A division is being sold for Rs 500 crore as a share sale. An asset sale would give the buyer a Rs 300 crore tax step-up but cost the seller Rs 30 crore more tax. What price range makes an asset sale work for both sides?

An asset sale works for both sides anywhere between Rs 530 crore and about Rs 546 crore, a band of about Rs 16 crore. The seller needs Rs 30 crore more to cover its extra tax. The buyer saves Rs 7.5 crore of tax a year for ten years, worth about Rs 46.1 crore today. An even split puts the price near Rs 538 crore. Switch only if the step-up is truly deductible and the transfer costs stay well under Rs 16 crore.

Think about buying a flat. Buy the flat itself, and the price you pay becomes your cost for tax when you later sell. Buy the shares of a company that owns the flat, and the company's old purchase cost stays on its books, however much you paid for the shares. In a share sale the buyer inherits the division's old tax base of Rs 200 crore; in an asset sale its tax base becomes the price, so Rs 300 crore of extra cost can be deducted against future profit. That gap is the step-upThe increase in the tax base of acquired assets when a buyer purchases the assets themselves, so the price it paid, not the seller's old cost, is what it can depreciate or amortise for tax.. Spread over ten years it is Rs 30 crore of extra deduction a year, and at 25% that saves Rs 7.5 crore of tax a year.

Each side compares the asset sale with the share sale it already has. Hemkund nets the same after tax as on the share sale only if the price rises by the Rs 30 crore of extra tax, so its floor is Rs 530 crore. The buyer is no worse off as long as the extra price does not exceed what the step-up is worth to it, so its ceiling is Rs 500 crore plus Rs 46.1 crore, about Rs 546 crore. Any price between Rs 530 crore and Rs 546 crore leaves both sides better off than the share sale, and the width of that band, about Rs 16 crore, is all the value the change of structure creates. It is the buyer's tax saving less the seller's extra tax, and nothing else. The asset sale does not make the snacks division more profitable; it changes who pays tax, how much and when.

The simple version holds the step-up at Rs 300 crore and the extra tax at Rs 30 crore whatever the price. In practice both move. The step-up is the price less the old base of Rs 200 crore, so every extra rupee of price adds a rupee of step-up, worth about 15.4 paise of tax saved today to the buyer. And every extra rupee Hemkund receives is taxed, at 25% on these assumptions. Redo the two ends with those links and the floor rises to about Rs 540 crore, the ceiling to about Rs 554 crore, and the band narrows only slightly, to about Rs 14 crore. The shape of the answer survives: a band of the mid-teens of crores, sitting a few per cent above the share price. Say this refinement if the interviewer pushes, and say why: the seller's tax on the extra price eats part of each rupee it asks for.

Three things, each of which can wipe out a Rs 16 crore band. First, deductibility: whether a step-up can be deducted depends on what it is allocated to. In India, for example, tax depreciation on goodwill was withdrawn a few years ago, and depreciable assets are written off at prescribed block rates rather than straight line, so a step-up that lands mostly in goodwill may shield little; confirm the current rules with a tax adviser before relying on any of the Rs 46 crore. Second, transfer costs that a share sale avoids: stamp duty on land and buildings conveyed, licences and approvals to be reissued, customer and supplier contracts to be moved across, employees to be transferred, and the indirect tax treatment of the transfer. If those costs exceed about Rs 16 crore, the share sale is better for both sides, whoever proposed the switch. Third, the buyer needs taxable profit to use the deductions; a loss-making buyer gets its savings later, and they are worth less.

There is one non-tax reason a buyer may still prefer an asset sale and pay towards the top of the band: it takes the assets without the subsidiary's past, so old tax disputes, claims and unknown liabilities stay with Hemkund. That protection has a value of its own, and a seller who understands it can ask for more. Close with the judgement: on these numbers the asset sale is worth doing at around the midpoint only if the tax adviser confirms the deductions and the transfer costs come in well below the band.