While a lot of talk has gone in on the immediate and long-term implications of GST 2.0, their impact goes beyond day-to-day operations. For Companies involved in M&A and investment transactions, GST 2.0 introduces valuation, contractual, and diligence considerations that one should not lose sight of:-

1. Valuation adjustments – Margin Uplift or Erosion

The revised GST rates, new sectoral treatments (insurance, automobiles, FMCG, drones, etc.) or restrictions on credits can either uplift or erode margins. For example, a Company previously enjoying input credit on certain services may now face disallowances, reducing EBITDA. The buyers and investors will need to factor these impacts into Valuation models. This could mean renegotiations of enterprise value or adjustments in deal multiples.

Further, sensitivity to GST changes should now be built into financial models to reflect potential revenue leakages or compliance costs.

2. Share Purchase Agreements (SPAs)

GST 2.0 also brings new risks that need to be ring-fenced in SPAs. The buyers will demand assurances that correct GST rates were applied in the past and that there are no undisclosed liabilities. The Sellers may need to warrant that ITCs claimed are eligible and reconciled, especially as mismatches or restrictions under GST 2.0 could lead to reversals post-closing.

The indemnity clauses may be negotiated for show-cause notices, demand orders, or exposure from tax reclassifications.  

3. Due Diligence Reviews (DDRs)

The tax diligence under GST 2.0 must become deeper and more forensic.

The goods or services may now fall under different rates, creating retrospective risks. The historical classification needs careful review. The ongoing or potential disputes under GST 2.0 should be identified early and quantified as Contingent liabilities.

The pending or likely GST disputes must be tracked, with an assessment of whether liabilities rest with the seller or can be contractually shifted.

4. Key takeaways for stakeholders

Buyers/investors: Reassess valuation and build buffers for GST-related risks. Ensure SPA clauses are watertight.

Sellers: Conduct self-diligence to clean up GST positions before approaching the market.

Advisors: Incorporate GST 2.0 impact into transaction structuring, especially where business models rely heavily on tax efficiency.

Conclusion

While GST 2.0 is a tax reform, its ripple effects on M&A and investment deals are significant. Valuations may shift, SPA protections will tighten, and due diligence must be more rigorous. Dealmakers who proactively account for these shifts will be better positioned to safeguard value and avoid post-closing surprises. To know more about the above impact and for us to evaluate the likely impact on your imminent transaction, please write to us on contactus@waycaadvisors.com