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Businesses which made acquisitions in recent years will need to take note of the new rules the Central Board of Direct Taxes (CBDT) has notified on Wednesday on accounting of goodwill and the tax liability arising from such transactions.

The purchase price of an asset often includes a premium, which is regarded as goodwill on the books of the buyer. The government amended the Income Tax Act through Finance Act 2021 disallowing goodwill to be treated as an intangible asset and denied depreciation benefit on this. Accordingly, businesses have to remove goodwill from the block of asset as on 1 April, 2020.

The Income Tax Amendment (19th Amendment) Rules brought out on Wednesday provides for a computation mechanism to tax the impact of such removal, deeming it as a transfer.

The notification, according to experts, states that where the value of net goodwill removed from the block is in excess of the opening written down value as on 1 April 2020, such excess will now be offered to tax as short term capital gain. Cases where goodwill was the only asset in the block, there is no impact.

“India Inc. has witnessed a record number of mergers and acquisition deals and emergence of Indian unicorns with intangibles fetching substantial value in these transactions. Transactions done in the past five years in sectors such as pharmaceuticals, life sciences, start-ups lining for IPO would have to closely evaluate the financial impact of this amendment," said Aravind Srivatsan, partner and tax leader at Nangia Andersen LLP, a consultancy.

Companies, where typically, the goodwill has not been substantially depreciated by April 2020, need to immediately quantify their tax impact, said Srivatsan. The impact for such corporates is that now short-term capital gain taxes need to be computed and be paid before filing of return of income for FY 2020-21.

According to Sandeep Bhalla, partner at Dhruva Advisors LLP, a consultancy, allowability of depreciation on goodwill has been a matter of litigation for a long time. The rules prescribing the computation mechanism were awaited and the written down value of the block intangible asset has to be recomputed in the manner laid down in rule 8AC notified, said Bhalla.

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