The liquidation or winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. An Administrator, called a liquidator, is appointed and he/she takes control of the company, realizes from its assets, pays its debts, and finally distributes any surplus among the members in accordance with their rights.
As per Section 2(94A) of the Companies Act, 2013 , “winding up” means winding up under the Companies Act, 2013 or liquidation under the Insolvency and Bankruptcy Code, 2016.
As per Section 270 of the Companies Act, 2013, a company may be wound up either—
As per Section 56 of the Insolvency and Bankruptcy Code, 2016, a Company that has not committed any default, may be wound up voluntarily by passing a special resolution. To read and understand more on Voluntary Liquidation, please click here .
Taxation issues may arise during the process of liquidating a company in a number of circumstances. The sale or transfer of a company asset may result in a taxable gain. In such a case the liquidator will need to pay the relevant income tax prior to distributing any remaining cash or assets to creditors or shareholders.
When distributing company assets in specie, a liquidator will need to consider impacts under indirect tax and direct tax alike:
– GST treatment;
– Capital Gains Tax implication, including the deemed market value; and
– The timing of other tax payments and liabilities.
Failing to take into account these factors can result in a liquidator becoming liable for tax debts incurred while doing disposal of assets and distribution of proceeds.
The Liquidator is required to maintain book keeping in receipts and payments mode. By a proper system of book keeping the liquidator, in the same way as the accountant of a company which is a going concern, could so keep his accounts that clearly demonstrates that distributions are made wholly and exclusively out of those particular profits or income.
Taxation issues may also arise in relation to distributions made to shareholders. Whilst returns to shareholders can be considerable, there may be tax requirements depending on the nature of the distribution. Based on the composition of the distribution, it may be deemed in part or wholly as a dividend which will incur tax. Distributions made to shareholders also may be taxed differently depending on the nature of their shares.
To understand more on taxability under Income Tax Act for companies in liquidation, please click here .