CBDT issued new provisions related to goodwill rules, tax liability of companies will increase

The Central Board of Direct Taxes (CBDT) has notified new rules for calculation of Short Term Capital Gains (STCG) and Written Down Value (WDV). The new rules will be effective where depreciation in goodwill has been achieved. Under the new rules, the tax liability of those companies which have been acquired or merged in the recent years will increase. Under the Finance Act 2021, it was amended that goodwill will no longer be treated as an intangible asset and depreciation will not be available from April 2020. Intangible assets are assets that cannot be touched, that is, they do not have a physical form. For this, the Income Tax Act, 1961 was amended so that the goodwill can be removed from the block of assets with effect from 1st April 2020 and the value reduced will be treated as the cost of the goodwill.

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STCG tax to be paid before ITR filing

According to Arvind Srivatsan, Partner and Tax Leader, Nanjia Andersen LLP, the transactions done by sectors like pharma, life sciences, startups lined up for IPO in the last five years will be impacted under this amendment and they should carefully assess its financial impact. will have to do. According to Srivatsan, companies that have not substantially depreciated goodwill as of April 2020 should immediately assess the tax impact. According to Srivatsan, the impact on such corporates would be that they have to assess STCG tax and pay it before filing ITR for the financial year 2020-21. According to Srivatsan, all corporates should assess the financial impact of this new change.

Record number of mergers and acquisitions in the last few years

Under the new provisions, a new rule 8AC has been brought under which a mechanism has been given to make the assessment. According to the CBDT notification, where the value of net goodwill removed from the block is more than the opening WDV as on April 1, 2020, the higher it is, the tax will be calculated as STCG. However, where there are only goodwill assets in the block, there will be no impact. A record number of Indian companies have been merged and acquired over the years and Indian unicorns have added enormous goodwill value to these deals.