In this age of globalization, the world of Mergers and Acquisitions is witnessing rapid growth. Mergers and Acquisitions have become a favoured business strategy for companies looking to expand and diversify their market to gain an edge over the competitors. With the increasing use of M&A strategy by companies it becomes imperative to protect and safeguard any confidential information against any risk of leakage and ensure that the exiting party does not re-enter the same business again and compete with the buyer. For this purpose, companies often turn to Non-Compete Agreements. In order to agree to a Non-Compete agreement, the exiting party demands a specific compensation, called Non-Compete fees.<\/p>\n\n\n\n
Read our article<\/b>:Pragmatic Impact of GST Rate on Indian Economy<\/a><\/mark><\/p>\n\n\n\n The Central Board of Indirect Taxes and Customs (CBIC) has\nrecently issued notice to several private equity firms, strategic investors and\nothers those who have bought businesses and entered into Non-Compete agreements\nwith sellers demanding them to pay 18% GST on the Non-Compete fee. The\nNon-Compete agreements that were exempted from tax till now will no longer be\nable to enjoy the tax exemption.<\/p>\n\n\n\n As per the tax department, a Non-Compete agreement is essentially a service provided by the seller of the business to the buyer.<\/strong><\/p>\n\n\n\n Some of the firms have already received a notice from the IT\ndepartment asking them to pay GST on the Non-Compete fee given to the seller.\nFor instance, a Bengaluru based technology firm sold its business to some\ninvestors for around Rs 1,000 crore and approximately 20 per cent of the deal\nvalue was the non-compete fee. Sellers of the business signed an agreement\nstating that they will not start any competitive business against the buyers\nfor at least three years. Sellers accepted that they would not approach the\nclients of the buyer through any means. Buyers, now have received a notice from\nCBIC bounding them to pay GST on non-compete fee given to the seller of the\nbusiness.<\/p>\n\n\n\n Another example involves an infrastructure company in which\na senior official of the company got the non-compete fee from the acquirer of\nthe business stating that the body will not disclose details of the company at\nthe time of acquisition.<\/p>\n\n\n\n Tax experts believe\nthat many buyers had not taken this additional cost of GST being levied into\nconsideration.<\/strong><\/p>\n\n\n\n The issue of levying GST on Non-Compete fees has been coming\nup in the recent past, and in many cases, the cost has not been accounted for\nand now the question arises that who will bear the cost of levied tax? For now,\nthe tax authorities are relying on a particular section under GST that\nsignifies the law for such transactions.<\/p>\n\n\n\n18% GST on Non-Compete Fee<\/h2>\n\n\n\n