India’s Tax Authorities Demand GST on Non-Compete Fee, Issue Notices to Firms
- Tax authorities in India have issued notices to firms and investors that entered into non-compete agreements with sellers.
- Buyers have been asked to pay GST at the rate of 18 percent on the non-compete fee.
- Under the GST framework, tax can be levied on non-compete fees, but firms need further clarity from government.
The Central Board of Indirect Taxes and Customs has issued notices to some private equity firms, investors, and others who entered into non-compete agreements with sellers.
The indirect tax (I-T) department demands that these firms and investors pay goods and services tax (GST) at 18 percent on the non-compete fee. According to the I-T department, a non-compete agreement is classified as a service provided by the business seller to the buyer.
Non-compete agreements during acquisitions can include several conditions for the seller including restriction on starting a new company for a while or poaching employees and customers.
Notices issued over GST payment
A recent media report has mentioned details of a few firms that have received notice from the I-T department.
For instance, a tech firm based out of Bangalore sold their business for INR 10 billion (US$140.25 million), and approximately 20 percent of the deal value was the non-compete fee. The sellers agreed that they would not start a competitive business for three years, and would not poach the company’s current customers.
Now the I-T department has issued notice to the buyers asking them to pay GST on the value attached to the non-compete agreement.
According to tax experts, many buyers had not taken this additional cost into consideration.
What does the GST framework say?
Under the GST framework, “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act,” is considered as a service. Therefore, GST can be levied on economic activities including the non-compete fee.
The firms, however, seek further clarity on this taxation.
Foreign firms and investors in India should seek out local tax and accounting service professionals to avoid exposure to unaccounted tax liabilities under the GST framework.