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  • Jul 09, 2021
  • Short-Term Capital Gains: New goodwill rule seen imposing tax liabilities on firms

    The Central Board of Direct Taxes (CBDT) has notified the new rules regarding computation of short-term capital gains (STCG) and written down value (WDV) where depreciation on goodwill has been obtained, potentially increasing tax liabilities on firms that have undergone mergers or acquisitions in recent years.

    Finance Act, 2021, had amended that ‘goodwill’ will no more be regarded as an “intangible asset” and depreciation would be not be available with effect from April 2020. The Income Tax Act, 1961, was amended to the extent that goodwill will have to be removed from the block of asset as on April 1, 2020, such value to be reduced will be cost of goodwill, net of depreciation claimed till date.
    “Transactions done in the past 5 years in sectors such as pharma, life sciences, start-ups lining for IPO would have to closely evaluate the financial impact of this amendment,” said Aravind Srivatsan, partner & tax Leader, Nangia Andersen LLP. Companies, where typically, the goodwill has not been substantially depreciated by April 2020, need to immediately quantify their tax impact, Srivatsan said.