the major recommendations:
| Authority | Recommendations |
| RBI | Confirm that the term “equipment” includes aircrafts or notify aircraft financing and leasing as permitted activity for banks or subsidiaries of banks. |
| Amend IBU circular to include equipment leasing and investment in capital of leasing entities in scope of activities of banks | |
| Confirm that equipment leasing entities shall be eligible to register as NBFC in IFSC | |
| Issue specific directions in regard to investment in or by foreign entities engaged in aircraft financing and leasing activities. | |
| Tax authorities | Capital gains on sale of leased aircrafts should be fully exempted. |
| GST on leasing aircraft should be made zero-rated. | |
| Nil withholding tax should be specified for airline companies. | |
| Transfer/novation of aircraft financing / leasing contracts to units in an IFSC should not be under the purview of GAAR, for both the lessee and lessor | |
| SEBI | Amend SEBI (AIF) Regulations to create a separate category of AIFs for investment in aircraft financing/leasing activities or permit greater concentration of investment in aircraft financing/leasing entities. |
| Clarify whether 25% investment cap by AIFs applies on investment in equipment and grant additional relaxations to AIFs investing in aircraft financing activities. | |
| Create separate category of mutual funds of investment in entities engaged in aircraft financing and leasing activities. | |
| Clarify which institution can invest in entities registered in IFSC. | |
| IRDAI | Amend IRDAI regulations permitting companies set up in IFSC to invest in entities engaged in aircraft financing and leasing activities. |
| Clarify whether investment of funds of policyholders’ in entities registered in IFSC be considered as funds invested in India only. | |
| Others | Clarify under aircraft rules that aircrafts of lessors cannot be detained against any statutory or other outstanding dues. |
| Entities like pension funds, insurance companies, employee provident fund organisations be allowed to invest directly or indirectly in aircraft financing and leasing activities. | |
| SARFAESI Act not be applicable to aircrafts. | |
| Gujarat Stamp Act to exempt aircraft financing and leasing from its purview. | |
| Permit airlines to set up branch in IFSC. |
CONCLUSION
It is absolutely evident that aircraft industry is on upsurge and will continue to be rising globally in the coming years. To meet the rising demand and expand the country’s hold in the aviation market the proposed structure provides a well-established groundwork through the proposed structure. All recommendations, if accepted and implemented in a proper manner, will enable India to pioneer a very profitable and growth-oriented aviation market.
[1] https://www.globalaviationsummit.in/documents/PROJECTRUPEERAFTAAR.pdf
[2] https://assets.kpmg/content/dam/kpmg/ie/pdf/2019/01/ie-aviation-industry-leaders-report-2019.pdf
E-form AGILE- Consolidation of various registrations along with company incorporation
By Dibisha Mishra (dibisha@vinodkothari.com) (corplaw@vinodkothari.com)
Introduction
There has been a series of changes brought in by the Ministry of Corporate Affairs (“MCA”) in recent years to bring in better transparency, easier compliance and weed out hurdles in the way of Ease of doing Business. In furtherance of the same, MCA vide notification dated 29th March, 2019, notified Companies (Incorporation) Third Amendment Rules, 2019 (hereinafter referred to as “Amended Rules”)[i] which has upgraded the existing SPICe form with a view to bring in a single window system for making application under GST, Employees Provident Fund Organization (‘EFPO’) and Employees State Insurance Corporation (‘ESIC’).
These additional services are being catered via e-form INC-35 named as ‘AGILE’ which shall be linked with SPICe (e-form INC-32) during filing with MCA. It is to be noted that though linking of the form is mandatory, option of availing the aforementioned services is left to the applicant. The company can very well choose the services which it wishes to avail.
The main features along with the technicalities of the incorporation process prior to the Amended Rules have been covered in our earlier article[ii]. This write up covers the highlights of AGILE along with a brief discussion on some practical aspects. Read more →
Slump sale, a supply of goods or service under GST?
By Yutika Lohia (finserv@vinodkothari.com)
Introduction
India is en-route to turn itself into a 21st century super-economy fuelled by the unprecedented growth of its business enterprises. Business may grow in two ways – either in an organic way or inorganic. The former refers to the internal forces of the enterprises which are re-organised to bring in development and growth into the business, whereas, in case of inorganic growth, the company goes into corporate restructuring to re-align its external facade to fuel the planned development and growth. In today’s fast moving corporate environment, corporate restructuring happens to be the most ideal tool to win an advantage in this pursuit.
Business restructuring is a comprehensive process, be it financial or technological or market or organisational. Business can be re-arranged by way of mergers, demergers, disinvestments, takeovers, strategic alliance or slump sale.
This article focusses on implications of GST on slump sale.
Concept of Slump Sale
The concept of slump sale comes from the Income Tax Act, 1961. The IT Act, in section 2(42C) defines “slump sale” as – “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.” Further as per explanation 1 to section 2(19AA), “undertaking” shall include any part of an undertaking or a business activity taken as whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Therefore, slump sale contains the following conditions:
- Sale of one or more undertaking,
- No individual value should be assigned to assets and liabilities, and the same to be sold for a lump sum consideration, and
- All assets and liabilities of the undertaking must be transferred.
Transfer of all assets and liabilities
One of the major precondition of a slump sale transaction is that all assets and liabilities of the business undertaking must be transferred to the buyer.
As per Section 50B of IT Act, the cost of acquisition of such sale shall be the net worth (book value of assets and liabilities) of the undertaking.
Explanation 1 provides the method of computing the net worth of an undertaking or a division sold on slump sale basis. As per Explanation 1 “For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account.” This definition is no different from the meaning of the expression ‘net worth’, as is commonly understood in the accounting parlance.
There are various judicial pronouncements where there is difference of opinion that it is not essential to transfer all assets and liabilities for a transaction to qualify for a slump sale. That is to say, that even if some assets are retained by the transferor and the undertaking after such transfer carries out its business activities without any obstruction, it shall still qualify to be a slump sale. The same has been substantiated by Bombay High Court[1] in its ruling.
Since all assets and liabilities are to be transferred in a slump sale, it is important for one to understand the concept of going concern which is discussed at length below.
Going Concern Concept
The terminology “going concern” is not precisely mentioned in the definition of slump sale. Transfer as a going concern means transfer of a business or a unit which is capable of being carried on by a purchaser as an independent business. To constitute a slump sale, it is not necessary that the business is ongoing at the time of its transfer.
Going Concern is a fundamental accounting assumption and Accounting Standard 1, Disclosure of Accounting Policies defines it as follows:
“The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.”
To constitute a slump sale all the assets and liabilities of the undertaking are to be transferred. Therefore it can be said that companies whose operations are shut and is into liquidation may also opt for slump sale provided the conditions mentioned above are met. The intention of such condition is to ensure that the business will continue in the new hands with regularity and a nature of permanency.\
Further it is not necessary that the entity should be a profit making company. The only valid point to be considered for a transfer to constitute as a “going concern” to mean if it constitutes a business activity capable of being run independently for a foreseeable future. Such views were taken In the Matter of M/S. Indo Rama Textiles Ltd[2]
The term “going concern” has no place in the GST Act. However one can refer to the pronouncement of the Advance Authority Ruling in case of Rajashri Foods Pvt Ltd for the same as mentioned below:\
A going concern is a concept of accounting and applies to the business of the company as a whole. Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business. Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc.
The transfer of business assets implies where the part of assets are transferred and not the whole business, i.e. the liabilities remain in the books of the transferor, whereas in transfer of business all assets and liabilities are transferred together. The concept of transfer of going concern comes handy when the business as a whole is transferred, however case laws and analysis do suggest the likelihood of transfer of assets as a going concern.
Slump sale: supply of good or supply of service under GST Act?
To understand the applicability of GST on a slump sale transaction, it is imperative to throw light on the word “supply” under the GST Act. It is explicitly discussed that for GST to be levied, there must be a case of “supply”. Therefore, we shall now refer the scope of supply as mentioned in Section 7 of the (Central Goods and Services Tax Act 2017 (CGST Act) which is as follows:
“(1) For the purposes of this Act, the expression “supply” includes––
- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”
XX
Supply includes activities such as sale, transfer, barter etc for a consideration in the course or furtherance of business. From this we can infer that the activities shall take place in the course or furtherance of business. Coming to slump sale, the transaction is neither during the course of business nor in persistence of business. However since the word “includes” has been used in the definition in Section 7 (1) of the CGST Act, the scope of supply goes beyond the course or furtherance of business. Therefore the transfer as a going concern shall also be treated as “supply” under GST.
As slump sale is considered to be a supply under GST, we should now understand if the same constitutes to be goods or services.
The term goods has been defined under section 2(52) of the CGST Act as:
“(52)“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;”
Further definition of “Service” as per section 2(102) of the CGST Act defines the term service as:
“(102)“services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.”
Clause 4(c) of Schedule II of CGST Act states that
“(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person.”
Schedule II of the CGST Act talks about activities to be treated as a supply of good or supply of service wherein Clause 4, transfer of business assets has been considered as supply of goods. In Clause 4(c ) transfer of business as a going concern does not constitute as supply of goods.
As per the definition of services, anything other than goods is called a service. Business transferred as a going concern is excluded from the list of supply of goods. Since the schedule specifically excludes this activity, it becomes very obvious that transfer of business as a going concern is considered to be a supply of service.
Ministry of Finance vide its notification[3] no 12/2017- Central Tax (Rate) dated 28th June 2017, came out with a list of supply of services and further brought clarity on “service by way of transfer of a going concern, as a whole or an independent part thereof” in serial no 2 of the said notification to constitute under supply of service. Further, activity of transfer of a going concern shall have “nil” rate of tax on such supply.
Since the notification talks about the activity of transfer of a going concern as a supply of service and the same is exempt from the purview of GST. Similarly Schedule II of the CSGT Act excludes transfer of business as a going concern as supply of goods, the same shall be considered as a supply of service and GST shall be levied.
It shall be inferred that transfer of a going concern as a whole or a part there or transfer of business as a going concern is tax-exempt under GST and transfer of business assets will have GST implications.
The above can be further justified by referring to the judgement passed by the Tax Authority of Advance Ruling in Karnataka in the case of Rajashri Foods Pvt Ltd[4] where it was decided that subject to the condition that the unit being transferred is a going concern, it will be considered as a supply of service and the same shall be exempt from the payment of GST to the extent leviable under sub section (1) of Section (9) of the CGST Act, 2017.
Itemisation of assets for levy of GST
In a slump sale, assets proposed to be transferred consist of both movable and immovable property i.e. land, building, stock, plant and machinery etc. Since these assets and liabilities are sold together for a lump sum consideration it does not tantamount to a “mixed supply” under GST.
Let us first understand the concept of mixed supply under GST
Section 2(74) of the CGST Act defines mixed supply as under:
“(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.”
To constitute a mixed supply, there has to be two or more supplies of goods or services and they have be in conjunction with each other. Therefore if the item in the bundle are neither goods nor services, it will not be considered a mixed supply under GST.
Let us understand the same with the help of an example. Suppose the assets being transferred to the buyer are plant & machinery, land and stock for a single price. Here there are more than one good transferred in the transaction. The bundle is not exclusively that of goods or services or both. The same will not qualify to be a mixed supply as land being transferred is excluded from the purview of GST (As per Schedule III of the GST Act which enumerates items which are neither supply of good nor supply of services).
Referring to the above example we may say that all legs of the definition should be satisfied for it to become a mixed supply. Merely because multiple items are sold for a single price should not, by the very fact render them as “mixed supply”. In so far as movable assets being concerned, it would be treated as supply of goods and is likely to attract GST.
Conclusion
Slump sale may be of an on-going business/unit or transfer of a stalled business/unit where the intent of the transferee is to run the entity. It can be said that that when there is a transfer of business and not of that of assets, in order to insulate from GST, it would require evaluation whether transfer is as a going concern or not.
The transaction of transfer of business as a whole of one of the units in the nature of going concern amounts to supply of service. The notification holds good, but subject to the condition that the unit is a going concern and therefore the same shall be free from the GST purview.
To summarise the above discussed concept
- Transfer of business assets: Supply of goods
- Transfer of business: Supply of Service
- Transfer of business/ or a part thereof as a going concern : Supply of service and exempt via notification
Revival of companies will definitely be more cost effective than setting up a new structure altogether. Also this will give a push to the investors to take over such companies and create more job opportunities in India.
[1] https://indiankanoon.org/doc/1182478/
[2] https://indiankanoon.org/doc/135651533/
[3]http://www.cbic.gov.in/resources//htdocscbec/gst/Notification12CGST.pdf;jsessionid=D5B61ED295EAEE2B9E0361CAE1525D0F
[4] http://gst.kar.nic.in/Documents/General/06_RAJASHREE_LIMITED.pdf