GST Liability on Payments under Share Purchase Agreement to Old Shareholders

[Sudhir M]

Company A has one shareholder, Company S. A new company has acquired 100% of Company A's shares from Company S under a Share Purchase Agreement. According to the agreement, there are certain incomes (such as incentives under PLI or claims from the government) that Company A will receive and subsequently pay to Company S (the old shareholder).

Will the amounts paid by Company A to Company S, whether from future receipts or profits, be liable for GST?

[Sadanand Bulbule]

Section 2(52) of the CGST Act reads as under:

(52) “goods” means every kind of movable property other than moneyand 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; 

So purchase or acquisition of shares, securities etc., is outside the ambit of GST Act. Hence it is not liable to tax. However this is subject to the provision of Section 87 governing the amalgamation or merger of companies.

[Shilpi Jain]

There is no supply by Company S for the future receipts/profits earned. No GST liability.

[KASTURI SETHI]

I support the views of both experts.

[YAGAY andSUN]

In this situation, where Company A (the acquired company) is paying certain amounts to Company S (the old shareholder) as per the Share Purchase Agreement, the key question is whether the amounts paid by Company A to Company S would be subject to GST.

To address this, let's break it down into relevant aspects:

1. Nature of Payment

The payments being made by Company A to Company S are related to incentives under PLI (Production Linked Incentive) or claims from the government. According to the Share Purchase Agreement, these amounts are not related to the sale of goods or services but are likely linked to government schemes and future receipts.

2. GST Applicability

GST is typically levied on the supply of goods and services. In this context, we need to understand if the payment from Company A to Company S constitutes a supply of goods or services.

• Payment for Incentives/Claims: If the amount is being paid as part of an incentive or government claim, it does not represent consideration for the supply of goods or services between Company A and Company S. It is simply a distribution of certain amounts based on a prior agreement and is not an exchange for any service or good. Therefore, this would not be classified as a taxable supply under GST.
• Reimbursement or Transfer of Rights/Benefits: If Company A is merely transferring a share of benefits or amounts that are not in return for a supply of goods or services, it would not be subject to GST. For instance, if the incentives are being received by Company A and passed to Company S based on a pre-existing agreement, it does not form part of a business transaction where GST would be applicable.

3. Is it a Consideration for a Supply?

For GST to be applicable, the payment must be in exchange for a supply of goods or services. In this case, if the payment is merely a transfer of funds due to the earlier arrangement (in the context of incentives and claims), it is unlikely that this payment would qualify as a supply for GST purposes. Therefore, such amounts paid by Company A to Company S will not be liable for GST.

4. Government Incentive Schemes

Payments related to government incentive schemes (like PLI) generally do not attract GST, as they are considered non-taxable financial support rather than consideration for the supply of goods or services.

Conclusion:

The amounts paid by Company A to Company S (the old shareholder) in relation to government incentives, claims, or profits under the Share Purchase Agreement are not liable for GST, as these payments do not constitute a taxable supply of goods or services. The payments are based on a pre-existing agreement and do not involve an exchange of consideration for a supply.

AI Summary

Shareholder Transfer Exempts Future Incentive Payments from GST Under Specific Transactional Conditions and Regulatory Interpretations A company acquired shares from an existing shareholder under a Share Purchase Agreement. The key issue involves determining GST liability for future payments related to government incentives and claims. Based on expert analysis, these payments do not constitute a taxable supply under GST regulations. The transactions are considered transfers of benefits or reimbursements, which fall outside the scope of goods and services taxation, particularly when linked to government incentive schemes.