Non-compete agreement is essentially a service provided by the seller of the business to the buyer. Non-compete agreements are entered during acquisitions that restrict the seller from starting a new venture for some time. Several private equity firms, strategic investors and others that have bought businesses and entered into these contracts with the sellers have already received notices from the indirect tax department. The notice demanded that they pay goods and services tax at 18% on the non-compete fee.
Various instances involves non disclosure of crucial company details, not doing business for few years in the same city or area or not at all etc.
The problem is that many buyers had not taken this cost into consideration. Thus the question has arises that who will bear this cost.
According to officials, in the GST framework, even an agreement to abstain from an economic activity for a consideration is deemed to be a service and must be taxed.
“Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is also considered an economic activity on which GST can be applied”.
There are various difference in opinion among taxpayers and tax experts on this the issue is expected to be resolved soon.