GST onTransfer of Business

GST ON TRANSFER OF BUSINESS

BRIEF INTRODUCTION

With the increase in the dynamicity of the business environment, restructuring of the business is gaining great attention.

In the business restructuring, businesses tend to undertake activities like –

1. Merger – where two or more entities merge together and form a new entity, thereby resulting in cessation of the old entities.
2. Amalgamation – where one entity, subsumes one or more entities, and the subsumed entities cease to exist.
3. De-merger – where one or more business divisions are either transferred or sold to a new or existing entity.

Business restructuring, generally involves, transfer of assets and liabilities as may be decided in the terms of transfer.

Under GST, some clarity is provided for taxation aspect under merger and amalgamation.

However,in the case of demerger, some of the points are still unclear like, which entity shall be required to take GST Registration.

what would be the implication input tax credit in respect of the part of business demerged, what would be the provisions for filing of Annual Returns & Final Returns, etc.

INPUT TAX CREDIT

ITC is one of the most crucial aspects of GST since the same can lower one’s GST outward tax liability.

As per Section 18(3) of the CGST Act, in case of transfer of business, the transferor can provide the credit of unutilized ITC, to the transferee, provided the liabilities of the business transferred is also vested with the transferee.

Also, under Rule 41 of the CGST Rules, Form ITC-02 has been prescribed for the purpose of transfer of unutilized ITC by the transferor to the transferee.

Such a form shall be duly filled and submitted by the transferor along with complete details of the business restructuring activity undertaken, and the details of unutilized input tax credit lying with them.

Once Form ITC-02 is submitted by the transferor, the same shall be passed to the transferee for his acceptance of all the details on the GST portal.

Where the transferee accepts the form, the un-utilized credit provided in FORM ITC-02 will get credited to the electronic credit ledger of the transferee.

The transferor shall also be liable to produce a copy of the certificate issued by a practicing chartered or cost accountant certifying the restructuring activity undertaken, along with the transfer of the liabilities.

MAJOR ASPECTS IN TRANSFER OF BUSINESS

1. GST REGISTRATION

As per section 22 (3) of CGST Act 2017, where a person is undertaking a transaction, involving the purchase of another company, is required to obtain a fresh certificate of ownership.

Where a separate certificate of ownership is issued, the same is to get registered under GST under a fresh number.

However, under Section 22(4), where the transfer is made under a scheme of merger or amalgamation or also in case of demerger, the transferee shall be liable to be registered, and the effective date of registration will be the date on which the incorporation certificate is received from the Registrar of Companies.

2.    INPUT TAX CREDIT

ITC is one of the most crucial aspects of GST since the same can lower one’s GST outward tax liability.

As per the Section 18(3) of the CGST Act, in case of transfer of business, the transferor can provide the credit of unutilized ITC, to the transferee, provided the liabilities of the business transferred is also vested with the transferee.

Also, under the Rule 41 of the CGST Rules, Form ITC-02 has been prescribed for the purpose of transfer of unutilized ITC by the transferor to the transferee.

Such a form shall be duly filled and submitted by the transferor along with complete details of the business restructuring activity undertaken, and the details of unutilized input tax credit lying with them.

Once Form ITC-02 is submitted by the transferor, the same shall be passed to the transferee for his acceptance of all the details on the GST portal.

Where the transferee accepts the form, the un-utilized credit provided in FORM ITC-02 will get credited to the electronic credit ledger of the transferee.

The transferor shall also be liable to produce a copy of the certificate issued by a practicing chartered or cost accountant certifying the restructuring activity undertaken, along with the transfer of the liabilities.

3.    ITEMIZED TRANSACTIONS

Itemized transaction refers to the transfer of business, wherein the transfer of each and every asset and liability is assigned with a value. Itemized transactions generally involve sale/transfer of a particular asset or liability.

Since each item is valued separately, the transferee will be liable to pay GST on each of the itemized transactions.

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4.    CRASH OR SLUMP SALE

As per Sec. 2(42C) of the Income Tax Act, 1961, slum sale is a term used for the transfer of one or more undertakings, in exchange for a consideration received in lump sum, and no specific value is assigned to the individual assets and liabilities.

However, it is provided that the transferee under a slump sale, is not subject to GST.

The same was clarified in the matter of Re Rajeev Bansal and Sudershan Mittal, Advance Ruling No 10/2019-20, where it was held, that the agreement of business transfer involving the transfer of a going concern consisting of an under-construction project, shall be exempt from GST.

5.    ACCOUNTABILITY OF BUSINESSES

It is generally seen that, where any two or more small businesses are merging or amalgamating, they tend to undertake certain transactions involving exchange of goods or services before the date of a final order of the court or Tribunal in relation to the transfer of business.

In such a case, section 87 of CGST Act will be applied, and the companies would be liable to pay tax on the transactions of supply, undertaken between them.

6.    TRADING OF SECURITIES

Another common way of acquiring a business is by trading or purchasing the major stakes in that company.

Under this, the shareholders of the transferor company, are provided with an option to exchange their shares held in the transferor company, with the shares in the transferee company.

It is also provided that trading in securities does not attract GST liability.

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JUDICIAL PRONOUNCEMENTS

1. In the matter of Re Rajeev Bansal and Sudershan Mittal, Advance Ruling No 10/2019-20, clarification was asked from the authority, regarding the inclusion of under-construction buildings in the business transfer agreements.
2. The agreement provides for transferring an under-construction building as well, which was the subject matter of the case, that whether the same can be included in the business transfer or not.
3. The Jurisdictional Officers held that the issue pertains to serial no 2 of the notification rather than serial no.12. thus, by the virtue of S No. 2 of Chapter 99 of the notification, it was provided that any services by way of going concern as a whole or an independent part, to be treated as supply of goods and services under Chapter 99 of the Service Code (Tariff) and will therefore be exempted from GST.
4. Under the case of M/s Durga Projects and Infrastructure Pvt Ltd 2019 (8) TMI 395, the matter related to the application of GST on transactions, where the agreement was executed prior to the introduction of GST and the construction of the said project completed after the implementation of GST.
5. The applicant believed that GST is levied only on the amount of work carried out after the implementation of GST, however, the Department believed that the whole construction process is a supply under GST, and the same be subject to GST.
   It was held by the Authority of Advance Ruling, that the said transaction is considered as a “barter” and the same falls under the definition of “supply” as provided under Section 7 of CGST Act. Thus, the supply of such service be considered to have taken place after the emergence of GST.

BUSINESS – SUPPLY OF GOOD OR SERVICE

It is provided that a business, being an immovable property cannot be termed as goods under GST, and thus, the transfer of business cannot be a supply of goods.

Since transfer of business is not a supply of good, the same be treated as a supply of service. However, in the case of an itemized sale, the whole business is not transferred as a going concern and each and every asset and liability are transferred have separate value. Thus, these transactions are treated as supply of goods.

TAXATION OF DIFFERENT TYPES OF TRANSFER

As discussed earlier, a business can be transfer as a going concern in whole or an independent part, and the same is exempted from GST. Thus, the GST would be exempt where the business transferred is –

1. In the form of a going concern business.
2. The business transferred shall include the transfer of a whole or an independent part of the business.

Transfer of business as a going concern means, that the business is currently running or operating. In such a case, the transferor shall transfer the unutilized amount of ITC lying with them, to the transferee in Form ITC-02.

REVERSAL OF ITC

1. Where the taxpayer gets registered under the composition scheme and utilizes input tax credit on goods and services, or both, which have thereon been wholly or partly exempt from tax, shall be required to reverse the amount equivalent to the amount of ITC on inputs held in stock, semi-finished and finished goods, and capital goods, and the said amount will be debited from their electronic credit ledger or electronic cash ledger.

For example, Aman Works supplied goods worth Rs 1,00,000 and claimed Rs 15000 as ITC on the inputs.

Now in case, Aman Works applied for composition scheme under GST, they would be liable to reverse the ITC of Rs 15,000 and the said amount will be debited from their electronic credit or cash ledger.

2. Where the registration of any taxpayer is canceled, the amount equivalent to the input tax credit unutilized in respect of inputs held in stock, capital goods, semi-finished and finished goods, will be required to be debited from their electronic credit ledger or electronic cash ledger, a day prior to the day of cancellation of registration.
3. However, it is to be noted, that such amount of ITC on Capital goods, be calculated on the pro-rata based on residual life which is expected to be 5 years.

It is provided that the said tax reversed, shall be separately calculated for IGST and CGST/SGST. In case the input held in stock, capital goods, semi-finished and finished goods is not supported with a valid invoice, the amount of ITC, be calculated on the basis of market price of goods prevailing on the date of payment. All these details be provided in the form GST ITC-03 and in the form GSTR 10, where the amount of ITC is reversed due to the cancellation of registration.

REVERSAL OF ITC IN TRANSFER OF BUSINESS

As discussed above, transferring of a business as a going concern is not subject to GST, and thus be termed as an exempted supply. Also, under section 17 along with rule 42 of CGST Rules, 2017, it is provided that where a taxpayer undertakes any exempted supplies, the ITC in respect of such exempted supplies shall be reversed proportionately.

COMPUTATION OF ITC TO BE TRASFERED

As per the Rule 41 of CGST Act, 2017, in case of transfer of business, the unutilized ITC shall be transferred, in the proportion to the value of the assets being transferred to the value of all the assets held by the business. The total value of assets means the full amount of all the assets of the business irrespective of whether ITC has been claimed on them or not.

Under the Circular No. 133/03/2020-GST dated 23^rd March 2020, CBIC provided clarification on various aspects related to the apportionment of ITC in case of business reorganization. The same is as follows –

ISSUES FACED	CLARIFICATION PROVIDED
THE VALUE OF THE ASSETS, WHILE APPORTIONING THE ITC, BE TAKEN AT STATE LEVEL OR AT ALL INDIA LEVEL.	THE VALUE OF THE ASSETS BE TAKEN AT STATE LEVEL AND THE ITC WILL AVAILABLE IN THAT PARTICULAR EACH STATE ACCORDINGLY.
REQUIREMENT OF FILING FORM ITC-02 IN EACH STATE WHERE THE TRANSFEROR IS REGISTERED.	TRANSFEROR IS REQUIRED TO FILE ITC-02 ONLY IN THOSE STATES WHERE BOTH THE TRANSFEROR AND TRANSFEREE ARE REGISTERED.
APPORTIONMENT OF ITC BE MADE INDEPENDENTLY FOR CGST, SGST AND IGST.	THE ITC BE APPORTIONED ON OVERALL BASIS I.E.., TOTAL OF CGST, SGST AND IGST INSTEAD OF CALCULATING INDEPENDENTLY.
DETERMINATION OF THE AMOUNT OF ITC TO BE TRANSFERRED TO THE TRANSFEREE UNDER EACH TAX HEAD (IGST/CGST/SGST).	THE TOTAL ITC TO BE TRANSFERRED SHALL NOT EXCEED THE AMOUNT PRESCRIBED UNDER THE RULE 41 OF CGST RULES, 2017. HOWEVER, THE TRANSFEROR IS FREE TO DECIDE THE AMOUNT TO BE TRANSFERRED UNDER EACH TAX HEAD, SUBJECT TO THE MAXIMUM AMOUNT HELD BY THEM IN THEIR ELECTRONIC CREDIT LEDGER. EXAMPLE – IN CASE ITC TO BE TRANSFRED IN RS 4 CRORES, THE MAXIMUM AMOUNT THAT CAN BE TRANSFERRED UNDER EACH HEAD WOULD BE – TAX HEAD BALANCE AVAILABLE (RS) AMOUNT CAPPED (RS) AMOUNT CAPPED (RS) MAXIMUM AMOUNT TO BE TRANSFERRED (RS) CGST 2 CR 2 CR NIL 1 CR SGST 2 CR 2 CR NIL 1 CR IGST 6 CR NIL 4 CR 2 CR TOTAL 10 CR 4 CR 4 CR 4 CR
DATE ON WHICH THE ITC BALANCE BE CONSIDERED FOR APPORTIONMENT	THE ITC BALANCE SHALL BE CONSIDEREED, AS ON THE DATE OF FILING ITC-02.
DATE FOR CALCULATION OF THE RATIO OF VALUE OF ASSETS	THE DATE TO BE TAKEN SHALL BE THE EFFECTIVE DATE OF BUSINESS REORGANIZATION.

FORM ITC-02

Where a business is transferred, by way of sale, merger or demerger, the transferor can transfer the unutilized amount of input tax credit and the same can be made available, to be used by the transferee company. For undertaking such transfer of ITC, the transferor is required to file a declaration in Form GST ITC-02. Once the said form is accepted by the transferee, the unutilized amount of ITC, will get credited to the electronic credit ledger of the transferee company. It is to be noted, that no specific time limit has been prescribed under the Act or Rules.

FILING OF FORM ITC-02

The form ITC-02 shall be filed by the transferor, after complying with the following provisions –

1. The transferor company has undergone sale, merger, de-merger, amalgamation, lease or transfer, with another company, known as the transferee company.
2. The transferor company shall apportion the ITC, from the amount unutilized in their Electronic Credit Ledger, that is available on the effective date of such business reorganization.
3. Both the transferee and the transferor should be having a valid GST registration.
4. The transferor shall have filed all the required GST returns during the past periods.
5. All the pending transactions in relation to the merging should either be accepted, rejected, or modified and along with this, the liability in respect of final return and payment of tax must have been properly complied with.

CONTENTS OF FORM ITC-02

SR.NO.	HEADING	DETAILS REQUIRED
1	BASIC DETAILS	DETAILS RELATED TO GSTIN, TRADE NAME AND LEGAL NAME OF THE TRANSFEROR AND TRANSFEREE COMPANY.
2	DETAILS OF THE ITC TO BE TRANSFERRED	DETAILS RELATED TO TOTAL ITC AVAILABLE AND THE AMOUNT OF ITC TO BE TRANSFERRED UNDER EACH MAJOR TAX HEAD.
3	DETAILS OF THE DESIGNATED CHARTERED /COST ACCOUNTANT	DETAILS RELATED TO THE CERTIFICATE ISSUED BY A CHARTERED OR A COST ACCOUNTANT.

PROCEDURE OF TRANSFER

The process is quite simple. the whole process involves only two steps –

1. At first, the transferor would be required to file Form ITC-02, providing all the required details and also stating the amount of the unutilized ITC to be transferred. After completing the form, the applicant shall submit the same on the GST portal.
2. The form will then be provided to the transferee, who would be required to accept/reject the same on the GST portal.

CONCLUSION

Sit is concluded that with the introduction of GST in India, a great extent of clarification has been providing regarding the taxability of business transfer. Every taxpayer, undertaking the restructuring of their business model would be required to analyze the implications of GST as well, since complying with the same, would indeed lead to smooth process of business restructuring.

The implication of ITC in respect of transfer and reversal is also important to be considered. It is of greater importance because the financial implications in respect of any mistake is very high under GST. Where the Form ITC-02 is filed with the department, it is provided that such department, can issue a show-cause notice, at any time within 4 years from the filing of form and such a case, they can recover a huge amount of interest and penalty, if found defaulter and also the cost in respect of litigation is also very high.

As discussed earlier, transfer of business does not attract any GST liability, however, the same shall be subject to capital gains tax under Income Tax Act 1961. Further, GST Law provides that the transfer of business assets can be considered as a slump sale or as an itemized sale.

Thus, we can say, that with the introduction of GST, an immense amount of clarity has been provided, in respect of the taxability of business transfer and its related aspect.