M&A Tax Considerations Every Business Owner Should Know
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Say you’re selling a manufacturing division for ₹50 crore. If nobody checks whether that sale actually qualifies as a slump sale before the papers are signed, the tax computation can end up running on numbers nobody in the room agreed to. Fixing that after closing is expensive and often impossible — you’re negotiating with the tax department at that point, not with your buyer.
That’s the general shape of M&A tax: it decides how much of the deal value you keep, and it isn’t one rule. It’s several separate tests running in parallel — income tax, GST, stamp duty — each with its own conditions, and a deal can pass one test while failing another. Since 1 April 2026, all three sit under different statutes than they did two years ago. The Income-tax Act, 2025 renumbered the provisions professionals have quoted for decades. Citing Section 50B on a deal closing today isn’t just old-fashioned; it’s citing a section that governs a different Act, one that no longer applies to a transaction happening now.
Here’s what changes with deal structure, what the 2025 loss-carry-forward amendment actually restricts, and where owners tend to lose money because two separate tax regimes got treated as one.
Who this is relevant to:
- Promoters selling a business, or a division of one, to a strategic buyer
- Founders structuring a partial buyout as part of a funding round
- Companies going through NCLT-approved resolution or restructuring
- Groups demerging a business unit ahead of a listing
The structure decides the tax bill. Not the other way around.
Quick Answer:
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The Structure Decision Comes Before the Valuation
Most owners treat deal structure as paperwork — something the lawyers settle once the price is agreed. It’s the reverse. Whether a deal is a share sale, an asset sale, or a slump sale decides who pays tax, on what base, and how much negotiating room exists before the deal closes.
| Structure | Tax on Seller | Tax / GST on Buyer |
| Share Sale | Capital gains for shareholders. 12.5% LTCG (no indexation) once unlisted shares cross 24 months; short-term gains taxed under the provisions applicable to the specific taxpayer (Section 197, Income-tax Act, 2025). | Securities are excluded from the definitions of goods and services under the CGST Act, so GST doesn’t apply to the share transfer itself. Applicable stamp duty applies on the transfer instrument. |
| Slump Sale (going concern) | Capital gains under Section 77: net worth is the deemed cost of acquisition, FMV of the assets (Rule 53, Income Tax Rules, 2026) is the deemed full value of consideration. Long-term beyond 36 months’ holding. | GST exemption depends on separately meeting the going-concern test under GST law — not automatic just because the deal is a slump sale for income-tax purposes. Stamp duty still applies to any immovable property in the deal. |
| Itemised Asset Sale | Depreciable assets fall under the block-of-assets rules rather than being taxed individually; other assets attract capital gains at fair market value. | GST treatment depends on what’s sold — land is outside GST entirely under Schedule III of the CGST Act, while machinery and inventory are generally taxable. Stamp duty applies separately, asset by asset. |
There’s no structure that wins on every metric. It depends on the seller’s loss position, whether the buyer wants a stepped-up asset basis for depreciation, and whether legacy liabilities need to stay behind with the seller. Get the structure wrong and the risk isn’t just a bigger tax bill — it can be a liability that surfaces years after everyone’s moved on.
- Suggested Service: Mergers & Acquisitions Services in India
Slump Sale: What Section 77 Actually Taxes
This is where a lot of informal explanations go slightly wrong. Section 77 is not “tax on net worth.” It’s a two-part formula.
Net worth is the deemed cost of acquisition: aggregate book value of assets minus liabilities, with depreciable assets taken at written-down value, certain self-generated intangibles valued at nil, and any change from asset revaluation ignored entirely — not merely excluded as a line item, ignored in the computation. The fair market value of the capital assets transferred, determined under Rule 53 of the Income Tax Rules, 2026, is separately deemed the full value of consideration. The capital gain is the difference between the two. If the lump-sum price and the computed FMV diverge, the FMV governs, not the number written into the agreement.
Every assessee doing a slump sale has to furnish an accountant’s report in Form No. 28. That’s not a best-practice recommendation — it’s a statutory requirement attached to Section 77(4).
Capital Gains on a Share Sale
In a share sale, the seller’s rate depends on one number: how long the shares were held. Unlisted shares held over 24 months are long-term, taxed at a flat 12.5% with no indexation. Held 24 months or less, the gain is short-term — and here’s where I’d push back on how this usually gets summarised: “taxed at slab rate” isn’t a universal statement. It’s accurate for an individual seller taxed under normal provisions, but the applicable rate depends on the taxpayer type and the specific provision governing that category of gain. Don’t assume it without checking who’s actually selling.
(The 12.5% flat rate on unlisted shares dates to the Finance (No. 2) Act, 2024 — what changed on 1 April 2026 is the section number it sits under, Section 197 instead of the old Section 112, not the rate itself.)
FMV Rules Don’t Work the Way People Assume
A common shortcut is “understating the price doesn’t help — FMV rules will catch it.” True in spirit, wrong as stated. There isn’t one universal FMV override. There are separate provisions for separate situations:
- Immovable property — Section 78 substitutes stamp-duty value for the stated consideration, but only where the gap is real: if the stamp-duty value doesn’t exceed 110% of the agreed consideration, the agreed consideration stands. That tolerance band matters and gets left out of most summaries.
- Unquoted shares — Section 79 deems the prescribed FMV as the full value of consideration where actual consideration falls below it.
- Slump sale assets — covered separately under Section 77, as above.
Know which provision actually applies to your asset before assuming a blanket override.
The 2025 Change to Loss Carry-Forward
This is the change that catches buyers off guard, and it’s often explained with the headline only. Before the amendment, it was common practice to assume that once a company amalgamated, the successor got a fresh eight-year window on the predecessor’s accumulated losses — even if the predecessor had already burned through most of its own eight years.
The Finance Act, 2025 closed that door. Section 116 of the Income-tax Act, 2025 (previously Section 72A) now limits the successor to the remaining balance of the original entity’s eight-year window, counted from when the loss was first recorded, not from the year of amalgamation. This covers unabsorbed depreciation as well as accumulated business losses — the two get treated together under Section 116, and an explanation of carried-forward losses that only talks about “losses” is missing half the provision.
Time isn’t the only gate, either. The amalgamated company also has to hold at least three-fourths of the acquired fixed assets’ book value continuously for five years from the amalgamation date, and continue the amalgamating company’s business for that same five-year period. Miss either condition and the previously allowed set-off gets reversed and taxed as income in the year the breach occurs. A comparable original-predecessor rule applies to specified banking amalgamations under Section 117 — banking companies merging with specified banks, not “bank mergers” as a general category.
Practically: if you’re valuing a target partly on its carried-forward losses, get the year each loss was first computed, not just the total. A loss that’s six years old going into the merger has roughly two years of statutory life left, assuming the continuity conditions are also satisfied — the vintage and the conditions both have to hold.
On transitional treatment for schemes filed with the NCLT before 1 April 2025: confirm the exact position with a professional before relying on it. The Finance Act, 2025 change applies to reorganisations effected on or after that date, but a clean automatic carve-out for pre-filed schemes is not something we’ve been able to source and confirm, so it isn’t asserted here.
GST and Income Tax Run Different Tests
Here’s the mistake worth calling out directly: treating “slump sale” and “GST going-concern exemption” as the same thing. They’re not. A transaction can be a slump sale for income-tax purposes under Section 77 and still fail the GST going-concern test, or vice versa, because the two regimes ask different questions. Income tax cares about how the undertaking’s net worth and FMV are computed. GST cares about whether what’s transferring can actually function as a running business in the buyer’s hands, or whether it’s really a set of individual assets with a going-concern label stapled on.
Structuring a deal correctly for one doesn’t automatically clear the other. Get both assessed separately.
On the itemised side, GST treatment isn’t uniform across “the assets” as a category. Land is carved out of GST entirely — Schedule III of the CGST Act treats the sale of land as neither a supply of goods nor of services, full stop, regardless of how it’s bundled into the deal. Machinery and inventory are a different story and generally attract GST. A term sheet that says “GST applies to the assets” without separating land from everything else is going to mislead someone.
One thing that’s missing from most guides on this, and shouldn’t be: Section 85 of the CGST Act makes the buyer jointly and severally liable with the seller for GST dues, interest, and penalty accrued up to the date of transfer — whether or not that liability had been assessed at the time of the deal. This applies regardless of deal structure. It’s a real reason to get GST due diligence done before signing, not after.
Stamp duty sits on a separate track from both. It applies to immovable property and, in a number of states, to the transfer instrument itself. The rate, the base, and the applicable exemptions vary by state and by the nature of the transfer — there’s no single national figure to quote here.
Example: How Structure Choice Plays Out
(Illustrative scenario, not an actual Sapient client engagement.)
A company sells off one manufacturing division while keeping the rest of the business. Structured as an itemised transfer of machinery, land, and inventory: the machinery and inventory attract GST, the land doesn’t, and stamp duty applies separately to each asset category — three different tax questions running at once. Restructured as a slump sale with a proper Section 77 net-worth and FMV computation, backed by the Form No. 28 accountant’s report: the transaction avoids assigning separate consideration to each individual asset for the deal itself, though the underlying FMV computation still requires detailed asset-level work behind the scenes. Whether it also clears the GST going-concern test is a separate question that has to be assessed on its own facts — not assumed from the income-tax structure.
Where Owners Lose Money Without Noticing
- Treating “FMV overrides price” as one universal rule: it’s three separate provisions — Section 78 for immovable property, Section 79 for unquoted shares, Section 77 for slump sale — each with its own mechanics and tolerances.
- Assuming slump sale automatically means GST exemption: they’re different tests under different laws. Structuring for one doesn’t clear the other.
- Treating “GST applies to the assets” as a blanket statement: land is outside GST by statute; machinery and inventory generally aren’t.
- Ignoring GST Section 85: the buyer inherits joint and several liability for the seller’s pre-transfer GST dues, assessed or not — this belongs in due diligence, not as an afterthought.
- Citing Section 50B, 72A, or 112 on a deal closing after 1 April 2026: current transactions run under Sections 77, 116, and 197; the old numbers still matter for matters governed by the earlier Act, but not for a fresh deal.
Before You Sign: A Short Checklist
- Fix the structure before the valuation — methodology differs across a share sale, asset sale, and slump sale, and starting with valuation usually means redoing it.
- Get both the income-tax slump-sale test and the GST going-concern test assessed separately. Don’t assume one clears the other.
- Confirm which Act’s section numbers are actually being cited in your valuation report or agreement — deals from 1 April 2026 run under the Income-tax Act, 2025.
- Check a target’s carried-forward losses against both the eight-year vintage and the five-year asset-holding and business-continuity conditions under Section 116, not vintage alone.
- Run GST due diligence on the seller’s pre-transfer position given Section 85 joint liability, before it becomes the buyer’s problem.
Frequently Asked Questions
What’s the actual difference between a share sale and an asset sale, tax-wise?
In a share sale, shareholders are taxed on capital gains and the company’s own assets and liabilities don’t move. In an asset sale, the company is taxed on what it sells — depreciable assets fall under the block-of-assets rules, other assets attract capital gains — and GST applies separately depending on what’s actually being transferred.
Does a slump sale automatically qualify for GST exemption?
No. Slump sale is an income-tax classification under Section 77. GST exemption for a going-concern transfer is assessed under a separate test. A deal can satisfy one and not the other.
What’s the current LTCG rate on unlisted shares?
12.5%, flat, no indexation, once the shares have been held over 24 months. Held 24 months or less, it’s short-term, and the applicable rate depends on the taxpayer.
Can a company keep carrying forward merger losses indefinitely through repeated amalgamations?
No — not since the Finance Act, 2025. Under Section 116, a successor only gets the balance of the original eight-year window, and only if it also meets the five-year asset-holding and business-continuity conditions.
Does the Income-tax Act, 2025 only change section numbers, or did the underlying rules change too?
Both. The Act renumbered provisions across the statute, but the Finance Act, 2025 also made a substantive change to loss carry-forward on amalgamation — it’s not just a renumbering exercise.
What does GST Section 85 mean for a buyer?
It makes the buyer jointly and severally liable with the seller for GST dues, interest, and penalty accrued up to the date of transfer, whether or not those dues had been assessed at the time of the deal. It applies regardless of how the deal is structured.
Is land subject to GST in an asset sale?
No. The sale of land is treated under Schedule III of the CGST Act as neither a supply of goods nor of services, and stays outside GST entirely, independent of how it’s bundled into a broader asset transfer.
What paperwork does a slump sale actually need?
A business transfer agreement, a net-worth computation that ignores revaluation, an FMV determination for the assets under the prescribed rules, and a mandatory accountant’s report in Form No. 28.
What to Do Next
Before a deal gets structured, get the income-tax classification and the GST classification assessed as two separate questions — one of the more common ways owners lose money is assuming a slump sale automatically clears GST. If a target’s accumulated losses are part of the valuation case, check the continuity conditions under Section 116, not just the eight-year clock. And if you’re the buyer, put GST due diligence on the list before signing — Section 85 joint liability means the seller’s unpaid GST becomes your problem the moment the deal closes. Sapient Services can review a proposed structure against both regimes before it’s locked into an agreement — reach out at +91 9540162888 or sapientservices.com.
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