Companies Asked to Pay 18% GST on Non-Compete Fee

The indirect tax department sends notices to various private equity companies, strategic investors, and other firms who have acquired businesses and have signed contracts with the sellers. The notice has been sent demanding them to pay 18% GST on the non-compete fee. 

As per the tax department, a non-compete agreement is nothing but a service rendered by a seller of the business to a buyer. In mergers and acquisitions (M&A) situations, the issue regarding the tax department seeking to impose GST on non-compete fees has been cropping up in recent times.

One such instance involved a technology-based company in Bengaluru that sold the business for around Rs 1,000 crore to some investors. The non-compete fee was about 20% of the contract value.

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The sellers— a group of promoters— accepted that they would not initiate a new business in a competition for three years. They also gave their consent, confirming that they will not get in touch with the present customers of the company in any way. The buyers have now received a notice demanding them to pay GST charges on the value that is enclosed in the non-compete agreement.

There has been another instance wherein a senior executive in an infrastructure firm was given a non-compete free from an acquirer of a firm for not revealing specific company-related information during the acquisition.

“Acknowledging to an obligation in order to refrain from an act or to withstand an act or a circumstance or to perform an act” is also regarded to be an economic activity on which GST charges can be levied, according to the GST framework. Tax experts seem to have a difference of opinion concerning whether tax needs to be levied on non-compete fees or not.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in